Auto Industry Rescue Delays the Inevitable

When discussing the Auto Bailout I think it's important that we frame the discussion properly, and recognize the fact that Detroit is asking the government for a loan (a loan they might've been able to get from the Private Sector if it weren't for the credit crunch), meaning that they're alleging that they'll be able to pay the loan back.

Meaning: that we shouldn't view this in the same manner as the original TARP program (buying toxic assets from the bank that may or may not increase in value some day), nor should we see this as a gift to auto executives per se as any funds received from the government will undoubtedly save the jobs of taxpaying citizens.

BUT

The fact remains that they're still asking to borrow money to prop up not only a broken system but arguably THE most broken system in American Business; any funds received will be used to buy Detroit time and enable business as usual more than it will be used to completely revamp the way these companies operate.

At the end of the day, Detroit's problem isn't the quality of the cars, the way the cars look, etc, etc, as General Motors (GM) and Ford (F) are still #1 and #3 in terms of market share in the U.S. The true problem is that Detroit is bloated and inefficient, hence the reason that they can lead in market share and yet make a fraction of the profits of competitors (if they even make money) with a fraction of the market share. Close the efficiency gap between Detroit and its foreign competitors and GM, Ford and Chrysler would all be profitable right now, even with the current economic downturn.

Can you name any other industry where the companies that are #1 and #3 in terms of market share are struggling to survive, whilst significantly smaller competitors have no problems generating several fold more in profit? Detroit sells more than enough cars to be profitable, they're just not structured in a way that allows them to be.

Detroit isn't asking for a loan to fund a major operational paradigm shift. They're asking for a loan to maintain their status quo of ineffective turnaround plans and bad overall management, and from a mathematical perspective it appears that the amount being asked for will only delay the inevitable for a couple of quarters (at best).

Just think about it: Detroit had a collective burn rate of $17.6 billion in Q3 of this year and is probably going to burn through a similar amount this quarter, so even if Detroit were to receive a $25-$35 billion cash infusion in January it's quite likely that any cost cutting measures (current and future) would be too little too late to prevent them from running out of cash sometime in 2009. After all, the economy is likely to worsen in 2009, these are companies that were losing money during the credit boom, and it's rather unlikely that demand will "return" to credit boom levels after the economy recovers.

Any efforts to save Detroit should be focused around closing the efficiency gap. Lending Detroit money to perpetuate or "tweak" their broken system will not accomplish this goal. Detroit isn't asking for this money to make key investments into their companies, they're asking for money so they can buy some time while they struggle to come up with a solution for their problems or the market "magically improves".

In short, my objection to Detroit's request for a loan from the Government is that all it will do is delay the inevitable, and there is no point in pumping money into a drainage ditch just so we can keep Detroit "alive" for another quarter or two.

The discussions in Washington shouldn't be focused on the terms of a loan package, they should be focused on how to facilitate some sort of "gentle bankruptcy" for Detroit, which minimizes the impact on the economy and Detroit's workforce. At this juncture, bankruptcy is the only way that Detroit can truly restructure and free itself from the myriad liabilities that are an impedance to profitability.

Anything less than this wholesale restructuring will only delay the inevitable at best, and waste precious resources at worse. It's time for Detroit and Congress to collaborate on a solution that fixes the underlying problem, as opposed to wasting taxpayer money on a delay tactic.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[mr.verymuch:]

GM, et al, the black sheep of american capitalism. simply unable to produce decent products, and just as incapable of real change. waste of time, waste of money

2008 Dec 09 09:22 AM

[mahony:]

Thanks for writing about the true problem. GM's turnaorund plan is based on the Volt, which they are going to have to sell well below cost...How exactly will that make them profitable? The loan and business as usual will mean that GM will just sink long before they can ever make money on the Volt...even if gas is $5 a gallon.

I find it hard to believe that a company that sells 150,000 cars per month at $20k a pop cannot turn a profit. A monkey with a typewriter could run GM better than it currently is. The proof is right on Lutz's lips when he says "it's not the CEO's fault...he's done a good job and the mean economy did all of this bad stuff". The Captain of the ship is responsible for the ship. And GM has been sinking for years, not just this year. Reference the Seeking Alpha Article (I can't remember the author) who said that after analyzing the Big 3 many years ago that they were technically bankrupt and that you should run screaming from their bonds (never mind there stock). The fact that Lutz feels as he does is proof positive that GM management does not get it.

Nationalization and a car czar is a joke....who is the drug czar again? Ask Russians how those state built cars are working out. If car sales are falling, nationalizing the industry isn't going to get Americans to buy more cars....it just props up a weak business model at the taxpayer expense. I feel for people who lose jobs, but those jobs are going away whether GM goes into bankruptcy or not (actually bankruptcy at least has the chance to save more jobs if GM can emerge with good management).

2008 Dec 09 09:38 AM

[mycargets52mpg:]

B2B: Born to bozo
B3B: Big three Bozos
B4B: Bailouts for Bozos
B10B: Beaten Bozos

2008 Dec 09 09:43 AM

[Joey:]

I would like to be the car czar. Mahony, per your question, GM is suppose to make $4,000 profit per car and $6,000 profit per truck. Why they are doing so poorly is beyond me. Here are two plans I put together.

How to Fix GM – Plan One
1) Sell All of GMAC and the Insurance Business (Ditech)
2) Cut down from five regional offices to two. One in Atlanta (east of the Mississippi River)and one in LA (west of Mississippi River). That means Chicago, New York, and Dallas are closed. With about 250 people working in each location (750 total) at an average of $100,000 each, that is a yearly savings of $75 million. Operation cost (rent, equipment, etc.) at the three locations will save another $1.8 million. Benefits for the 750 employees will save another (at $20,000 each) another $15 million.
3) Next, there is an average of three offices per state (local offices in cities across the country), if we close them, that is another $3 million in office space.
4) Next, the District Managers work out of their house and the Zone Managers (or whatever term is given to them), could be let go. They make around $150,000 a year and there are about 75 of them. Again, a savings of $11.25 million. With benefits, a total of $12.75 million in savings.
5) Next, cut around 150 jobs at the Detroit GM Headquarters. A savings of around $18 million with benefits.
6) Next, cut Buick down to two cars (Enclave and Lucerne), cut Pontiac to one (G6), cut GMC to two (Yukon and Sierra), cut Saturn to one (Vue) – and put all cars to a new umbrella called “United GM”. This will save GM billions. Also cut back on two Chevy models and two Cadillac models.
7) Next, cut advertising in December, January, February, March, April, and May (with the exception of auto show advertising for a three week period during the show and its incentives). This will save GM around $1.4 billion.
8) Sell all five planes. This will save GM $100 million in sales and another $100 million in yearly travel expenses for a total savings of $200 million dollars.
9) Change the Union rule from 90% of pay for one year if someone is laid off to 70%of pay for 9 months. This alone, if an employee was making $72,800 a year (which is equal to $35 per hour), this would save GM $27,300 per union employee laid off. If there are around 30,000 union employees laid off from the brands closing, that is a savings of $819 million dollars .
10) Get rid of any health care benefits for those 65 and over. Medicare will cover them.
11) Change the 90% of pay for a year factory workers laid off to 70% of pay for seven months. At a salary of about $75,000, this will be a savings of $36,875 per employee. For every 10,000 people laid off, this will be a savings of $369 million.
Plan Two on Fixing GM
How to save GM
1) GM needs to cut their total car models to 25 (from 60). What they could do is get rid of all Buicks expect Lucerne and Enclave; get rid of all Pontiacs except G6; get rid of all GMCs except Sierra and Yukon; get rid of all Saturns except the Vue; get rid of Saab all together; get rid of at least three Chevy models; get rid of at least two Cadillac models.
2) Get rid of half the dealerships. Chevy seems to have the best distribution so change the Chevy dealerships to Chevy, BPG, Saturn, and Cadillac
3) Close at least three of the five regional offices
4) Close all Zone offices and have employees work out of their homes
5) Get rid of 50% or more of white collar workers in the field
6) The factories will close based upon which models will be discontinued
7) Have upper management take a 35% pay cut
8) Have middle management take a 20% pay cut
9) Cut advertising from $2.3 billion per year to $750 million
10) Get rid of advertising groups and have national advertising only
11) Get rid of co-op advertising dollars
12) Get rid of all promotional advertising
13) Cut all regional and national meetings that cost more than $100,000
14) No parties for auto shows
15) Have special cash incentives for cash only purchases
16) Once the Volt battery is discovered, convert at least half the cars and trucks left after the cut to Hybrid
17) Move 1/2 the engineers to be used to discover more fuel efficient standards and more alternative fuel / hybrid cars
18) Sell all five planes and travel coach (a $100 million savings from cost of planes and a $100 million savings in yearly air cost for a total savings of $200 million).
19) Change the Union rule from 90% of pay for one year if someone is laid off to 70%of pay for 9 months. This alone, if an employee was making $72,800 a year (which is equal to $35 per hour), this would save GM $27,300 per union employee laid off. If there are around 30,000 union employees laid off from the brands closing, that is a savings of $819 million dollars .

2008 Dec 09 09:47 AM

[TB3:]

It's interesting that most critics talk about the "Big Three" when talking about the problems in the industry. However, it seems that when they drill down to specifics, almost all seem to focus on GM, not Chrysler or Ford. I think Chrysler is all but gone, and GM is on the edge. However, I wonder if they are all so bad, why is it that Ford is not asking for money now, and why is it that no "analyst" that I've read, has come up with a better plan for success than Mr Mulally? And why does Ford have a significally higher market cap than either of the other two? Ford has certainly had its problems in the past, and it will be very difficult to regain profitability with their high operating costs (read UAW) and depressed market sales in the U.S. However I think it's time to give Mr Mulally his due and recognize that he has in just a short two years, significantly changed the culture, operating model (business plan), and product quality and reliability at Ford. He should not be included in the "throw the bums out" cry,

2008 Dec 09 10:33 AM

[GM realist:]

Dude one slight issue with your plan to close regional offices. The MAJORITY of cars sold are in the MIDWEST and TEXAS is their biggest truck market. If you close one office it would be LA because SoCal has been a suckhole for GM for at least 10 years.

But I know all you "internet" experts know this...

Closing local offices? So how do the dealers and (mainly) the consumers get support? Oh wait on the east coast time or wait until the LA office rolls in? Do you know what the cost of living is in LA?? Its a lot cheaper to staff in Chicago (Naperville to be exact) than LA.

Its also great that all these "Netsperts" love to exalt Toyota except they have the same field model....

On Dec 09 09:47 AM Joey wrote:

> I would like to be the car czar. Mahony, per your question, GM is
> suppose to make $4,000 profit per car and $6,000 profit per truck.
> Why they are doing so poorly is beyond me. Here are two plans I put
> together.
>
> How to Fix GM – Plan One
> 1) Sell All of GMAC and the Insurance Business (Ditech)
> 2) Cut down from five regional offices to two. One in Atlanta (east
> of the Mississippi River)and one in LA (west of Mississippi River).
> That means Chicago, New York, and Dallas are closed. With about 250
> people working in each location (750 total) at an average of $100,000
> each, that is a yearly savings of $75 million. Operation cost (rent,
> equipment, etc.) at the three locations will save another $1.8 million.
> Benefits for the 750 employees will save another (at $20,000 each)
> another $15 million.
> 3) Next, there is an average of three offices per state (local offices
> in cities across the country), if we close them, that is another
> $3 million in office space.
> 4) Next, the District Managers work out of their house and the Zone
> Managers (or whatever term is given to them), could be let go. They
> make around $150,000 a year and there are about 75 of them. Again,
> a savings of $11.25 million. With benefits, a total of $12.75 million
> in savings.
> 5) Next, cut around 150 jobs at the Detroit GM Headquarters. A savings
> of around $18 million with benefits.
> 6) Next, cut Buick down to two cars (Enclave and Lucerne), cut Pontiac
> to one (G6), cut GMC to two (Yukon and Sierra), cut Saturn to one
> (Vue) – and put all cars to a new umbrella called “United GM”. This
> will save GM billions. Also cut back on two Chevy models and two
> Cadillac models.
> 7) Next, cut advertising in December, January, February, March, April,
> and May (with the exception of auto show advertising for a three
> week period during the show and its incentives). This will save GM
> around $1.4 billion.
> 8) Sell all five planes. This will save GM $100 million in sales
> and another $100 million in yearly travel expenses for a total savings
> of $200 million dollars.
> 9) Change the Union rule from 90% of pay for one year if someone
> is laid off to 70%of pay for 9 months. This alone, if an employee
> was making $72,800 a year (which is equal to $35 per hour), this
> would save GM $27,300 per union employee laid off. If there are around
> 30,000 union employees laid off from the brands closing, that is
> a savings of $819 million dollars .
> 10) Get rid of any health care benefits for those 65 and over. Medicare
> will cover them.
> 11) Change the 90% of pay for a year factory workers laid off to
> 70% of pay for seven months. At a salary of about $75,000, this will
> be a savings of $36,875 per employee. For every 10,000 people laid
> off, this will be a savings of $369 million.
> Plan Two on Fixing GM
> How to save GM
> 1) GM needs to cut their total car models to 25 (from 60). What they
> could do is get rid of all Buicks expect Lucerne and Enclave; get
> rid of all Pontiacs except G6; get rid of all GMCs except Sierra
> and Yukon; get rid of all Saturns except the Vue; get rid of Saab
> all together; get rid of at least three Chevy models; get rid of
> at least two Cadillac models.
> 2) Get rid of half the dealerships. Chevy seems to have the best
> distribution so change the Chevy dealerships to Chevy, BPG, Saturn,
> and Cadillac
> 3) Close at least three of the five regional offices
> 4) Close all Zone offices and have employees work out of their homes
>
> 5) Get rid of 50% or more of white collar workers in the field

>
> 6) The factories will close based upon which models will be discontinued
>
> 7) Have upper management take a 35% pay cut
> 8) Have middle management take a 20% pay cut
> 9) Cut advertising from $2.3 billion per year to $750 million

>
> 10) Get rid of advertising groups and have national advertising only
>
> 11) Get rid of co-op advertising dollars
> 12) Get rid of all promotional advertising
> 13) Cut all regional and national meetings that cost more than $100,000
>
> 14) No parties for auto shows
> 15) Have special cash incentives for cash only purchases
> 16) Once the Volt battery is discovered, convert at least half the
> cars and trucks left after the cut to Hybrid
> 17) Move 1/2 the engineers to be used to discover more fuel efficient
> standards and more alternative fuel / hybrid cars
> 18) Sell all five planes and travel coach (a $100 million savings
> from cost of planes and a $100 million savings in yearly air cost
> for a total savings of $200 million).
> 19) Change the Union rule from 90% of pay for one year if someone
> is laid off to 70%of pay for 9 months. This alone, if an employee
> was making $72,800 a year (which is equal to $35 per hour), this
> would save GM $27,300 per union employee laid off. If there are around
> 30,000 union employees laid off from the brands closing, that is
> a savings of $819 million dollars .
>
>

2008 Dec 09 10:55 AM

[AmericanVOR:]

"Can you name any other industry where the companies that are #1 and #3 in terms of market share are struggling to survive, whilst significantly smaller competitors have no problems generating several fold more in profit?"

Can you name me any other industry where the home companies are given standards and regulations by their government, but no financial subsidization to execute their law, but then that same home government offers heavy tax breaks to foreign makes to set up shop here? Foreign makes that have health care sponsored by their home government? Foriegn makes that are also subsidized by their home government in their operations including the resource hungry R&D operations?

Can you name me another business that: is credited for raising the standard of living, creating the middle class, offered security to workers at retirement, provided health care, manufactured war machines for their country, gives heavily to the United Way through corporate and employee contributions, donated milions in cash and vehicles after national disasters and terrorists attacks, and was given accolades for helping jump start the economy after 911, and now that same company is treated like gum on a shoe by congressmen and millions of decade-old stereotype-spouting amature bloogers and uninformed professional journalists?

Can you name one other company that has been such an intregal part of American history, but is now the subject of hate and ridicule for simply trying to provide quality benefits while its market is structured for foreign brands to do business much more cheaply than the home team?

2008 Dec 09 11:12 AM

[sr9web:]

Joey - I vote you for czar!

2008 Dec 09 01:34 PM

[Paul Killinger:]

In what other industries are the No. 1 and 3 players losing money?

Let's see. How about banks, brokers, home builders and electronics for a start. The Congress is on course to bail them all out.

You asked the question.

2008 Dec 10 08:51 AM

[Ferdinand E...:]

This year's Nobel prize winner in economics (Professor Paul Krugman) gave a talk in Stockholm a few days ago, and in his opinion the US car industry is not long for this world. Since it can't be shaped up, he thinks that it will have to be shipped out.

Unfortunately he also admitted that he doesn't know much about that industry. A lot of other people are in the same position, although he probably knows more than last year's prize winners, whose work was completely and totally without any scientific value, and so they needn't be questioned. Therefore, I think that this is the time to forget the opinions of know-nothings and practice what is known in game theory as 'backward induction'.

We start with the bottom line, which is that the US automobile industry will stay in the US, regardless of what Mr Krugman or anybody else thinks or believes. The reason is given above by AmericanVor. As for working out the details, I would love to put my arrogant shoulder to that wheel, but unfortunately I can't drive, know less about cars and car factories than Dr Krugman, and have no desire whatsoever to change this situation.. .

2008 Dec 10 10:33 AM

[k9s-4-k8:]

i see this car czar as a Congressional marketing ploy to hide the fact that they're totally unwilling to push the UAW to rework their contracts. Part of the congressional/UAW plan may be new expectations with the card check bill. If the UAW can infuse new union dynamics into the domestic based foreign auto manufacturers plans, they might be able to afford the UAW cost structure as it now stands. The mistake in this thinking is to assume that these foreign auto manufacturers haven't learned anything from UAW history and remain in the U.S.

2008 Dec 10 11:31 AM

[k9s-4-k8:]

Krugman published his work 30 years ago. It isn't any new theory. Its not even clear he still believes his earlier work. Nevertheless, he isn't likely to denounce that which got him his prize now. One may wonder what took them so long. Its because his work didn't really deserve a Nobel prize. It was purely a political choice before the U.S. elections where the Nobel prize voters are a roomful of European socialists with a watchful eye on the American elections.


On Dec 10 10:33 AM Fred Banks wrote:

> ........ although he (Krugman) probably knows more than last year's prize winners, whose work was completely and totally without any scientific value, and so they needn't be questioned.

2008 Dec 10 11:42 AM