The Biggest Problem Detroit's Big Three Face 29 comments
- Andrew Mickey's articles on Seeking Alpha
- Visit: Q1 Publishing
- Subscribe: Prosperity Dispatch
- Andrew's Special Free Report
-
Font Size:
-
Print
- TweetThis
“Buy One, Get One Free” - That was the offer last week in the United Kingdom. But the two-for-one sale wasn’t for bags of potato chips or loaves of bread at the supermarket - it was for cars.
U.K. newspaper The Guardian reports car dealers across the country were doing the unthinkable to unload excess inventory. They were selling Dodge Avengers at 2-for-1. The gas-guzzling Avenger, made by Chrysler, has been one of the worst-selling cars in the country where gas will run you $5 a gallon (even with oil at $50 a barrel).
Dealers were so hard up to unload the “Yank Tanks” they were literally giving them away. That’s how bad demand has gotten in the U.K. and it could be a sign of what’s to come for the United States.
American car dealers are already starting to offer extreme deals as the 2009 models roll in, which is normally the best time of the year to be selling cars.
The NY Times reports in Automakers Office Big Incentives to Spur Sales desperate offers are already being made to help move new cars off the lot. A dealership in Minneapolis is offering $15,000 off a GMC Yukon. Other reported discounts include $14,000 off a Ford F-150 pickup, $12,000 off a Jeep, and $2,500 off a Ford Focus.
With those kinds of discounts, they might as well be 2-for-1. In some cases, the discount is half the list price. Worst of all, the discounting will only continue for the next few months as 2008 models have to be moved out to make room for 2009s. It could get even worse if the auto industry gets its $25 billion bailout.
Take a look at General Motors (GM). GM is in the worst shape of all the U.S. automakers and it’s only going to get worse.
Earlier this week we saw how truly weak the retail market really is. Of course, most investors have been expecting the worst consumer shopping seasons in decades, but GM hasn’t been able to get prepared in time.
At the end of October, GM North America reported it has 799,000 vehicles in stock – consisting of both cars and light trucks. That’s about five months worth of inventory (when measured against the 166,000 sold in October), which is 15% below last year’s inventory, but it’s only getting worse.
At current sales rates, inventory will start to grow. GM expects to produce an additional 567,000 (875,000 total for Q4 minus 318,000 October production) over the next two months. If the October sales rate holds up, despite rising unemployment and falling consumer disposable incomes, GM’s total inventory will increase to 1,234,000 vehicles.
Considering the growing lot of unsold cars and trucks, it’s no wonder the Associated Press warns, “[GM is] practically running on empty already, and analysts and others warn that it might be out of business by the time Obama is sworn in on January 20th.”
Ballooning inventories are the biggest problem the automakers are facing. Insufficient demand and oversupply will always show up in inventories. And, frankly, a $25 billion bailout will exacerbate the problem and will only delay the inevitable; one of the major U.S. automakers is doomed to go out of business before this recession is over.
If GM is allowed to go under, the consequences will be harsh. More than 3 million jobs associated with the automaker would be lost. The federal government would also lose an additional $150 billion in annual tax revenues associated with GM. That will certainly make the $25 billion price tag (although probably only $15 billion will go to GM) much more palatable.
On the plus side, when a major automaker moves out of a factory, there will certainly be someone willing to move in. The solar industry has already started to set up shop in the Rust Belt. For example:
First Solar (FSLR) has been one of the first to start tapping into the rust belt. The $22 billion solar panel manufacturer recently announced the expansion plans for its Ohio factory.
Flaberg is slated to build a new solar panel-making facility in Pittsburgh, Pennsylvania.
Energy Conversion Devices (ENER) operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also laid out a plan to almost double production and double capacity in one of them
Replacing all of the auto factory buildings with solar panel manufacturing isn’t going to happen overnight. Also, all the blue collar jobs will not be replaced by green collar jobs in the foreseeable future either.
One of these major employers going under would certainly spell another disastrous day for the markets and a bailout probably isn’t going to be well-received either. It’s a lose/lose situation over the short-term.
Letting one of the Big Three automakers go bankrupt will be the equivalent of ripping the Band-Aid off. And it will hurt. But it would probably help the foundation of a recovery start to form much quicker.
Until this story plays out, I’d still recommend using a very conservative investing strategy. To try and find something positive here, the sooner a direction is chosen, one of the many uncertainties hanging over the markets would be out of the way.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Bill Gross
-
3
Peter Schiff
-
4
TraderMark
-
5
Serge Hagopian
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 29 comments:
The company has not changed it's basic philosophy since the 1970's. Two many options for consumers (that people don't care about), refusal to truely implement lean manufacturing (they pretend - but have no clue).
They let purchasing run the business which then leads to out-sourcing and loss of market share and the purchase of cheap equipment.
Overall, if the gov't is going to give them money, then they should also insist on new leadership at the top - and should look at getting someone from Toyota.
Second, Congress should explain why certain industires and certain "size" companies are being singled out for "special consideration". It smacks of a payback to the UAW. Why not money for retail and for every other commercial endeavor? Where does it all stop? When?
Third, unless/until a bankruptcy judge gets involved IN ADVANCE of any bailout or loan, there is no way for the taxpayer to be #1 in line. Secured creditors remain secured. And, with GM already owing $56 BILLION more than it owns, well...think it through.
Fourth, GM's problems are older than the sour economy. Please review their sour balance sheet and Profit & Loss statement. Providing them $25 BILLION while they are losing $38 BILLION per year such as they did in 2007 won't even get them through one year.
Fifth, who will buy the vehicles they would produce with the $25 BILLION? With the economy down and no real end in sight, the $25 BILLION will do what, pay the light bills? Provide funding for the UAW JOBS BANK while all the INDIRECT jobs attributable are done for?
Sixth, Congress, including Barney Frank, Speaker Pelosi, et al, should explain how GM could EVER pay back the loan. Per GM's latest filing with the SEC, they are already bankrupt:
GM owes $56 BILLION more than they have. That's 56 BILLION in NEGATIVE equity:
finance.google.com/fin...
GM In MILLIONS:
Total Assets 136,046.00
Total Liabilities 193,016.00
Total Equity -56,970.00
Ford is not QUITE as bad:
finance.google.com/fin...
Total Assets 265,297.00
Total Liabilities 266,980.00
Total Equity -1,683.00
Why should we sustain companies that cannot even FULLY fund their pension liability? It's just MORE money down a rat hole, isn't it? Even if GM were to make a multi-BILLION dollar profit per quarter, do you honestly believe the UAW would sit still for that without a hand out for MORE? If we taxpayers are to be stuck like pigs, then there should be wage freezes at the executive level as well as at the hourly level until the taxpayer is repaid. The UAW and its members have as much to gain in this effort as the Big 3. Let them sign on as a co-guarantor.
In any event, if the taxpayer is going to be stuck, at least insist on NO wage increases, NO stock options, NO bonuses, NO pension plan increases, NO health care improvements and NO dividends until the taxpayer is FULLY repaid.
Now, what COULD be done? How about a $2,500 tax credit to any taxpayer who purchases (no leases) a NEW vehicle within 6 months, provided they have at least a $2,500 downpayment and can qualify for a loan? That helps anyone who desires to spend their money supporting the auto industry, not JUST the "Big Three".
UAW wanted to Lead everything. They are
the Boss. They always called the Shots.
Remember ? Trike - Strike - Strike ........
That's the word for the last 59 years we heard.
The word "Strike" should be only for base-ball.
Renewable energy is a good direction for Americans moving forward, but not the solution. Like it or not, we need oil and coal to power our society.
GM's problems are not new. Their management has been a disaster for decades. They offered me a management position back in 1965 and I refused because as a manager I would get neither authority nor responsibility for my department (IT). Decisions would be made in Detroit HQ and I would just be the lackey implementing them. No thanks!
news.cnet.com/8301-107...
www.globalsecurity.org...
On Nov 16 12:29 PM stevendedalus wrote:
> If we let the Big Three fail we are ingrates. The auto industry long
> ago spearheaded the middle class. If we leave the industry to Japan
> and Korea what happens to national defense. Have we forgotten the
> tremendous role the Big Three played in mobilizing tanks and millions
> of supportive vehicles during WWII?
By voting to close GM, you vote against your investment in your own community and to allow foriegn interests to entrench deeper in your back yards. I agree that GM needs to redo their business plan because there are lots of mixed signals and this is why congress is taking their time to sort all this out. But to destroy any community in this country as a lesson to unions and poor management would be like cutting off your nose to spite your face. I don't look at this so much a bailout, but as a loan to help out a nieghbor who's fallen to an unfreindly economy. Hell, we're pumping 10 billion into Iraq every month. Just helping a nieghbor out right? Let's help our own with 2 just months of Iraq compensation.
But demand a business plan, that emphasizes that our communities come before retention bonuses, golden parachutes, foriegn investment and global aspirations. Demand union accountability - stem absenteeism, tighten work restrictions, better review family medical leave abuse, throw out appointed position slackers and eliminate job entitlement attitudes.
In turn we should expect work coming back to our communities, which should energize our economy, which hopefully will return the big three to profitability, and in a year or two create a robust return for the taxpayer.
If we don't start to come together soon, we will surely fall apart.
We just have to put politics aside and demand accountability. Please
save the U.S.A.. Don't ask for it, Don't argue about it. Demand it!
Reply |Report abuse
in the early 1900s, union's job was to protect the worker against the immoral companies. unions and companies both have changed since then - unfortunately in the case of the automakers and unions - both sides changed too slowly. this is always a danger when one side wants as much as it can get, while the other side strides to give as little as it can.
everyone took their eye off of the ball - the overall health of the automakers. both the companies and the union are to blame for the loss of market share, the quality of the product, and the economic health of the usa industry. as outside observers, it was easy to see this happening - and we watched both the companies and the unions inappropriately react to the growing maelstrom.
now, you ask for governments help. i say you have got to be kidding me. although there are many changes that are happening at the big 3, it is a case of too little, too late. you need to develop a plan first how you will be competitive. it is not a case of toyota or honda being better - it is a case of toyota and honda being smarter.
as an american, i can demand that you show me how you are going to pull the rabbit out of the hat. i know you can do it. you have to first change the automakers overall direction. union and management must start to row their ship in the same direction. Detroit deserves no money based on what i have seen yet.
On a serious note, let the Big 2 go Ch.11. That 25 Bill will only go towards bonuses & this is TWICE that Japanes auto makers have beat Detroit. Once, ok maybe I'll cut Detroit some slack. Everyone screws up once. But twice? If a Heavyweight fighter gets pummeled twice- it's time to retire. A third time would just be embarassing......
> jack
"$150 billion in annual tax revenues" associated with GM?
is GM a tenth of the entire US economy? in the 50s they used to say, as goes GM so goes the US, but that was only hyperbole, and the world has changed since the 50s.
Also, what is all this talk about the big 3 being "American" companies and Honda, Toyota, or Nissan being "foreign"? Anyone from any country can purchase stock in any one of these companies TODAY and the profits or losses accrue to those shareholders. GM and Ford are mostly owned by index fund investors around the world (who can't chose not to own them). All of these multinational corporations contribute taxes to the states/countries in which they have facilities. But if the big 3 "contribute" their losses to the taxpayer, is that really a contribution?
In WW2 manufacturing facilities were basically seized (sometimes called "nationalized") by the government from their owners, so in that case what difference would it make who owns the shares?
2. Said pre-arranged BK will also allow union contracts to be torn up and start negotiating from scratch. Start with the Toyota US plants' contracts as a start point.
3. 1 month furlough for all plants for any company with a 3-month inventory overhang.
Problem: too many cars/trucks being built for too much cost and no one wants to buy them. Solution: it sure isn't give them $25 billion to build more of them so they have a 12-month inventory!!
On Nov 16 03:57 PM TURI wrote:
> HERE WE GO AGAIN...IT'S THE UNION! IS THE REASON WHY WE ARE IN THIS
> MESS, ALLWAYS BLAMING THE HARD WORKING PEOPLE, THOSE THAT MAKE A
> LIVING BY SWEATING. OUR FATHERS AND GRANDFATHERS FOUGHT SO WE CAN
> HAVE HEALTHCARE AND PENSIONS BENEFITS, 40 HOUR WORKWEEK VACATIONS
> AND HOLYDAY PAY NOT TO MENTION THE SAFETY IN THE WORK PLACE.. WHY
> IS IT THAT IF TOYOTA WORKERS ARE MAKING $30 AN HOUR ($25 HOUR PLUS
> $6000 TO $800 IN BONUSSES YEARLY)IT'S OK. BUT IF UAW WORKER MAKES
> $28 HOUR THEN THEN WE'RE THE PROBLEM? LET ME TELL YOU WHAT THE PROBLEM
> IS. IT'S YOU,THE TRAITORS, THE ONES THAT INVITED TOYOTA AND HONDA
> TO BUILD IN THIS COUNTRY,TAKING AWAY VOLUME FROM THE BIG THREE...FOR
> EVERY ONE OF THEM THAT OPENS A FACTORY IN THIS COUNTRY ONE OF OURS
> SHUTS DOWN...TRAITORS.
Toyota, Hyundai, etc. all have factories here in the US hiring red-blooded American workers. Many of them, however, are priveledged to not be union members and hence their advantage over the Big (little) 3 automakers. Pensions, healthcare, restrictions on how to work, who can work, etc., all come at a cost, either financial or quality. But if my Hyundai was built in Alabama, why am I a traitor for buying it? Sure weren't a bunch of Koreans building it there in Alabama, that I can tell you!
Heard the other day one Congressman from Alabama who said "We in the US don't have an automobile makers crisis, we have a GM, Ford and Chrysler and UAW crisis. We have factories in Alabama that are doing real well!". Telling.
If you are a senior studying economics, my advice is don't get too hung up on the religion of free market economics. This is the real world out here, and dogmatic economic theories followed as if they were a fundamentalist religion are not realistic. Ever notice how the free market cult is the same group who supports corporate influence pedaling in congress? The very large corporations that are obstacles to a level playing field of competition are the same entities preaching free market economics. It's pretzel logic. I'm sure the management of Wallmart are big proponents of the free market for instance. Meanwhile they are the biggest obstacle to a free market in
retailing. Also, free markets run based on demand, not the supply side economics of the past 25 years.
Reminds me of a joke made by Steven Colbert on his TV show. They were talking about global warming and polar bears. Colbert jokingly asked "can't we just let the free market decide which animals we let go extinct?" That's only a slight exageration of the extent to which some adhere to this theory as a cure for everything.
Not to say the theory has no merit.
Hypothetically, what if we were facing ecological collapse due to pollution and global warming, while at the same time we were not near peak oil. Let's say we had abundant supplies of oil to keep down prices. And let's assume that alternative energy was more expensive than the abundant cheap oil. I think you can see where the free market would lead us. We would never make a transition to clean energy, because the free market would prevent it.
It's odd, how many adhere religiously to the soft science of economics while eschewing the hard science of climate change.
Here are a few collected facts - all possible to verify with third party sources:
Product
The domestic industry is oftentimes criticized for building vehicles out of step with today’s need for fuel efficiency. The facts are these:
- At GM, we offer the most fuel efficient cars and trucks in 7 of the 20 Wards Automotive segments in which we compete (35%) -- more segments than any other manufacturer in 2009.
- We offer 20 vehicles achieving 30 miles per gallon, or more, on the highway, more than any other manufacturer. Popular high volume models include the Chevrolet Malibu, Chevrolet Cobalt, Pontiac G6, and Saturn Aura.
- We are the world leader in bio-fuel vehicles, with over 5 million vehicles
on the road today, including over 3 million vehicles in the United States. We
are committed to having over 50% of the vehicles we sell in 2012 being bio- fuel capable
- We offer 6 hybrid vehicle models today, with 2 more to be introduced by year end, more models than any other manufacturer, and this number will grow to 19 over the next few years.
- In 2008, GM has won 6 World Green Car titles, including Green Vehicle of the Year for the Tahoe Hybrid. . . .a vehicle that gets the same city fuel economy as the base 4 cylinder Toyota Camry, but can tow 6000 lbs, and comfortably carry 8 passengers with cargo.
- Over the next two years, GM will introduce 15 new models in the United States,
14 of which are fuel efficient cars and crossovers. Throughout our
product line up, our new and more fuel efficient 4- and 6-cylinder engines will
rapidly displace 6- and 8-cylinder engines previously preferred by our customers. Between 2007 and 2012, our 4-cylinder-equipped vehicle volume will more than double, and fuel-saving 6-speed automatic transmissions will grow by 800%.
We are clearly among the leaders in fuel efficiency, but we have more in the pipeline:
- Since moving to a ‘global’ product development process in March 2005, GM
has under development all-new mini, small, compact and intermediate size passenger cars, which provide fuel economy improvements of up to 25% compared to the models they replace. We also have a new class of pickups under development, somewhat smaller than what this country has grown up with, but with payload and towing capability that will cover most customers’ needs and provide up to 38% better fuel economy (with L4 gas engines).
- Included in this tally is the revolutionary Chevrolet Volt, an electric vehicle
providing up to 40 miles range on a single charge. . .enough to meet the
daily driving needs of 70% of Americans. For those needing to go farther,
a small range-extending gasoline engine kicks in to maintain the battery charge,
and extends the range of the vehicle to 300 miles.
Setting fuel economy aside, there are those who contend we don’t make vehicles that people want. Here are the facts:
- We still sell more cars, trucks and crossovers in this, our home market, than
any other manufacturer. . .despite carrying cost burdens not shared with our
Japanese, Korean and German counterparts. And where the playing field is arguably more level, like the emerging markets around the globe, we are the market leader, outselling Toyota by half.
- Since 2005, GM has won more than 270 awards in China, Europe, and North America - over two thirds of them right here in the United States. . . including the Saturn Aura, the Chevrolet Silverado, and the Chevrolet Malibu that were selected as Car and Truck of the Year recipients. And, just this week, the first vehicle from our new, global mid-size architecture, the Opel Insignia, we won the European Car of the Year.
- Many ask about the more fuel efficient fleet of vehicles that GM makes and
sells in Europe. These vehicles are typically one class smaller than those preferred by U.S. customers, in part due to European taxes on gasoline making
fuel about three times more expensive than in this country.
- Apart from fuel price and vehicle size differences, Europeans also equip their
vehicles with manual transmissions and diesel engines to a greater degree
(85% and 60%, respectively), with customer preference for diesels
oftentimes encouraged by European government incentives, and by diesel
emissions standards that are less stringent in Europe than in the U.S.
Productivity
The domestic industry, including our union-represented partners, are sometimes viewed as uncompetitive when it comes to productivity and, in turn, our manufacturing costs.
- Fact is, GM leads in manufacturing productivity in 11 of 20 vehicle North America Assembly Plant segments in which we compete, according to the 2008 Harbour Report.
- GM is the only manufacturer to have improved year-over-year overall for the entire history of the annual report (15yrs.)
- Also, GM has five of the top 10 engine plants in North America (all located in the U.S.) and the #1 transmission plant (Toledo, Ohio).
Safety
GM has become the World Leader in Occupational Safety. Toyota's 'recordable injury' rate is more than 3 times higher and their 'lost work day' rate is more than 4 times higher than that of GM. GM's 'recordable' and 'lost work day' rates are less than one-third that of any other plants operated by foreign manufacturers in the US.
Environment
2.60% of GM's US energy consumption comes from renewable resources (photo-voltaic, landfill gas) <0.001% of Toyota's US energy is from renewables
GM is aggressively eliminating landfill waste, and currently has 12 US sites that are 100% landfill free. 7 of these sites achieved this goal in 2008, and plan is to make 50% of all manufacturing operations landfill free by year-end 2010, this is along our overall goal to zero landfill.
In the area of renewable energy, GM --in the US-- has 5 sites that are using landfill gas; Toyota has none.
GM has the first and only LEED (Leadership in Energy and Environmental Design) Gold Certified automotive manufacturing plant (LDT); Toyota has none.