car_guy

Big Three Endure Public Flogging - Government Finally Gets it Right

This brings up another good point. How can the ratings agencies constantly downgrade the US 3 manufacturers driving up their costs & making them uncompetitive (you notice only Toyota is offering 0% financing, with GM's credit rating how could they afford it) while rating derivatives they don't even understand AAA. Isn't a lack of understanding the very definition of risk.

This sounds like market manipulation 101. Put high ratings on the products your customers, the investment banks, want to sell and downgrade everything else. After being so incredibly wrong, why does anybody care what Moodys/S&P/etc rate anything at?


On Dec 07 02:47 PM James Wilson wrote:

> I can see what Buffet means now. Each Derivative split into hundreds
> of small pieces with the total profit broken into even more Derivatives
> then sold in a package at full value as AAA paper.
>
> The same thing Enron was doing by dividing the risk then packaging
> the longterm profits as a short term gain.

Detroit Bailout: What's the 'Real' Cost?

Tom got his facts backward. The Michigan congressional deligation & some from other Auto heavy states in the midwest threatened to block the approval for the next $350B if something wasn't approved for the Auto companies.

The original deal that Senator Carl Levin brokered and then killled by Pelosi & Reed killed was for the original $25B in loans, that was allocated to offset the $40B in spending congress forced with the CAFE bill last year, was to be used for immediate expenses and the fund would be replenished as OEMs paid it back. It would then be available for the original loans which are restricted to spending on tooling for plants over 20 years old and for vehicles that are 20% more fuel efficient than the previous product. So the total outstanding loan amount will not exceed $25B.

Of course it took Congress over 1 year to fund the original $25B they promised and after another month under the microscope they still haven't approved anything for the short term. Citigroup got their first $25B in a day without any testifying or sacrifice of any kind and got their next $25B along with a $300B guarantee, over a weekend, also without any sacrifice on their part. These aren't even loans but equity and purchase obligations for bad debts.

Stop complaining about the Auto loans, when and how are we going to see any of our $350B from Citi or the $150B from AIG? Who is going to get fired at AIG for the $500M European exec vacation they took with our tax dollars?

Aid for Chrysler: Why I'm Saying NO!

Robert,

This is a good article, but it does highlight the depressing amount of misinformation in the media and on the net about the auto industry and the US 3 in particular. Going over your loan conditions...

1. An oversight board would make sense, but replacing Rick & co. would only set things back further. Ford brought Mullaly in to fix a dysfunctional culture which GM does not have. Cerberus replaced almost all of the top management at Chrysler and the non-Auto execs have made a number of major mistakes while trying to learn the business.
2. This is logical, and should be a requirement for the financial companies, but would unnecessarily handicap GM. They turned their acquisition of Daewoo into their small car development center & they may need to acquire or invest in a supplier to provide a solid source of batteries for the Volt & other hybrid vehicles. Also, there is no chapter 11, only chapter 7 for an Auto OEM. When Auto OEMs die they are purchased whole or in parts by other companies. While buying all of Chrysler doesn't make great sense for GM, buying their minivan business could since this is profitable and fills a hole GM has.
3. Most of this was done last year and the jobs bank was put on the table this week. The problem is not current workers, no UAW member is making $70/hr, but the cost of retirees. GM has 4 retirees for every 1 working employee. GM has tried to change this in the past but the retirees have taken them to court and won claiming that they have a contract. Also, if Congress was so great at taking entitlements away from seniors I think we would have made more progress w/Social Security & Medicare.
4. Brands are not really the issue, the issue is dealers & model diversification. Dealers, and therefore brands, used to need 3-4 models to survive. Today less than 10 models sell over 100K vehicles/year so dealers/brands need many more vehicles to meet profitable volume. Toyota now has 17 models, not counting hybrid variations or Lexus. GM & Chrysler can't have 17 models for each brand, but by combining brands into a single dealer, can achieve the same result. Killing brands requires huge payments to dealers due to state franchise laws and dealer consolidation may be the only way to solve this.
5. Sorry, but GM does not have any brand specific plants because there are no brand specific platforms. Multiple brands, when done correctly, helps build up volume to profitable levels. This is why every automaker shares platforms between brands. Killing brands will also likely reduce the volume below profitable levels on the remaining vehicles. Kill those vehicles and the brand can't compete. See how fun this gets? Take the brands out of the equation and GM is already doing this and has been working on increasing manf flexibility for the last decade.
6. GM already produces more fuel efficient vehicles than Toyota or Honda. Once they fix their cost structure they can actually start making $ on them. This is the dumbest myth that the media constantly repeats, "Detroit doesn't build small cars." GM & Ford make plenty of small cars, they just don't make much if any profit on them. Americans will not pay big $ for small vehicles, unlike Europeans and Asians, so the margins for small vehicles are very small no matter who makes them. The $2K "penalty" GM pays for retiree healthcare & pension costs wipes out any profit from these vehicles. The profit for trucks & SUVs are much higher because the sales price is much higher because Americans will pay more to get more. Europeans & Asians pay more for small cars in urban areas because big cars are not workable in Paris/London/Tokyo but also because those governments actually have an energy policy that provides incentives for consumers in the form of expensive gasoline. This is not just the US 3, if you look at the vehicles and factories that the foreign companies build in the US, all of the recent investment has been trucks & suv. The last 3 plants Toyota build in the US, including the one that is going to build the Prius, were all for full size trucks & SUVs. If the numbers were available you would see that Toyota has easliy outspent GM and/or Ford on this market segment because that was where the profit & growth in the US was until this year. Therefore, forcing GM to build more small cars, without changing energy policy, doesn't make much sense.

Chrysler is also a victim of the credit crunch, but in a different way. In a normal credit market a foreign OEM like Renault/Nissan, PSA, Fiat, Tata, or a Chinese OEM would have purchased most or all of Chrysler. Renault would make the most sense since they have a successful alliance w/Nissan, need a North American partner, & worked with AMC in the past. However, they cannot secure the credit they need for an acquisition and are waiting, like everyone else for sanity to return. Chrysler going down would take a few large suppliers with them, not as bad as GM but it could cause a similar crisis for all Auto OEMs including the Asians. The better solution is to find a suitable partner for some or all of Chrysler. Cerberus should take the bath they deserve, but no reason to take the rest of the country down with them.

Big Three Endure Public Flogging - Government Finally Gets it Right

Mr. Newman's article raises very good points. The Wall Street firms never even had to testify for their gifts. Their money is not even a loan. The $300B for C is to cover the losses on bad debt. That is all taxpayer $ down the drain. Their remaining $50B is in "equity" which I put in quotes since this already exceeds their market cap. I also have not heard Congress demanding that Pandit cut his pay to $1 and sell all of their perks. I did not even hear any uproar when AIG spend $500M of taxpayer money for trip to Europe to "reward" their top executives for their performance this year.

TenQ - the gifts to the financial community are not a 1 time deal. We have been here before with the savings & loan crisis, the huge infusion of capital after the '88 crash, the huge infusions of capital at the begininng of this year, and AIG has already gone back to the well 2 months after their original loan for another $70B and a huge cut in their interest rate. This was after wasting almost 1% of the original amount on the executive vacation. GM/F/C were not interested in government loans until the banks tightened credit so much that ALL US auto sales, foreign & domestic, dropped over 30% the last 2 months to levels that no car company can run at for long. If the financial institutions that caused this mess took some of the $7 TRILLION in government money they received and actually used it to provide consumer credit, the US 3 would not be in Washington.

The UAW, of which I am neither a member nor a fan, finally took their lumps last year and conceded to a contract with lower wage benefit levels for new workers and moving the health care & retirement liabilities off the companies books & into a VEBA. That is why they keep saying they will be at parity with Toyota/Honda/etc in 2010.

Why AmEx Becoming a Bank Holding Company is a Positive Move

So you support Amex getting a bailout for providing credit to uncreditworthy individuals and getting hurt by the credit crunch, but you are against loaning money to the auto companies who are hurting from the same crisis.

This is the type of hypocrisy and regionalism that is a big problem in our country right now. If you work out of New York or California you can take all of the risk you want and the government will cover your downside. If you work in the "rust belt" of the midwest then you are on your own.

It is not the government's place to pick winners and losers. Once they started bailing out Wall Street for making fortunes selling bundles of liar loans to investors, they opened the door to help other companies that are "too big to fail".

Bail Out Capitalism, Not Detroit

GM has 2 cars in Car & Driver's top 10, Ford has 1 and Toyota has NONE. Honda's brand new Fit gets worse gas mileage than the Chevy Aveo & the Chevy Cobalt, which has a more powerful engine. Consumer Reports new paper on Auto quality states that Ford's quality is equivalent to the "good' Japanese companies (Toyota & Honda) and many of GM's vehicles are as good or better, including their mid-size Chevy Malibu.

You can always spot somebody who knows nothing about the industry or the business when they use the Hummer as if it were the most important GM vehicle. Hummer fills a niche, a very expensive & profitable niche, but was never more than a way to sell very high priced versions of GM's high volume SUVs. Low cost & high profit is typically a good combination.

I would stay away from Professor Katsenelson's business classes. The truck market sells high volumes (+1MM per platform) of high priced(40K+ per vehicle) vehicles and the GM/Ford/Chrysler brand name is still very strong. The small car market is lower volume(+100K per platform) and much lower priced(<20K per vehicle) and the Toyota/Honda brand name is much stronger than the US brands. Additionally, the $2K/vehicle penalty the US 3 pay for pension and healthcare can't be covered by the margin on a sub-20K price.

Why would the US 3 invest more heavily in a market where they get a much smaller return? For the 3 months when gas goes above $4/gallon? I am really tired of this moronic argument.


On Nov 21 04:14 PM JSL15 wrote:

> I'd say that article's pretty right on. The problem with GM is they
> don't make a very good product. How many of you defending them actually
> own or plan on buying one of their vehicles now? Hummer anybody?
> Sure that's a practical vehicle. Who could have possibly forseen
> that a FINITE resource that is the most traded commodity in the world
> would become expensive? The real shame of course is that the worker
> suffers because of terrible management. The best thing that could
> happen would be for GM's factories, assets and workers to be taken
> over by a company that can design vehicles that people actually want
> or better yet NEED. You have to think ahead in the auto industry
> to stay alive.

Tough Love for Detroit Is Long Overdue

Professor Yermack's agrument is fundamentally flawed. The US financial industry has destroyed well over a $1 Trillion in value and the credit crisis they caused by packaging up liar loans and selling them as AAA securities has caused a global recession and may cost the US 2.5-3 milliion jobs & up to $150B/year in tax base if the one or more of the US 3 go bankrupt. However, they were rewarded with $700B in bailout funding, which appears to have come with few if any strings.

Tough Love for Detroit Is Long Overdue

The Bush administration's policy of providing cheap credit to try to keep Wall Street growing drove the housing crisis. The housing crisis impacted contractors who buy pickup trucks and SUVs for work. This started the downward pressure on the US 3.

The Bush administration's ongoing war and huge deficit spending combined with cheap credit created a weak $ which increased the price of oil +30% beyond where it would have been with a strong $. Great for oil companies but when it hit $4 the people that didn't "need" to drive pickups & SUVs but bought them anyway stopped buying. This made things much worse.

When gas hit $4 Bush signed a 40% increase in the CAFE standards which penalize the US OEMs for selling high profit, high volume, vehicles where their brand image is very strong (Toyota has been building full size pickups for 15 years and still hasn't passed Chrysler let alone GM & Ford). This burdened the industry with an estimated $40B in additional cost at a time when the industry was in trouble. That would be like increasing the capitalization requirements for banks by 10-20% when the banking crisis started.

Bush's EPA dragged their feet and delayed writing the rules for the $25B loan that Congress & Bush authorized in 2007 w/the CAFE increase but never bothered to actually fund,

The credit crisis created by lack of Bush adminstration oversight and the decision to let Lehmen to bankrupt dried up the credit market and drove down sales in the entire US auto market by +30%.

Remember, last October GM, Ford, & Chrylser signed a new contract that would resolve the hourly health care and pension issues and bring their costs in line with Toyota and other Asian OEMs. Even in June all 3 companies were reducing capacity, bringing their costs in line by buying out expensive workers to replace them with less expensive workers. Chyrsler was shaky, but GM & Ford were still on track and no 'bailout' was necessary. The credit crisis changed all that.

I really can't imagine how this administration could have managed this any worse. His team couldn't have been more effective if they were trying to kill off the industry.


On Nov 18 02:28 PM mynine14 wrote:

> This is a great piece and coincidentally I could not agree more.
> With a bailout what would the two or three do differently in the
> short run such that they will emerge from their destitution? Without
> a bailout they would perhaps reevaluate the marketing strategy and
> conduct an honest market risk analysis so that they will align production
> with consumer demand.
>
> The current situation is largely executive complacency, product marketing
> mismanagement, and demonstration of the union pitfall.
>
> Rhetorical question for Mr GM Driver... Please explain how President
> Bush had his hand in the demise of the domestic auto industry?

Detroit's Hail Mary: Saving the Automakers

paulk8756 - so you are saying that the US is the only capitalist society on the planet? Everyone else is socalist? I thought we won the cold war!

Detroit's Hail Mary: Saving the Automakers

This is a good article and summarizes the current situation. The biggest problem is that unlike Japan, Europe, and even Korea, health care and retirement pensions are the responsibity of the company. In the home country of every US 3 manufacturer, government programs cover pensions and health care, especially for retirees. While this also raises taxes, it distributes the cost across the economy. Additionally, US laws force companies to meet ever changing minimum funding requirements for their pension plans. This means that the government will likely force GM to take cash it needs to run its business into its pension plan and retiree health plan because of the huge drop in the market. Ironically this will drive the companies into bankruptcy, chapter 7 not 11, faster which will shift the liability for these penisions to the government. I have seen estimates that for just GM & Chrysler, this will cost the government over $20B.

The UAW contract negotatied last year will make the Detroit 3 cost competitive with Toyota/Honda/etc (that is what GM held out for in the negotiations) once the VEBA to manage retiree health care is established and these liabilities come off the books. Both GM and Chrysler must put $7B in cash into their VEBAs in 2009 (Ford's number should be similar). If the government provided this funding it would take these liabilities off the books, which would give the companies the cash they need to move into 2010 and help offset the competitive disadvantage policies around health car in this country have created.

Also, GM and Ford would likely go into bankruptcy like Delphi did, which was to only declare bankruptcy for their US operations. Their international operations, which have been very healthy and competitive would continue. Chrysler cannot do this because they are US based. .

So either the government provides some aid, preferably by providing funding to the VEBAs, or they accept over $20B in pension and healthcare liability, the loss of over 100,000 jobs, and the relocation to Europe of 1 or 2 historic US companies.

I'm glad to see you understand the dire consquences involved. Too bad most other people do not.

Nationalizing Detroit? It's a Good Idea

Markham,

This is a good article and summarizes the current situation. The biggest problem is that unlike Japan, Europe, and even Korea, health care and retirement pensions are the responsibity of the company. In the home country of every US 3 manufacturer, government programs cover pensions and health care, especially for retirees. While this also raises taxes, it distributes the cost across the economy. Additionally, US laws force companies to meet ever changing minimum funding requirements for their pension plans. This means that the government will likely force GM to take cash it needs to run its business into its pension plan and retiree health plan because of the huge drop in the market. Ironically this will drive the companies into bankruptcy, chapter 7 not 11, faster which will shift the liability for these penisions to the government. I have seen estimates that for just GM & Chrysler, this will cost the government over $20B.

The UAW contract negotatied last year will make the Detroit 3 cost competitive with Toyota/Honda/etc (that is what GM held out for in the negotiations) once the VEBA to manage retiree health care is established and these liabilities come off the books. Both GM and Chrysler must put $7B in cash into their VEBAs in 2009. If the government provided this funding it would take these liabilities off the books, which would give the companies the cash they need to move into 2010 and help offset the competitive disadvantage policies around health car in this country have created.

Also, GM and Ford would likely go into bankruptcy like Delphi did, which was to only declare bankruptcy for their US operations. Their international operations, which have been very healthy and competitive would continue. Chrysler cannot do this because they are US based.

So the natural selection people describe will be GM or Ford or both shutting down operations in the US and moving to Europe, most likely Germany, to resume as smaller companies. They could even import cars from Europe/Asia and trucks from Mexico into their remaining dealer network.

So either the government provides some aid, preferably by providing funding to the VEBAs, or they accept over $20B in pension and healthcare liability, the loss of over 100,000 jobs, and the relocation to Europe of 1 or 2 historic US companies.

I'm glad to see you understand the dire consquences involved. Too bad most other people do not.

Buy a GM Car, Get 50 Shares Free?!

Markham,

Toyota is offering 0% financing to everyone on every model except the Prius and Yaris (no special offers) and the Avalon (2.9%) and (Camry Solara 3.9%). Here is the link:
www.buyatoyota.com/Spe...=

Employee pricing is much cheaper for GM right now than 0% financing. With GM's & GMAC's credit rating at junk bond levels the point spread between the rate they borrow the $ at and 0% is too high. Keep in mind that GMAC doesn't charge GM 0%, so GM's spread is even higher.

GM went with the big incentive earlier than Toyota because they have less cash than Toyota. Toyota held out longer hoping the market would recover in September. When it got worse they needed to recover volume and went with the big incentive. Even for Toyota 0% financing has to be very expensive right now.

You can still lease an American car, just not thru their captive financing organizations (GMAC, Ford Motor Credit, Chrysler Finance). The reason they stopped leasing is because the American companies sell way more trucks than the Japanese and Germans and the bottom fell out of the auction market for trucks & SUVs last summer which resulted in big losses when the finance companies had to sell the vehicles for far below the residual value.

Here is a NY Times article that explains the problem and why discontinuing them makes good sense:
www.nytimes.com/2008/0...

Leasing is actually one of real problems the American companies created for themselves. Leasing requires the finance company to assign a residual value to a vehicle 3-5 years before they plan to sell the vehicle. If the market changes, like it did this year with the price of gas, the companies are forced to spend cash to pay for vehicles they already sold.

The Toyota Camry outsells the Malibu because it has been a market leader in that category for 25 years and the new Malibu came out last November. No matter how good the car is, it will not overtake the Camry in less than 1 year.

Here is an article from Edmunds AutoObserver describing the success of the Malibu in significantly increasing its avg transaction price over the previous version: www.autoobserver.com/2...

Here is an article from Motor Authority showing that almost 1/5th of Malibu buyers replaced import vehicles: www.motorauthority.com...

And just for grins, the editors of Kelly Blue Book voted the Malibu the top mid-size sedan over Accord and Camry here: www.prnewswire.com/cgi...=

Your article claims that GM needs to produce a car that can sell without needing discounts (Edmunds article) and attract buyers from import brands (Motor Authority article). The Malibu does both.

Unfortunately the article describing the higher transaction price for Malibu over Camry is no longer on line. However, I would love to see your references for how poorly this vehicle is doing.

Stick to what you know, which is obviously not the Auto industry.

Buy a GM Car, Get 50 Shares Free?!

Its amazing how someone who posts articles on the internet doesn't see the need to use it to research an industry he obviously knows nothing about. The heavy use of incentives was news 2 years ago when it was causing problems in a reasonably healthy auto market. The US 3 addressed this issue by changing their pricing structure and downsizing to meet retail demand. The new Malibu was so popular it was selling for a higher final sale price (the price consumers actually paid for the vehicle) than the Toyota Camry.

If Marhkam did any actual research he would realize that the auto market right now is 3-4 million vehicles less than the last 2 years. This is why Toyota is now offering 0% financing, just like the US 3.

For a consultant Markham does very little research and his opinions, at least on this industry, are consistently outdated and incorrect. I hope his actual customers get a higher level of service.

Government Approves $25B Low Cost Loan Package for Auto Industry

Another example of how the Seeking Alpha contibutors know absolutely nothing about the Auto industry they love to complain about. These loans were tied to a 40% INCREASE in Corporate Average Fuel Economy which requires Auto companies to SELL a combination of cars that average 35 MPG. They can make all of the small cars they want, although domestics and imports are counted seperately so Chevy's Aveo doesn't help the Impalla, but if customers want to buy larger vehicles because gas becomes cheap again, the Auto companies have to pay the government a huge penalty. The $25B loan package does even come close to offsetting the $35B cost the government estimates the Auto companies will pay to achieve the new government regulations.

CAFE is far more socialistic than any government loan package will ever be. It penalizes Auto companies for selling a vehicle mix the government doesn't like but consumers actually prefer. It is also the root cause of the truck/SUV fad because the CAFE requirements for these vehicles were much lower than cars so Auto companies could make the big trucks/suvs customers wanted without paying a CAFE penalty.

The loans also come with huge requirements. They will be given out on a plant by plant basis and each plant must be at least 20 years old (Honda, Toyota, and Nissan plants are elligable) and the loan must be used for tooling for a new vehicle that gets 25% better mpg than the previous vehicle the plant produced.

If the government treated the banks and wall street like they treat the Auto companies they would have raised the capitalization rates 20 or 30% when the credit crisis hit instead of pumping cash into the system, opening the discount window, and eventualy offering to buy all of the bad debt. That is the definition of a bailout, not the loans to the Auto companies.

Chrysler: Trying to Stake Its Claim in Electric Cars

Paulk8756
What 'raid on the federal treasury' are you referring to? The $25B in LOANS was part of the original energy bill that raised the CAFE standards and is forcing the auto industry to spend $35B in tooling & research trying to meet these standards. If the government is going to force the companies to make cars consumers may or may not buy the least they can do is help them pay for it.

Also, the Japanese government has been investing heavily in the development of batteries for the Auto industry which is why most of the companies supplying hybrid batteries are Japanese. Since the US has been investing nothing, we have nothing. If we do not start investing now, we will be importing batteries forever.