Problems That Detroit Bailout I Doesn't Address 16 comments
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Call it a starter bailout. And get ready for a second, a third, or even a fourth.
The $15 billion in emergency loans that the White House seems ready to approve for General Motors (GM) and Chrysler would extend their lifeline into the first weeks of the Obama administration. And by putting a "car czar" in place to oversee the companies, the bailout would create a new structure for forcing change in the beleaguered automakers.
But GM and Chrysler would remain very weak and continue to lose ground to the competition. Ford (F) may, too, although it hasn't asked for any emergency cash just yet. Here are some problems that Detroit Bailout I doesn't address:
A desperate need for cash. The $15 billion for GM and Chrysler falls far short of the $28 billion the two companies say they need. And it's a good bet even that is a low-ball figure. Mark Zandi of Moody's Economy.com told Congress that if the Detroit 3, including Ford, maintain their combined market share of about 50 percent, then the car companies will require about $75 billion in government aid. If their market share shrinks to 40 percent and they sell fewer cars, it could cost $125 billion. It's extremely unlikely that GM and Chrysler will be able to stop burning cash anytime soon, especially with the car market expected to be even worse in 2009 than in 2008. That means the automakers will be back asking for more, probably a lot more.
[See why bankruptcy might be good for GM.]
Falling market share. It's also a safe bet that the Detroit automakers won't hold on to their 50 percent market share—so plan on Zandi's worst-case scenario. Fitch Ratings, in its forecast for 2009, points out that while domestic dealerships are losing sales because of tighter credit standards, foreign-based companies like Toyota (TM) and Nissan (NSANY) are still able to offer zero-percent financing and other enticements, which almost certainly means they'll take more share from the domestics in 2009. Any discount is good news for consumers, but it means the Detroit 3 will sell even fewer cars—and therefore require more money and more time to get healthy.
[See who might benefit from Detroit's woes.]
Damaged brands. Car-shopper data already show that GM and Chrysler are losing customers, as news of their problems spreads to showrooms and consumers. Sales of domestic brands are down this year, more than twice as much as import brands. And in a recent study by CNW Marketing Research, 29 percent of buyers considering a GM vehicle said they fled to another brand because of fears that the company would declare bankruptcy. Of those, 19 percent went to fellow domestic Ford, but 15 percent went to Honda (HMC) and 11 percent went to Toyota. That's one more reason GM and Chrysler sales are likely to tank in 2009, possibly coming in far below what the companies themselves predict.
[See why America is shunning GM.]
Time is working against them. All three Detroit automakers made favorable deals with their labor unions last year—but most of the concessions won't materialize until at least 2010. In its "viability plan" submitted to Congress, GM said it expects to lower labor costs to the point that they're about equal to those Toyota carries at its U.S. factories—but not until 2012. Ford said its labor costs are about 44 percent higher than at nonunion auto factories, with a goal to lower them to near parity by 2011. But it seems obvious now that we can't wait that long. The United Auto Workers has said it will make more concessions if necessary to keep the companies in business. But the union has also asked for a seat on GM's board, which isn't a concession: It's a demand.
[See how the automaker's bailout plans rate.]
Nobody's buying cars. No matter how much money Washington sends to Detroit, it won't give consumers a reason to buy cars. "Government mandates don't create market demand," says Jeremy Anwyl, CEO of Edmunds.com. Just a year ago, the automakers were preparing for Americans to buy about 16 million cars this year and next. Actual sales in 2008 will be fewer than 14 million, and sales could bottom out at 12 million in 2009. Nothing will boost that except for an end to the recession and a consumer-confidence revival. Unless, that is, the automakers go out of business and flood the market with fire-sale cars.
Disclosure: No positions.
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Or is "forced" bankruptcy the real plan? That way neither policians nor executives could be blamed. After all, they tried.
That sums it up. This entire Detroit debate only addresses a symptom of the recession. Better to fix the economy and cure the disease.
Don't start with old Detroit auto companies and the "deep south" crap.
The REAL outrage is the financial sector ( Like AIG, etc) that continues to reward it's hot dog gurus with outrageous bonuses and salaries and no questions asked for $150- $350 - $700 - $800 BILLION. Yes, the "Big
3" could have tried to anticipate the market and get workers to work for less, and yada-yada-yada sooner. But what about the grossly overpaid financial guys at Freddie, Fannie, Lehman Bros. , etc who went bust and got HUNDREDs of BILLIONS with hardly a question and no congressional 3rd degree.
This auto thing is more of a smoke screen to confuse and draw attention away from the greed, stupidity, and irresponsibility of the financial world, and the good old boys in congress who just HAD to help out those buddies! Go back to school. Everything you learned about business and finance was bogus and designed to let run away greed happen like it just did in the financial sector. Derivatives, credit default swaps, what a bunch of rip off BS!
What you fail to consider is the catastrophic effects on the American Economy if the American automotive industry is allowed to go bankrupt. Its something called jobs, something that a large number of so called financial analysts don't bother to mention. If the American automotive industry goes bankrupt, its going to take out their LONG supply chain as well… yet more jobs, yet more economic chaos… If the bridging loans are not provided, you better short everything, because the market will go off a cliff. Now you have money, money that will probably be worthless because our currency will probably go off the same cliff.
You need to consider the bigger picture. Stop pointing fingers and stop constantly reporting all of the negative aspects associated with the American automotive industries current position. The fact is the American automotive industry needs to be revitalized. That change process needs to be integrated with a national energy policy. That integration would NEVER have happened if the American automotive industry was in good financial condition. With the appointment of an Automotive Kaiser or Caesar, the United States has an opportunity to make major changes in an obviously dysfunctional industry. Its dysfunctional in many ways, but in this instance, its dysfunctional because if it was highly successful in selling gasoline powered vehicles the country would never have the opportunity of implementing what should be our countries fundamental goal, ending our dependence on foreign oil.
One of MANY possible scenarios… Immediately start building natural gas distribution stations all over the US. Now mandate that say X % of all new American vehicles only run on natural gas. Now start expanding the distribution stations… now increase the natural gas made American vehicles… Now pass laws that X % of foreign imports must run on natural gas… keep expanding the natural gas distribution stations… Keep this up until this country no longer allows new gasoline vehicles to be sold in this country. Who owns those natural gas distribution stations? In the end, they should be sold in an IPO, but I suspect private capital would probably enter the market as soon as the game changing aspects of a plan like this were known.
Lots of obvious issues here that need resolution.. But instead of just critizing or identifying problems, how about identifying the problems and coming up with solutions to those problems that are in alignment with the PRIME GOAL, ending this countries dependence on foreign oil.
What is good for America is sometimes not necessarily in alignment with goals of private businesses designed to maximize profits, goals that are often highly short-sighted. Its time to stop the transfer of this countries wealth to foreign countries by purchasing foreign oil. If you visit one of the oil rich countries, you will see that their infrastructure is brand new. Its brand new because Americans paid for it. Contrast this with our crumbling infrastructure. It's long past time for change.
What did the American automakers do? Continued to build gas guzzlers at inefficient plants that failed to excite the American public.
Then, Chrysler asked the Congress for a loan to keep from going under. The loan was granted, the company introduced the K car and minivan, and resurrected itself and the industry. And repaid the loan early.
GM was at the time the largest automaker in the world, with a 55% market share in the US, by far the largest market. Its strategy at the time was to 'graduate' buyers from Chevys, to Pontiacs, to Buicks, to Cadillacs, all the while making profits on each upgrade. And the company sustained a loyal following for another 15 years. But quality was an issue. That didn't matter much, though, because no alternatives existed.
Then, the foreign manufacturers, led by Honda and Toyota, began to introduce well-designed, reliable, fuel-efficient cars that ran without problems for years. They simultaneously expanded their dealership network (although not at the pace of the domestics). As a result, foreign dealerships found themselves making excellent profits, selling excellent cars.
As the foreign dealer network became more powerful, profits flowed back to Japan and Germany to finance massive R & D projects, to further streamline production processes, refine designs and introduce a broader model range.
Meanwhile, the American manufacturers were more interested in keeping the peace with the UAW than improving their efficiency.
When foreign automakers began building plants in the US, the streamlined production processes bore fruit in markedly lower production costs. The Japanese business model had as a cornerstone the use of contract workers, a more flexible workforce that could be adjusted based upon demand, rather than a static workforce that needed to be paid whether or not autos were selling. That, along with the ability to quickly adjust production in response to consumer demand, spelled the end of the US automaker model.
But the end was masked by strong demand through the 1980s and 1990s, which lulled the Detroit 3 into believing that they didn't need to adjust to a changing competitive landscape.
And now, the bridge loan will keep the companies in business for four months.
Bankruptcy protection would probably be less messy than the proposals that are now on the table, even though the cases would drag on for years. (Case in point: Delphi has been operating in Chapter 11 since 2005. GM could conceivably operate another decade or two while in Chapter 11.)
In the end, I agree with Dr. Zandi: A failure to act now would put many jobs at risk when the economy is already in recession. But after this money is dispensed by whoever becomes the Car Czar, the systemic problems plaguing the US manufacturers will continue, pointing to bankruptcy protection for Ford and GM/Chrysler by 12/31/2009.
(I'm presuming that Chrysler and GM will ultimately merge, and Chrysler Financial will become the commercial bank that gains access to TARP funds.)
But the Republicans are so bitter about losing the election, that the few remaining Repubs want to take it out on organized labor and the regular working people, (for whom they have never done anything for). This whole idea of wanting them to go into bankruptcy is just an attempt to break the Union, and screw the retirees.
At least the bottom 40% have been sinking for years with no benefits. At some point the politicians will not be able to wave their magic wand anymore. All the distortions and political favoritism have yielded the last lousy "recovery" (really it wasn't except for phony stats and insane Wall St. leverage) followed by this historic bust.
I understand somehow mitigating all the pain, but this path of rewarding the most privileged is despicable. Especially to our future generations.
Top salaries paid to members, proven track records in their respective fields.
We would then have a goverment of active members doing what is right for the country and not concerned about getting reelected.
R&D funding for qualified companies in alternative energy fields.
GM is looking to dump pensioners on goverment.....
Hire CEO's from Japanese companies ......
Give oil industrry 5 years to find alternative sources on energy or nationalize them
America, it is your move now. The ball is now firmly in YOUR court.
I believe that without some sort of legal intervention (Congress, bankruptcy courts, whatever), the big three were doomed by the entitlement society that America has become. Without the scornful eyes of the public, more than likely GM et al would have been forced to continue such outlandish programs like the "Jobs Bank". I'm sure that without UAW arm-twisting, GM would have done away with that abomination ages ago - no public company can shamelessly flaunt that in front of shareholders and expect their management to survive UNLESS labor was the cause of the problem. Furthermore, labor couldn't have gotten away with such a feat without the media's liberal bent. Which brings us back to the consumer of all this content, who elected the officials that are now prosecuting these companies. It couldn't have happened any other way...
Bravo! Let's get the party started...
On Dec 10 10:11 PM Ricard wrote:
> This has been years in the making. I'm not sure exactly who you
> can blame. The big 3 pushed insane incentives the past couple of
> years to get anyone, ANYONE to buy a car (0 down, 0%, employee discounts,
> etc). Now, they've completely exhausted the market, which even without
> a recession, is probably oversaturated anyway with cars. I praise
> the leadership in this sense - they knew it was going to be bad,
> so they prepped the market so that when it came, it would hit so
> hard that Congress would be forced to act.
>
> I believe that without some sort of legal intervention (Congress,
> bankruptcy courts, whatever), the big three were doomed by the entitlement
> society that America has become. Without the scornful eyes of the
> public, more than likely GM et al would have been forced to continue
> such outlandish programs like the "Jobs Bank". I'm sure that without
> UAW arm-twisting, GM would have done away with that abomination ages
> ago - no public company can shamelessly flaunt that in front of shareholders
> and expect their management to survive UNLESS labor was the cause
> of the problem. Furthermore, labor couldn't have gotten away with
> such a feat without the media's liberal bent. Which brings us back
> to the consumer of all this content, who elected the officials that
> are now prosecuting these companies. It couldn't have happened any
> other way...
>
> Bravo! Let's get the party started...
willworkforjustice.blo...
Noone - at least not me - knows where this is going. There is no point in saving jobs in a buggy-whip industry (irony intended). If the gov't bails out the big three then the Democrats will mandate well-meaning but ill-informed change.
The root problem is that we have designed our cities so that an automobile is a necessity. This is what we bought with the trillions in public and private debt we must now unwind. We built roads, water/sewer, electric grid, and quarter acre lots. Some think we should invest in rebuilding that infrastructure to give people jobs. But this only tries to maintaing an unsustainable status quo. Look how Japan is building thier cities. We should copy. Put that in your pipe and smoke it!
That's close to impossible, not to mention wildly impractical.
Public transportation is woefully inadequate for moving the millions of people who now use their own cars. Cities built many years ago with transit systems based on a 'hub and spoke' concept now find that there's as much commuting between suburbs as there is from the inner city to the suburbs. Not only the LA basin, but Dallas, the SF Bay area, Houston, south FL, Atlanta, the DC area, NYC, and Boston have thriving suburban workspaces, unserved by public transportation.
As a consequence, even if you could unwind the progression of cities growing into exurban areas, what would you replace the automobile with? And how would you pay for it?
To me, a push for more energy efficient commuting vehicles is a far simpler plan. And the foreign carmakers have responded with well built, well engineered, market pleasing products. Those products, by the way, have a far lower cost to own than domestics, not because of price, but because of long-term reliabilty and ease of repair.
Until the Detroit carmakers figure out how to build small cars at a profit, they'll be under financial pressure. And unless the industry is forced to do it, it won't.
You're absolutely right about rebuilding cities being nearly impossible and impractical. I really didn't mean to promote this as a short term solution; more to illustrate the depth of the problem. Nonetheless, it is time to create policy and incentives to discourage and reverse sprawl.
Yes, it would certainly help to build energy efficient cars. It costs the same to have a door installed on an Explorer as a Focus. Hence, large vehicles are more profitable. Small vehicles will only be profitable with much lower cost structure which primarily means lower labor costs.
My point is that even as we need to financially restructure the auto industry, we also need to retool to different technology, only it is still premature to know what that technology should be.
1) Have you been to Tokyo recently? It takes over 20 minutes to go about 1-2 km on an average day. Sure they got great public transportation, but their road system is even more congested than ours.
2) About looming obsolescence, the automobile will become obsolete once tanks do, and I don't see that coming any time soon. We need that industrial capability, lest we export our national defense to other countries along with everything else.