The battery pack for the Volt is possibly the most important part of the car.  It’s the most expensive component, and if it malfunctions the car loses almost all of it’s appeal (assuming it doesn’t cause a fire in which case the car loses all of its appeal).

LG Chem is going to be the supplier for the lithium ion batteries used in the Volt, but GM is going to be the assembler of the actual battery pack.  I don’t blame them either, from a quality control standpoint and a liability standpoint GM wants to be in charge there.  It would be a PR nightmare to tell the owner of a Volt that they have to talk to a third party about their car.  So the batteries will be shipped to a plant in Michigan where the ‘T’ shaped battery pack will be assembled under GM supervision and control.

General Motors Corp., anxiously awaiting a government loan so it can continue operations into 2009 said Wednesday it will halt one of its most important projects to save money should a Washington bailout fall through.

The cash-strapped automaker is putting the breaks on the construction of a factory in Flint, Mich. set to make 1.4 liter engines for the Chevrolet Cruze and Chevy Volt plug-in electric car.

Source: msnbc

A few days ago the leaders of the three Detroit automakers sat down with Democratic leaders to discuss their dire situation.  It seems that they’ve done what they intended to do.  The leaders sent a letter to the treasury asking it to use part of the 700 billion bailout for financial institutions to help out GM/Ford/Chrysler.  However, given that GM has already asked the treasury and been told no, I doubt that this will work.  Still, it means that congress will probably do something, whether it be now or when Obama takes office.  The transcript of the letter is below:

Dear Secretary Paulson:

We are writing to request that you review the feasibility of invoking the authority Congress provided you under the Emergency Economic Stabilization Act of 2008 (EESA) for the purpose of providing temporary assistance to the automobile industry during the current financial crisis. Under EESA, Congress granted you broad discretion to purchase, or make commitments to purchase, financial instruments you determine necessary to restore financial market stability. A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector’s workforce.

The economic downturn and the crisis in our financial markets further imperiled our domestic automobile industry and its workforce. On Thursday, we separately met with the leaders of the automobile industry, and its top union representative, to discuss the financial challenges confronting the industry and its workforce, and possible actions to address these challenges. We left the meetings convinced that our nation’s automobile industry - the heart of our manufacturing sector - and the jobs of tens of thousands of American workers are at risk. Friday’s news of the automobile industry’s record low sales figures only reaffirm the need for urgent action.

Were you to determine that the automobile industry is eligible for assistance under EESA, we would urge you to impose strong conditions on such assistance in order to protect taxpayers and maximize the potential for the industry’s recovery. An automobile industry that is forward-looking and focused on ingenuity, competitiveness, and the creation of green jobs for the future is essential to its long-term viability. Other taxpayer protections should mirror those required of financial institutions currently participating in the Troubled Assets Relief Program (TARP), such as limits on executive compensation and equity stakes to provide taxpayers a return on their investment upon the industry’s recovery. Any assistance to the automobile industry should reflect the principles contained in EESA that guard against the need to recoup costs to the taxpayers.

We must safeguard the interests of American taxpayers, protect the hundreds of thousands of automobile workers and retirees, stop the erosion of our manufacturing base, and bolster our economy. It is our hope that the actions that Congress has taken, and that the Administration may take, will restore the preeminence of our domestic manufacturing industry so that it can emerge as a global, competitive leader in fuel efficiency and in new and path-breaking energy-efficient technologies that protect our environment. We appreciate your serious consideration of this request, and look forward to your response.

Best regards,

NANCY PELOSI       HARRY REID
Speaker of the       House Senate Majority Leader

Source: AP

So it would seem that Cerberus has no intention of not selling most of their stake in chrysler.  If Nissan had some to the table with more than 20% in their offer Cerberus probably would have taken more time to consider that deal.  For now we’ll have to settle for Chrysler making Nissan’s Titan and Nissan making a small car for Chrysler - if Chrysler is still around.

The US Treasury has told GM that no, it can’t have anymore billions of dollars, not yours.  GM was hoping that the bailout money would come before the election (or is it Cerberus that is on an accelerated time table?) in the amount of 10 billion.  So far the US has bailed out financial institutions (both GMAC and Chrysler Financial qualify) but has yet to aid any other sector.

The reason for the bank bailout is clear, if the banks fail then no more credit is available and no one can spend any money and we all get to see how our grandparents lived back in the 30s.  Even that bailout is not popular among many in the US, indeed, much of the money is going to bonuses to already really rich guys that ran their bank into the ground.  So when another big corporation like GM comes to the US government and asks for some money the US is reluctant to say the least.

GM is a more sympathetic recipient than banks are, but not by much.  One could argue that the bailout would save manufacturing jobs in the US at a time when outsourcing is the norm.  Even though GM would have to slash about 50,000 jobs from Chrysler immediately, in the long run it saves the biggest automaker in the world.  Better to see one absorbed than both die off.

There are two problems with giving taxpayer money to GM.  First, it is not clear that GM and Chrysler will both fail if left separate.  No one has made a convincing argument there.  And (still part of the first reason) it is not clear that the combined company will succeed.  I have yet to see a convincing argument that shows me the combined GM/Chrysler company make it through the next few years of poor sales.

The second problem with US aide here is if they give it to GM/Chrysler for a merged company they also have to give it to Ford, and eventually anyone that comes begging.  The line of companies in trouble will never end, better to draw the line at the banks and be done with it than see the government as a partial owner in every sector in the US market.

First, I want to point out that most mergers in history are not successful.  Second, I would like to point out that most mergers happen between a company that is doing well and a company that is doing poorly or between a company that is doing well and a company that is doing ok.  I can’t recall any merger, especially a successful one that happened between two companies that are bleeding money.

Second, the talks surrounding the merger are not yielding much information, though various news outlets have quoted sources.  So most of what we think we know is speculation of some kind.  With that in mind I would like to add my speculation to the mix.

From most of the reports coming out of Chrysler (and I watch the company closely) it would seem that Chrysler is well on it’s way to becoming profitable all on its own.  Every time Nardelli or Press talked about Chrysler they said that they were meeting and exceeding their goals for becoming profitable.  Then the credit market seized up and a lot of things went out the window.

I believe that the guys at Cerberus think they know how to make any company profitable, and that includes automakers.  They took a look at GM and saw that GM was bleeding money fast and is in a tough position.  This makes them an easy target.  And why not?  Cerberus already owns one american automaker, combine the two and make them profitable and now you have a much bigger piece of the pie.

From there Cerberus must have done a study to find out what brands in a proposed company would be the most valuable.  They find out that the Chrysler brand itself is one of the brands that needs to go, so they can’t position the merger as Chrysler buying out GM.  It would look silly to have Chrysler buy GM and then shut down the brand that the company is named for.  So it needs to be positioned as GM buying out Chrysler.

This also helps out Cerberus by making GM the bad guys.  The only way to make the combined company work is to cut all redundant staff.  If it’s GM doing the buying and the cutting Cerberus comes out of this a lot cleaner than if Chrysler buys out GM and kills the staff.

There are reports that Cerberus (from the company itself) wants to have a stake in the combined automaker.  This would seem to support the idea that they want to combine the automaker and have a bigger piece of the pie.  Since Cerberus would probably be the biggest stock holder in the company they would get to cherry pick the board members that they want.  There are conflicting reports on this, Cerberus denies that they would can any of the GM board members, but most of the GM board seems pretty cool to the idea of a merger.  Why wouldn’t they if their jobs are gone after the merger?

Overall I see this as Cerberus seeing an opportunity to own a large portion of the biggest automaker in the world.  They think they can reduce costs by cutting redundant workers and improve the image and quality of their cars.  I think they’re biting off more than they can chew.

According to a Wall Street Journal report, talks between General Motors and Cerberus/Chrysler are “floundering” as GM is having a tough time finding investors who would be willing to finance any deal between the two US automakers.

General Motors and Chrysler have been suggesting a plan that would save $10 billion while at the same time 40,000 jobs at a combined company.  Backers of the deal between the two car companies think that the combined company would produce $250 billion in annual revenues, with sales around 30% of the US market.

Of course there’s also the $10+ billion in cash that Chrysler holds and the combined company would hold about $30 billion in cash, improving GM’s credit rating and helping the company get through the next couple years of being in the red.

While the plan seems like a no brainer at first glance, many potential investors are having trouble accepting that a deal would do anything for either GM or Chrysler.  The WSJ puts it, lenders remain fearful of the complexity and scale required to combine two massive industrial companies given extreme uncertain in the credit markets. The article points out that if investors continue to be wary of the deal, executives may need to bring the plan in front of the US government, hoping for a possible intervention.

Sources say they are unsure of what role the government would take in the event of a deal, but believe that a government stake in the combined automaker would be “very important”.

With all the rumors flying around about the chrysler sale and or merger many journalists have posited that Renault-Nissan is one of the potential buyers.  It makes sense, afterall, Nissan and Chrysler have a close relationship right now.  Starting in 2010 Chrysler will build the Nissan Titan and Nissan will build a small car for Chrysler.  For that deal to take place Nissan would’ve wanted to look at the books pretty closely to make sure that Chrysler wasn’t going out of business.

With all that knowledge journalists are saying that Renault might buy up Chrysler like it did Nissan and just run the company independently.  Afterall, Renault doesn’t have a strong presence in the US and they have been clamoring for one for years now.  The addition of Chrysler would also make Renault a powerhouse spanning three continents.  Another more recent possibility is that Renault buys the Jeep brand from Cerberus and GM gets the rest.

But now we are getting reports that Renault isn’t in the running for Chrysler nor it’s Jeep brand.

“There are no discussions. We are focusing on dealing with the current market situation,” Renault spokeswoman Frederique Le Greves said. A spokesman for Nissan declined comment on any talks with the Japanese automaker which is 44-percent-owned by Renault.

So it would seem that with Renault out the only other possible buyer is GM.  And with GM buying Chrysler you can bet things would change.

While there are many sites and journals and blogs out there reporting that GM and Chrysler are just a hair away from merging one is reporting of the financial roadblocks to such a merger.  As it stands right now Cerberus has stated that they want to retain a major stake in any combined company, it’s unclear how any kind of merger would deal with the 19.9% of Chrysler that Daimler still owns.

JPMorgan owns a lot of the debt that Cerberus took on to get Chrysler.  They have been pushing for a merger and likely would put some financial backing to it, but the amount of money needed to get something like this done is beyond what JPMorgan would or could handle.  Right now the financial markets are not favorable to any type of transaction of this magnitude happening.

Rick Wagoner, the CEO of GM seems to be desperate to have a merger take place (his legacy right now isn’t all that great and the merger might shine a little bit of light on it).  But the board members at GM are reluctant to merge GM with Chrysler.

Reuters is reporting that Cerberus Capitol Management is not looking to sell it’s stake in Chrysler.  Rather it would like to buy up a portion (or all) of whomever they make their deal with to combine the two automakers.

“Cerberus executives have maintained repeatedly that they believe in the industry. They expect to be there for the long term and want to do all they can to position Chrysler for the future,” a source said.

Chrysler has seen sales slide 25% this year alone, a higher percentage than the auto industry as a whole.  It remains a hot topic for automotive reporters to speculate on.  No one quite knows what the future of Chrysler is and with the company being silent to the press it’s an easy target to fill a column with.

Cerberus recently had talks with General Motors about a potential merger.  But according to a source the talks never consisted of giving up any of their stake in Chrysler.  Nor would they swap it for GMs stake in GMAC.

“Cerberus is not dumping Chrysler or simply swapping it for an increased share in GMAC. That deal was not discussed and they have no interest in it,” said the source, who declined to be identified.

“In any business combination with GM or anyone else Cerberus would look to come out on the other side owning a meaningful stake in the combined auto company,” the source said.

I guess with the auto industry in shambles it makes sense for the guys with all the cash to come in and scoop up some of the mess for pennies on the dollar.  The upside would be too hard to ignore.

There’s an article printed late today in the NYTimes that talks about GM possibly buying up Chrysler.  I find this to be an unlikely event, given the current state of the auto industry.  No automaker has any cash to buy up another one.  From the article:

General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

GM would have over 10 viable car lines then and without Chrysler many of them overlap.  With Chrysler and you now add another 3 that compete with one another.  Dodge with Chevy, Jeep with Hummer, Chrysler with Buick.  Toyota succeeded because they only have 3 car lines and focus on just making those the best they can be.  More is less in this case, and GM is already trying to sell of different lines - the last thing they need to do right now is add three more.

UPDATE:

Chrysler has officially responded to the merger talks by saying they won’t comment.  I guess we now know why Cerberus is keen to buy the remaining 19.9% of Chrysler from Daimler.  I still don’t see it being sold to GM, GM isn’t financially healthy enough to spend that much money.  And they won’t enjoy any economies of scale or shared platforms for half a decade, by which time they’ll probably be healthy on their own.