The US auto industry is in turmoil – rising gas prices, changing buyer tastes, stiffer environmental laws, and massive labor costs, among other things – have cost US automakers tens of billions in losses in recent years. And now the pompous jackasses at Daimler-Benz have killed Chrysler. It’s bad enough that my beloved IBM ThinkPads have been sold to Lenovo – I can’t even imagine buying a Chinese-made Jeep! Chrysler was in trouble when Daimler bought them in 1998, but the Germans were supposed to make it better, not spend $40 billion to make it worse.

Schumpeter’s “creative destruction” may well be at play here. In fact, then entire auto industry may be heading for fundamental change not only in product design, but in who it sells to and how [see Shaping the Future by Charles Stross.] What Hannaford describes is very much a “Barbarians at the Gate” scenario. Pay particular attention to his analysis of what Cerberus Capital (the distasteful but quite necessary carrion eaters of the capitalist world) will do with the decaying corpse. Oh, and you can be sure that somewhere the government (that means you and me) will get pegged to pickup the tab for some significant portion of this fiasco.

The Chrysler deal

What to say about the Chrysler deal that already hasn’t been said. A few thoughts:

The deal was even worse for Daimler than the putative $7.4 billion that was announced. That sum was just for show, a pitri enough remnant of the $36 billion Daimler paid for Chrysler. What Daimler will receive for the Chrysler division when all is said and done is nothing – in fact it will pay over half a billion dollars for Cerberus Capital Management to take the US automaker off its hands. As we’ve said before, this makes the merger the 1998 Daimler-Chrysler “merger” in year the worst deal ever. As one commentator said on NPR, “It like when you have a broken down car in your front yard, and pay someone to haul it away.”

The deal is likely to end up in the chop shop. The valuable bits will be sold off eventually, and the brand names (especially Jeep) may be attractive to, say, a Chinese company. Cerberus will be ruthless in cutting pensions and healthcare costs. It may operate a much reduced business, with SUVs and pickups as the main assets, at least for a while. It will dump dealers mercilessly, lay off workers, and move more operations overseas. And, like the airlines, it will plead extreme duress to outflank the unions.

Meanwhile, Cerberus will suck the company dry, so that the investors get their money back with a hefty profit quickly. It set up a labyrinth of holding companies to preserve the good assets from an eventual bankruptcy, much as was done at Kmart.

It will be curious to see if the company has any development in the pipeline, now that Daimler will have all the R&D assets. It’s hard to believe that, for example, a hybrid or electric car, or even a cool sports car or luxury vehicle could originate form a stripped-down Chrysler.

buying a company that looks like it is in freefall. What value will a five-year warranty have, for example, if the company could close its doors at any time. And how motivated will workers be to make dependable cars when their health benefits and pay are threatened?

It’s hard to imagine a renaissance, especially in new product areas. And it seems clear that with $5 gasoline looming, auto companies are going to have to adapt quickly in the next decade, something Chrysler is certainly not ready to do.

As for Cerberus, it’s interesting to speculate on their motivation. They have been make increasing bets in the auto industry. Lat year they bought 51% of GMAC, General Motors’ financing subsidiary. They recently bought Tower Automotive for $1 billion. They also one auto parts suppliers CTA Acoustics and GDX Automotive, and were in hot pursuit of Delphi, the parts maker spun off from GM. Do they think they can derive some synergy form these vaguely related firms and weld them into a new auto empire? Call me a skeptic on that one. These guys are investors, not “car guys.”

For Daimler, it’s a retreat from an attempt at world dominance. Like Ford and GM, Daimler’s dreams of profitable investment in other companies have become a liability. No synergy, but plenty of culture clash and inner turmoil, has made both brands-Mercedes and Chrysler- weaker. Meanwhile, the single-minded, organic -growth approach of Toyota and Honda seems to be the winning one.