In the old days, Ford Motor Co. (F) faced relatively minor threats to its profitability : the UAW, legacy medical and pension costs, a crushing debt load, retooling costs to meet safety and environmental standards, rising gasoline prices and high quality foreign competition from titans Toyota and Honda. But now, things are going to get REALLY tough. After seeing its two American competitors go down the financial drain, Ford now must compete with streamlined versions of GM and Chrysler, which are having many of their contractual burdens (previous labor contract provisions, inefficient dealer networks, huge debt repayment obligations, etc.) swept away by the bankruptcy process. This is all reminiscent of the challenges facing the airline industry over the years. As airline after airline declared bankruptcy (some more than once), rather than liquidating, most continued to function under Chapter 11, then emerged leaner and meaner to compete with and weaken the survivors. The result has been that airline stocks and bonds have remained a wasteland for investors over the decades.
A similar scenario is now facing the auto industry, but with one crucial factor that makes its situation potentially worse than that of the airline industry: the bankrupt auto companies have financial backing from the U.S. Treasury. This is a problem going forward, not only for Ford, but also for Honda (HMC), Toyota (T M) and Nissan (NSANY), which sell widely in the U.S. Indeed, the competitive problem is made worse by the fact that the U.S. Treasury is providing $12.5 billion of TARP funds plus additional TALF funds to GMAC, which is now offering relatively easy low-cost financing to buyers of GM and Chrysler vehicles.
If I owned a hardware store (as I used to), I would not want to have even the most incompetent government-owned competitor nearby if it had an unlimited source of funding. We have no way to know whether our government will be able to successfully pull out of its financial involvement in the auto industry, as it intends. But, until Treasury starts to dial back its involvement in GM, Chrysler and GMAC, investors would do well to turn their attention to other industries for investment opportunities.
Disclosure Statement: Neither I nor any of my clients hold securites of any company mentioned in this article.