Two turkeys can't make an eagle

I'm not a car guy, but I can't resist commenting on the reports that General Motors might be about to take over Chrysler. The so-called Big Three US auto makers (these two plus Ford) have been taking it in turns to flirt with oblivion for the last three decades. Until now, they have managed to survive and struggle on, one way or another. Both GM and Ford have been supported by their profitable finance arms and their non-US operations. Chrysler, which was never so big outside its home territory, went the opposite route, getting bought out by Daimler in the late 1990s in what now looks like one of the worst deals of all time, at least from the German perspective.

Nothing that has happened in the past thirty years has come close to solving the basic problems that the Big Three face. They are all saddled with a high cost structure and ruinous union contracts that make it impossible to compete with the Asian manufacturers, who have been opening plants all across the US, mainly in "right to work" (i.e. non-union) states, ever since the 1970s. These plants have achieved much higher productivity and lower costs than the Big Three's geriatric facilities could ever hope for.

A key element of the Big Three's higher costs has been the pensions burden. For many years, the main auto unions have concentrated on achieving gains in benefits, including pension rights, rather than higher wages. When each of the companies has engaged in one of its periodic bouts of labour-shedding, it has offered early retirement to large groups of workers. As a result the number of pensioners has swollen dramatically in relation to the number of people actually making cars. And the pensioners are getting younger and younger -- not long ago I recall reading in the Wall Street Journal about a former GM worker retired on a full, lifetime pension at the age of 40! No business can possibly support this kind of overhead.

But the real problem with the Big Three is more basic than any of this. As anyone who has driven one can tell you, American cars are crap. Last time I was in those parts I was unlucky enough to rent a Buick something-or-other. It was a nightmare to drive -- huge and unresponsive, with a scary habit of changing lanes on the freeway whenever it hit a bump. It was striking to note how few other people on the roads were driving these monsters, which used to be the bread and butter for the domestic industry. Most of the cars on the roads were small sedans (almost all Japanese) or SUVs, on which the Big Three had bet their future. With the rise in fuel prices over the past year, that bet is set to bring the industry to its knees.

So why is troubled GM even thinking of buying more-troubled Chrysler? Supposedly, the Jeep and Dodge brandnames have some cachet (though I've always thought that Dodge is one of the most incongruous car names ever devised). However, there is no sign of a queue of Asian carmakers lining up to take a crack at Chrysler, which would be the only thing that would make me think there is something there worth saving. I've seen many takeovers of troubled companies, in many industries, that have left the "winning" company in bad shape. Sometimes it's better just to let a failing company die, so as to remove overcapacity from the industry. This looks very much like one of those occasions. Don't do it, General!