General Motors + Chrysler = ???

The recent buzz is that GM may be thinking about buying Chrysler. I'm not certain this is a good plan.

I don't think either GM or Chrysler have problems that can really be solved by additional scale. In fact, one could easily argue that they both have too much scale right now, not too little. They both need tremendous downsizing to target narrower markets and to alter their cost structure to be able to make profitably the few things they can do well.

So what benefit will accrue if they combine? Will they have greater bargaining power to deal with the UAW? Perhaps, but couldn't gaining the upper hand on their unionized workers possbily lead to additional product quality problems? If their problems are scale, products and costs, will tackling costs alone really help?

Will their combined engineering and design teams suddenly be able to make higher quality cars that people really want? Would the combined company be capable of streamlining their supply chains, further integrating their suppliers and buyers? I doubt it. In fact, a larger, more bureaucratic company with at least two, probably many more, dissimilar cultures will find it even more difficult to solve such problems.

Although I think GM looks like a statistically cheap investment right now, I think its problems are too big to solve this way. I have no reason to believe that Daimler Benz wants to sell Chrysler because they believe its their crown jewel, and the fact that Daimler's stock price took off on the rumor seems to indicate many investors agree. So, GM is thinking about buying the red-headed step-child from a better company that couldn't fix its operations, in hopes that they can both right Chrysler's and their own operations in a heroic effort. Wow, that sounds silly.

Both GM and Chrysler need to scale back operations, vastly improve the quality of their vehicles, and produce niche designs that they can sell at a profit, while also dealing with their legacy cost structure that needs immediate overhauling. Can they really work on this problem together and hope to succeed, or should they get their own house in order first before combining with others?

I really don't know the answer, but I do know what bet I'm NOT making.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.