Auto Industry: In for a Penny, In for a Pound

AIG (AIG) yesterday announced a deal with the Federal Reserve that will have the effect of increasing the Fed’s bailout financing to AIG from $85 billion to in excess of $167 billion (and most likely counting).  Any seasoned distressed company investor knows that the first new money put into any failing company is likely to be lost unless the investor is prepared to follow the initial investment with a lot more (sometimes referred to as “good money after bad”).  More than one wag has described this phenomenon as “the second mouse gets the cheese."

The other big economic news of the day revolved around the proposed bailout of General Motors (GM).  Clearly something is likely to happen here with three million jobs at stake and a lot of political power in play with the United Auto Workers.  Given the inevitable, wouldn’t it make more sense if the money comes in as part of a pre-packaged Chapter 11 which cleans up the company’s balance sheet before the money comes in?

I’ve never seen a successful turnaround that keeps the old, failed management on board to steer the sinking ship.  Perhaps it would make more sense to put together an ownership group that includes some Japanese auto manufacturing skill.  Toyota (TM), Honda (HMC), et. al. clearly know something about running a successful auto plant and they are not afraid of investing in the United States.  They also have a bunch of bucks in their Treasury that could be used to fund the recovery, green initiatives, etc.

Disclosure: no positions

Comments

[2222:]

Dear John,

Have you lost your mind? Japanese ownership of Ford or GM? Why don't you just move over to Japan and save us from listening to your drivel? Your over assessment of the Japanese is a continuation of the false mystique that the uninformed blindly believe. You give undue credit to the Japanese. Contrary to popular perception Toyota’s growth in the past 10 years has come from light trucks – not fuel efficient vehicles. Look at the brilliant move Toyota made getting into Pick-up trucks just when fuel hit $4/gallon. How effective is their plant in Texas when there are no sales? Look into all the tax credits that plant got and the fact that they pay Americans half what UAW has. WOW that took real smarts. Investing in the US - give me a break - do your homework. How many jobs have the big three lost over the past ten years and how many have all the imports added, then do that for the number of factories. You sir need to support the home team. And stop writing!

2008 Nov 11 11:25 AM

[Fam62c:]

I don't think the Japanese want any part of the US Big-3, in fact, no foreign maker may want any part of these companies unless they can get it with no attached liabilities. I do agree with the article in that a pre-packaged bankruptcy assisted by government backing may be the only way for GM to shed enough of it's liabilities, leases and contracts to quickly reorganize and start off with a somewhat clean slate. A company like GM will need to close plants, lay off employees, reject leases and modify contracts quickly to survive and this is the situation that Chapter 11 is designed for. A reorganization under Chapter 11 will get everyone (management, unions, vendors, state and local governments, lease holders bondholders, etc.) on board. Simply handing them more money with their current cash burn rates won't accomplish anything other than wasting tax dollars. The Big-3 have proven time and time again that with their current cost structures they can only be profitable selling large vehicles during good economic times with cheap fuel prices. I believe that America has the capability of designing and building good small cars that people would buy but they can't do it profitably with their current costs so they don't apply many resources to these projects. I also agree with the previous poster regarding Toyota's entry into the large pick-up market. Toyota picked a bad time to do it and it hurt them but they are good at adapting and switching production capacity from lesser selling models to better selling models quickly. You can say what you want about the Japanese but their auto companies have much better leadership at the top than US auto makers. The Japs know how to design and build cars and they know how to run an auto company. Many of their advantages were the direct result of listening to American quality, production, efficiency and customer service experts in the '50's, 60's and '70's. These American experts found that the Japanese were very interested in what they had to say when the Big-3 wouldn't give them the time of day. The "home team" hasn't been very smart for a long time.

2008 Nov 11 12:14 PM

[MJ Pragmatist:]

Good article. It should be noted that the government is not making direct investments in banks performing as poorly as GM (excluding Fannie Mae and Freddie Mac that were already quasi governmental). The government is encouraging someone else take them over.

2008 Nov 11 01:20 PM

[IXLR8:]

Well, John Slater. more great insight about the auto industry from a guy who likely cannot change the oil in his car.

How, John Slater, would you handle the UAW, given the Democrats that the UAW has bought and are likely to stay bought?

How would you handle the fact that state and federal law prohibit the manufacturers from closing ANY dealership, even the rotten ones that you know and hate?

How would you handle the fact that the federal government requires US automakers to build small cars in the zero-profit US while allowing your beloved Japanese to import the Yaris, Fit and Versa from low cost sources?

How would you handle the approximately 1 million people that the BIG 3 are covering for health care? Cut them off?

How would you handle the nearly 600,000 pensions being paid by the Big 3? Dump them on the Pension Benefit Guarantee Corp. which is already $50 Billion underfunded?

How would you handle the most recent federal fuel and environmental mandates which will cost the Big 3 approximately $100 billion to meet within the next six years? PS The government arranged $25 Billion in loans, maybe sometime in 2010. (See the math here?)

Sorry, John Slater. 200 M&A activities with a combined value of $3 billion doesn't even get you a seat at the table for a Big 3 solution.


.

2008 Nov 11 05:45 PM

[newtraveler:]

The unions collected the money to provide benefits to its members, WHAT HAPPENED TO THE MONEY? Where are the promised benefits? How about federal Pension insurance, was mandatory, WHAT HAPPENED? The UAW has put our economy in a down hill spiral with the full support of the democrats. They need to stand up and face the fire with the voters, and SHOW US THE MONEY!! and pick up the tripple golden FLEECE AWARD that they deserve

2008 Nov 11 06:34 PM

[newtraveler:]

OK NOW I get it! SHOW ME THE MONEY!!
At a Glance: GM's Deal with the UAW
The United Auto Workers and General Motors tentatively agreed Wednesday to a contract that ends a two-day strike — the first nationwide walkout against the automaker in 37 years. Both sides said they are pleased with the new contract, which has yet to be approved by the union. Here are a few of the highlights:

Legacy Costs: The new contract transfers responsibility for retiree health benefits from GM to the union. Under the agreement, the UAW will hire a financial company to manage the health care trust. That allows GM to clear a $50 billion liability from its books — which the company says has hindered its ability to raise funds and compete against foreign rivals. Still, GM will have to pay about 70 percent of that obligation — some $35 billion — to fund the new health-care trust.

New Workers: New unionized workers in certain non-production jobs would be hired at lower wages. That could be a big help for a company that spends upwards of $70 an hour on wages and benefits for janitors. In exchange, the UAW gets a commitment from GM to keep union employment at the current level of 70,000.

Signing Bonuses: GM workers will receive a signing bonus worth thousands of dollars to accept the deal. But those workers give up their cost-of-living adjustments, and the company gains more control over setting future salaries.
Job Security: The new contract "will absolutely protect their jobs and keep jobs from being reduced," said UAW President Ron Gettelfinger. He offered few specifics, but said the number of jobs at GM would be "pretty much the same, if not higher" when the contract concludes in 2011. But job protection provisions don't go into effect until after GM completes a planned restructuring— which includes cutting 30,000 jobs and closing all or part of a dozen plants by next year.

2008 Nov 11 07:02 PM

[John Slater:]

Ten years ago up close and personal I watched the U. S. car manufacturers fight the move to electric cars with a not invented here attitude. Silicon Valley beat the Japanese at their own game by importing the world's best talent and creating the world's best products. There's nothing patriotic about doing things our way when its not the best way. Winners enlist people who are better than they are at specific tasks (including changing oil), not by hiding their head in the sand and assuming they are the best at everything.


On Nov 11 11:25 AM user 2222 wrote:

> Dear John,
>
> Have you lost your mind? Japanese ownership of Ford or GM? Why don't
> you just move over to Japan and save us from listening to your drivel?
> Your over assessment of the Japanese is a continuation of the false
> mystique that the uninformed blindly believe. You give undue credit
> to the Japanese. Contrary to popular perception Toyota’s growth in
> the past 10 years has come from light trucks – not fuel efficient
> vehicles. Look at the brilliant move Toyota made getting into Pick-up
> trucks just when fuel hit $4/gallon. How effective is their plant
> in Texas when there are no sales? Look into all the tax credits that
> plant got and the fact that they pay Americans half what UAW has.
> WOW that took real smarts. Investing in the US - give me a break
> - do your homework. How many jobs have the big three lost over the
> past ten years and how many have all the imports added, then do that
> for the number of factories. You sir need to support the home team.
> And stop writing!
>
>

2008 Nov 11 09:17 PM

[James Wilson:]

Put your business on the stock market you risk forgein take overs deal with it.

2008 Nov 12 10:06 AM

[Fam62c:]

The previous post was interesting. GM actually had an electric car, and unlike many others, I accept why it never went into large scale production. The market for the car would have been very small given the limited range and size of the vehicle. This small market would have resulted in low production and a very high retail price for the car that very few would have been willing to pay. The part that I didn't understand was when GM essentially stopped R&D on the project instead of leaving the leased fleet of EV-1's out there and slowly improving them. They had a base of willing car enthusiasts who were willing to lease the cars and actually pay to operate a GM test fleet; GM could have supplied them with improved versions of the car as the project developed. They had an edge in a future technology and walked away before it evolved into the right product at the right time. GM must have known that there would come a time when oil would become very expensive. GM had the closest thing out there to an actual, marketable electric car. If they had had the foresight to continue on with that type of vehicle development they might have gone a step further and had the first hybrid/electric cars on the market and become known for something new. Instead, Honda marketed the first hybrid (Insight) and Toyota was the first company to make a hybrid that really caught on in large numbers. The fact is, it could have been GM who came out with this technology first and got all the sales to the "early adopters" as well as the recognition as an innovator. GM still has a chance, if they would stop talking about the Volt and get the car to market they would have the first plug-in and could claim the title of being first with the highest mileage hybrid car out there. If GM could get the car out there I bet the Democrats would be willing to pass some sort of tax reabte or other incentive for plug-in hybrids (maybe even specifically for American built plug-ins) that would allow GM to make some money on the cars and get people to buy them. I'm afraid that the Japanese will beat the Volt to market with a plug-in and the Japanese car will be the one to get all the sales. Like it or not, The Big-3 are going to have to find a way to build high quality, attractive, innovative small and medium sized cars that people want. They are also going to have to do whatever it takes to adjust their cost structures to be competitive with foreign products or they will not survive in anything but a booming economy with very cheap gas. It will be hard to compete with Accord, Civic, Camry and Corolla, these nameplates have been out there for 20+ years and the models have been constantly improved. They have a reputation for quality and they are the cars that buyers gravitate to. The closest the Big-3 ever got recently to a car with this kind of following was the Taurus but they let it slip away by not keeping the car updated and competitive. I think a company like GM needs to concentrate their energy on fewer brands and fewer models; get a few things right and get rid of the rest.

2008 Nov 12 11:11 AM

[Repper:]

The previous poster wrote:
"I'm afraid that the Japanese will beat the Volt to market with a plug-in and the Japanese car will be the one to get all the sales. Like it or not, The Big-3 are going to have to find a way to build high quality, attractive, innovative small and medium sized cars that people want. They are also going to have to do whatever it takes to adjust their cost structures to be competitive with foreign products or they will not survive in anything but a booming economy with very cheap gas. It will be hard to compete with Accord, Civic, Camry and Corolla, these nameplates have been out there for 20+ years and the models have been constantly improved. They have a reputation for quality and they are the cars that buyers gravitate to. The closest the Big-3 ever got recently to a car with this kind of following was the Taurus but they let it slip away by not keeping the car updated and competitive. "

You posting was generally well thought out, but you're still infected with the all-pervasive general prejudice that US products are inferior, and that the US automakers haven't tried to brak into those car segments dominated by the Japanese. The "reputation" is the only thing that those models have over their US counterparts. They have not put more innovation or updates in their products than the Big 3 have. They simply have a following who refuse to consider American products bacause of past sins. "Cars that people want" isn't that the trick. Everyone loves to bash the US makers for not being able to produce them while they don't even look at what they've actually done lately. If anything, you'll find that the Big 3 have come up with better products if you do an honest comparison.

As far as the Volt goes. I can assure you that it will come to market as fast as any car company has brought any vehicle to market in the history of cars. I don't know exactly what Honda and Toyota are up to on this front, but I do believe we'll beat them to market.

2008 Nov 12 11:58 AM

[Fam62c:]

Repper: Good post, and I don't doubt that US quality has come way up but who's fault is it that people don't know that? My point is that the Japs make the same nameplate year after year and constantly improve it creating not only brand loyalty but MODEL loyalty. Everybody knows what an Accord, Camry, Civic and Corolla are because they have been built for 20-30 years. There are Honda and Toyota buyers who have bought the same model for 25 years because the first one they bought in the early 1980's was light years beyond American small cars of that era. I've owned VW Rabbitt/Golfs for 21 years, I've had five of them. The first two (a 1982 Rabbitt and a '84 GTI) had 120+ thousand miles on them when I bought them and were still running well when I was done with them (the Rabbit got killed in an accident and I gave the GTI to my Niece who drove it all through college and then sold it!). Most 1982 small Big-3 cars never lived to see 100K miles. I liked the model and the brand and stuck with it like many Honda and Toyota customers. American makers simply didn't build good or desireable small cars back then (Lee Iacocca was marketing K-cars against really good, sporty Jap cars) and lost millions of customers.


The US seems to make a new small car model for a few years and then it gets dropped for another new model, also, they cannibilize their own business by making the same cars under different brands. You are correct, their is a prejudice against American small cars and I don't believe the Big-3 are trying hard enough to build new, loyal customers. I can't even think of the name of any American small car models so the Big-3 must be doing something wrong with branding and marketing. I know what an F-150, Ram, Escalade, Expedition, etc. are even though I'm not a truck buyer so why am I not familiar with their cars? The answer is that they promote what they want you to buy not necessarily what you want to buy. I guess I looked at a Pontiac Vibe once and thought is was somewhat comparable to a Golf/GTI but even the Vibe is a joint venture with Toyota. I'm not in the market for a new car but give me the name of an American made compact hatchback comparable to my GTI and I'll go test drive it for the heck of it and see what I think, and I better not see any cheap American fake chrome in the interior :)

I hope that the Volt beats everyone else to the market and I hope the car gets good reviews. I still believe that, as recently as a couple years ago when gas was cheap and the economy was good, the Big-3 really only put minimal effort into small cars. It's been that way forever in Detroit because small cars have small profit margins and Detroit's costs just don't allow for profitable small cars.

Another thing to remember is that most buyers start out with a cheap, small and probably used car when they are young and poor. If they like that car they may stick with that brand for a long time, and conversely, if the car is crappy they may never buy a car from that company again. Remember, a 1982 VW Rabbitt purchased in 1987 with 145,000 miles made me a VW customer for 21 years. I don't think that an equivalent Ford Escort or Chevy Chevette from the same era would have made me a Ford or GM customer. The Japs (and VW) understood this and it allowed them to eventually make larger cars and trucks for these buyers as they got older and eventually introduce Lexus and Acura for the buyers as they got older and had more money. Detroit made a huge mistake by dismissing the lower end of the market, when the Jap cars first came Detroit figured the customers who bought them would "upgrade" to American cars when they had more money and if they didn't have more money Detroit didn't want them as customers. Detroit let the Japs in by ignoring the part of the market they weren't interested in and basically gave away a giant piece of market share, the customer erosion continues to this day. The Japs don't have to rely on "cheap" small cars anymore, they get more money for their cars (new and used) than the Big-3 does. The Big-3 will have to try a lot harder than they have in the past if they want to win customers back; they will need to really make a major marketing push in support of one or two small car models if they want custowers to get interested. It's not the customers fault for not buying American, it's Detroit's fault for not paying attention to small car customers for the last 30 years. Detroit isn't entitled to American customer's hard earned money, they have to earn that business.

2008 Nov 12 03:23 PM