America’s Two Auto Industries
Fantastic article in the WSJ today about the pending bailout plan to GM, Ford and Chrysler.
America has two auto industries. The one represented by GM, Ford and Chrysler is Midwestern, unionized, burdened with massive obligations to retirees, and shackled to marketing and product strategies that have roots reaching back to the early 1900s.
The other American auto industry is largely Southern and non-union, owes relatively little to the few retirees it has, and enjoys a variety of advantages because its Japanese, European and Korean owners launched operations in this country relatively recently. Their factories are newer, their brand images and marketing strategies are more coherent — Toyota uses three brands in the U.S. to GM’s eight — and they have cars designed for the competitive global market that exists today.
What are the differences between the two? Read on:
Honda Motor Co. sells one basic Civic world-wide. Ford sells two different versions of its rival Focus compact car. Ford is engineering one Focus to take advantage of global economies of scale, but the new car won’t hit the U.S. market until 2010.
The New American auto industry employs about 113,000 people, according to a recent study by the Center for Automotive Research. The economic slump is hammering sales and profits for these manufacturers, too. But they aren’t looking for subsidies, and probably wouldn’t get any since the rules governing the auto industry aid proposals to date effectively exclude them.
So this debate is strictly about the Old American auto industry, represented by the “Big Three” of Detroit. The Detroit Three employ more than 200,000 people directly, and sustain nearly 3 million more indirectly, according to the CAR study. Diminished as they are, the Detroit Three still account for about 4% of U.S. gross domestic product. They also represent a way of doing business that has run its course. GM’s plea for a federal bailout makes that official.
Whatever bailout we give to the “old” auto industry is unlikely to do much beyond delaying the inevitable. Unless Detroit somehow manages to shed its obligations.
The only way to do that? Offer the Unions a piece of the company in exchange for giving uo some fo the health care and pension benefits.
Otherwise, a bankruptcy reorg would make a whole lot more sense than merely pumping another $50 billion into them . . .
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UPDATE: November 11, 2008 6:07am
Be sure to read the comment from Automobile Insider
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Source:
America’s Two Auto Industries
Government Aid to GM, Ford, Chrysler Could Preserve Old Way of Building and Selling Cars
JOSEPH B. WHITE
WSJ, NOVEMBER 10, 2008
http://online.wsj.com/article/SB122608860916209213.html
November 10th, 2008 at 1:36 pm
The UAW is one of Obama’s most important constituencies. Come hell or high water, he’s going to give them money.
While I personally oppose giving the auto companies any taxpayer money at all, it would seem that there might be a compromise. And that would be to offer them a $25B loan in exchange for going into bankruptcy. The bankruptcy court could then reorganize the company, recognizing that the $25B loan would be there at the end of the process.
Again, Obama is just going to throw money at the auto companies, no matter the political cost to him. But the foregoing would seem to be a compromise worth considering.
November 10th, 2008 at 1:42 pm
While I appreciate the problems from retirees, no seems to mention that the Big Three have lobbied against fuel efficiency standards - they lobbied against establishing and against every increase. This represents decades of being on the wrong side of this issue, not to mention opposing airbags and, before that, safety glass in windshields.
I live in S.E> Michigan, so I appreciate the jobs and economy issue. But it still burns me up to be bailing out an industry that has so aggressively dug its own grave. And I wish the MSM would note that as well as legacy costs related to UAW bargaining.
November 10th, 2008 at 1:43 pm
As I ventured a week or so ago, a GM bankruptcy would be a wonderful buying opportunity as it would show a glimmer of common sense, something we havent seen at a leadership level for a while now.
November 10th, 2008 at 1:44 pm
It would be a great sign of Obama leadership if he doesn’t throw money at them. But, I imagine he will. How much longer will that keep them afloat though? 25b = X years. They are still going to be a garbage company. I like how rick wagoneer is being relatively honest about how desperate they are. If they were to fail though, how bad would the ramifications be to the US for the next year? Should they go bancrupt, but maybe in a little while, once the economy could handle that failure a little bit better? I am more scared of them failing in the next few months, then giving them too much money and letting them survive for the next 2-3 years though then failing. Am I wrong?
November 10th, 2008 at 1:57 pm
25b = X WEEKS more likely. The 25 bln given as loans (last month?) are already gone, if I am not wrong.
Universal healthcare means = take on the employees, retirees onto the public system and let GM fail. The problem is not just the unions. The management has been really bad - taking awful strategic decisions. Break them apart and sell them to the others (European/Japanese/Korean) carmakers. Cheaper and more sustainable long term. I might be wrong but I think this problem has not long term solution BUT to fire them all.
November 10th, 2008 at 1:57 pm
There is something deliciously perverse about the prospect of socialist take-overs of the automobile industry brought about by the continued application of laissez-faire government policy. Hee hee.
November 10th, 2008 at 2:09 pm
I totally agree with you, ReturnFreeRisk. We should ‘bail out’ the employees and allow the company to fail. A foreign auto manufacturer would undoubtedly purchase them and turn them around through good management. The U.S. auto market is gigantic, so there’s little doubt that it’d sell…
November 10th, 2008 at 2:09 pm
I like your thinking, ReturnFreeRisk. Don’t penalize the retirees for mgmt’s awful performance; offer them gov’t benefits and be done with it. Let them all fail. If we’re going to give a dime to the American auto industry, then give it to the one taking shape in Silicon Valley in the form of Tesla and also A123 in Massachusetts!
November 10th, 2008 at 2:14 pm
The UAW is to take over the health care and benefits of the union workers in 2010. It was part of the deal that all new workers would be hired at half the rate of existing workers, a very limited health care plan established, and a 401(k) instead of a pension. GM and Ford paid something like $30 billion to the UAW to seed a fund I believe.
Not for a bailout, but with a friend as a Ford dealer he is very concerned. He is pretty certain, family has been selling cars for a couple of generations, that if they go under, folks will just stop buying Ford and GM cars. Folks are always calling about fears with parts and service now it is in the news. A GM bankruptcy on the front page would halt sales immediately.
The bankruptcy would start with GM and Ford but would not end until about every link in the chain is in Chapter 11. Even steel companies, AK Steel comes to mind, would have to declare as demand would drop to zero for about 6-8 months while things worked themselves out.
Rock/hard palce
November 10th, 2008 at 2:37 pm
That union assembler has a new car every 3 yrears, a nice house and vacations twice a year. Eats steak every other day and can afford to send his kids to college. Damn I got get some of that for my family. I’m being factious.
Fact - the cash register clerk minimum wage to CEO salary issue needs balance.
Fact - business needs a comsumer. That requires enough spare cash to make it all go round.
Otherwise you get ponsi schemes, drug dealing and robberies because the slaves or the robots got our jobs.
Keep in mind - an industrial business is an immense task to start anew in the 21st century.
So imo thats a switch to socialism one wage for all - or the fight continues - and that probably won’t work either because of waste and laziness - so the fight continues - get out the gloves - I mean guns.
Go ahead let it slip away, then I can laugh and say I told ya so.
November 10th, 2008 at 2:42 pm
The employees/retirees are coming onto the public balance sheet anyway. Good segue into the universal health care system. A good percentage of the people are already on some kind of government healthcare - Medicare/Medicaid/VA etc. Combine them all, put the “bailed out” employees on it (believe me, the auto makers are not the only companies coming). Probably massive savings to run a single payor system which will allow for bargaining and NOT allow torte cases. If you want to sue a physician - sue the US govt. Good luck. Etc etc…but I am getting off topic here.
I am not in favor of giving more free money to mgmt or union bosses - dismantle everything. The boys at Cerberus (John Snow and company) will take their cut and so will everyone else. Say NO to it.
November 10th, 2008 at 2:44 pm
griffj @ 2:14
“A GM bankruptcy on the front page would halt sales immediately. The bankruptcy would start with GM and Ford but would not end until about every link in the chain is in Chapter 11. Even steel companies, AK Steel comes to mind, would have to declare as demand would drop to zero for about 6-8 months while things worked themselves out”.
I don’t think that people would stop buying GM cars during bankruptcy, as long as management made it clear to the public which brands they would go on producing. All they have to do is lower the prices, and people would buy them. Hell, I would even buy a GM car during bankruptcy if the price was right.
One point that is missing in this analysis is that, to the extent that GM/Ford/Chrysler sales decline, one would expect sales INCREASES at Toyota, Honda, and the others. This would be BENEFICIAL to employees and suppliers of these companies. Toyota and Honda, together with all their suppliers employ a very large number of U.S. citizens, and they would probably hire more if GM went into bankruptcy.
Furthermore, many people would be willing to go along with the idea of providing taxpayer money DIRECTLY to people who became unemployed as a result of the bankruptcy.
November 10th, 2008 at 2:53 pm
As a registered Republican, I have to blame the McCain campaign for failing to keep the White House, thus sabotaging my party’s long-term strategy to keep the US automakers in business, which was to break the unions and force thousands of Americans into indentured servitude. Then again, somehow our supply-side education policies also ensured that the US would be starved of competent automotive engineers, by limiting the talent pool that would be able to afford this type of training.
Oh well, I got an idea, why don’t you just lower interest rates and taxes some more?
November 10th, 2008 at 3:00 pm
ReturnFreeRisk — what about the stuff that is “below the water line”? I’m referring to the supply chain companies that support the domestic auto industry. If you shut down GM (or Ford, and maybe even Chrysler alone) even for a week, the downstream effects of interrupting the flow of payments will be sufficient to throw several hundred thousand into the streets and wipe out thousands of smaller dependent businesses.
While it sounds attractive, this is really about as practical as shutting down the US government to deal with the deficit.
November 10th, 2008 at 3:02 pm
And I should point out that these “dependent industries” are all solvent, profitable firms, that have as their only liability an overwhelming dependence on a few large customers — ones that they believed were “too big to fail”.
Ya gonna shoot them along with the mismanaged giants?
November 10th, 2008 at 3:03 pm
“…this is really about as practical as shutting down the US government to deal with the deficit…”
Probably not a bad idea during periods of economic growth.
November 10th, 2008 at 3:04 pm
I favor direct intervention - bomb Detroit, invade Michigan.
November 10th, 2008 at 3:06 pm
BK is the only way clear liabilities and keep what’s left of USA manufacturing in whatever form it will take after BK/liquidation.
This isn’t going to your father’s type recession. But, it may be your grandfather’s recession.
November 10th, 2008 at 3:07 pm
One other thing the Japanese and Germans have that Americans don’t Universal Health-Care coverage.
If the U.S. would pull it’s collective head out of it’s ass we could have a single payer system that would help a lot of businesses that are struggling trying to keep up with providing health-care coverage for their employees.
November 10th, 2008 at 3:10 pm
Well, that didn’t take long. The disillusionment of free market capitalists, who justified voting for Obama by saying in their heads “He doesn’t really mean it” to some of his anti-trade, anti-capitalism rhetoric, begins now.
I am afraid what we’ll find out is that yes he did mean it and he means to do a lot more.
November 10th, 2008 at 3:22 pm
Obama is not anti-trade, and he is not pro-living in caves. He is going to be anti-bailout seeking financial engineering douchebags and scumbags, though, you can be sure of that. He is probably going to do what he can to protect the few manufacturing jobs that remain in this country.
Looks like another bounce off 905 area. Score another one for my range bound trade prediction.
900 - buy, 1000 - short. Rinse, repeat, make money.
November 10th, 2008 at 3:29 pm
leftback @ 3:22
“Looks like another bounce off 905 area. Score another one for my range bound trade prediction.
900 - buy, 1000 - short. Rinse, repeat, make money”.
Fair enough. But do we break out of the range on the upside or the downside?
November 10th, 2008 at 3:33 pm
25-50 billion? wouldn’t it be cheaper to let the companies go bankrupt and continue to pay all the employees 100% of salary for 10 years plus pay for 100% of vo-tech training for 5 years
GM has proven they can’t run a company over and over, if we do wind up giving them the money can we at least insist from the minute they take the money they are only allowed to produce vehicles that get a minimum of 50 mpg ?
November 10th, 2008 at 3:33 pm
@DL & lb: I predict we break out of that range to the downside first, but what do I know? Answer: Not much but it’s just a hunch.
November 10th, 2008 at 3:36 pm
Mannwich @ 3:33
That’s what I’m thinking. After that, though, there’s got to be an intermediate term (at least 4 weeks) rally out there somewhere.
November 10th, 2008 at 3:36 pm
as gm goes, so goes the nation
has that expression been tossed around much lately?
November 10th, 2008 at 3:38 pm
And I should point out that these “dependent industries” are all solvent, profitable firms, that have as their only liability an overwhelming dependence on a few large customers — ones that they believed were “too big to fail”.
To be honest, who _didn’t_ see this coming back around 2005-2006 or earlier? (I figured fuel prices would go up after 9/11 and the Iraq war just from international disruption risk, returned my leased SUV in 2002 and paid for a relatively-efficient diesel Benz in cash, so far so good)
I remember telling anyone I knew who was thinking of putting money into the auto industry that at least one of the big 3 would go bankrupt and be bought out by some asian combine seeking entree into the US market.. I figured China buys GM (Buick is well-regarded there) and anyone else buys Ford.. So maybe Tata buys GM, big deal, anyone with a brain and middle-school arithmetic could take one look at domestic product mix, fuel prices, and all that debt on their balance sheets and come to the same conclusion.
As far as suppliers go, big 3 have been shafting all suppliers for more than a decade, including the spinoffs (Visteon/Delphi) as opposed to Japanese makers who bring suppliers in as partners in product development. Suppliers who haven’t diversified out of the big 3 are fcuked, and if they didn’t see this coming 3 years ago they weren’t doing their jobs.
November 10th, 2008 at 3:40 pm
MikeDonnelly @ 3:33
“25-50 billion? wouldn’t it be cheaper to let the companies go bankrupt and continue to pay all the employees 100% salary for 10 years plus pay for 100% of vo-tech training for 5 years”
You’re right, but you’ll never hear Obama admit that.
November 10th, 2008 at 3:42 pm
Just interjecting a noteworthy article.
Who are the Architects of Economic Collapse?: Will an Obama Administration Reverse the Tide? by Michel Chossudovsky
http://www.globalresearch.ca/index.php?context=viewArticle&code=CHO20081109&articleId=10860
November 10th, 2008 at 4:02 pm
I realized in 1976 after researching European autos and test driving quite a few that they were years ahead of the U. S. automakers in that their priority was functionality before aesthetics (and actually did a nice job of combining the two), as opposed to the U. S. automakers who placed aesthetics before functionality. I could not sit up in a U. S. made car without my head hitting the ceiling and as a general rule the cars were gas hogs with lower quality parts and workmanship. And here we are today, with the major U. S. automakers in trouble. I also realized about that time or thereafter that the unions had outlived there purpose and had gotten too greedy asking for more pay and benefits, even during slow economic times. Paying higher labor costs I suspect forced the U. S. automakers to cut corners on some of their vehicles sacrificing quality in order to compete pricewise in the market place. They did change some, but obviously not enough as they have gone deeper and deeper into debt.
If the U. S. Gov’t helps them out financially, then as a condition these companies should be forced to change their business model which should include a forced downward renegotiation of all union contracts. They should cut all personnel costs, including managers, as this is always the biggest controllable cost of any business. I did a tax return for a retired GM assembly line worker in the late 1980’s and was appalled at how much this guy made and in addition he had great benefits. Otherwise, reduce the U. S. automaker debts in a Chapter 11 reorganization which as someone mentioned above will more than likely have a domino effect on a large number of related businesses causing some of them to do the same.
These managers along with the unions have created quite a mess. It is not a pretty picture nor is there an easy solution here. Some people are going to have to make sacrifices here and the ones who helped create this mess should pay.
November 10th, 2008 at 4:05 pm
“ReturnFreeRisk Says:
November 10th, 2008 at 1:57 pm
…The 25 bln given as loans (last month?) are already gone, if I am not wrong…..”
The money has not made it out yet, it is being rushed but the last timeline I saw for handing out the loans was for 6-18 months. The loans are only for retooling to make more energy efficient cars and will be given out to suppliers as well as automakers. Another possible roadblock is that the language in the bill requires that loans be given only to firms that are “financially viable”. Depending on how DoE interprets that, some or all of the big 3 could be ineligible (if you’re a Bushite out the door in 2 months do you really want to take that chance?).
The problem is there isn’t a good solution. We could try to keep Detroit on life support and wait for the economy to turn. There is no certainty that would work and if it fails you’ve wasted a lot of borrowed money. We could let them fail. Then you have cascading failures in Suppliers and Communities, quite possibly disrupting supply chains for the transplants as well. The PBGC gets a big slug of new retirees. Two million or so workers would be thrown into unemployment, with all the unhappy knock on effects. The best idea I have is to arrange a synchronized Ch 11 with extended unemployment benefits, a loan facility for suppliers and communities, extra funding for the PBGC, and Federal DIP financing for the big 3 (or at least the survivors). Still a lot of money and no guarantee of success. However it happens it’s probably going to be a cluster for the next 5 years.
November 10th, 2008 at 4:11 pm
The UAW has killed the domestic industry with onerous wage and benefit packages. No more bailouts please!
November 10th, 2008 at 4:21 pm
These companies will never change. They’re just pyramid schemes. The CEOs just try to coax one quarter after another out of the revenue streams. Just enough to make them rich and get the booked on some TV shows where they can act like important economic thinkers who comment on the future of American manufacturing. It’s pathetic. I can’t recall ever seeing the CEO to Honda or Toyota on American TV. I don’t even know their names. They must be back in Japan doing their jobs. Except for a few sports and luxury models (e.g., Corvette, Mustang, Cadillac), the big three should abandon coupes and sedans to the foreign marques and stick to making trucks and vans. That’s all they do well.
November 10th, 2008 at 4:31 pm
Forget it. It’s almost over. The bottom will remain. Crash no longer likely.
I am now seeing some of the biggest insider buying I’ve ever seen in the last 5 years.
http://www.secform4.com/insider-trading/24741.htm
http://www.secform4.com/insider-trading/1121788.htm
http://www.secform4.com/insider-trading/764478.htm
November 10th, 2008 at 4:35 pm
OT:
Someone asked a while ago about how to get an image to appear in the little box at the top right of your comment.
Go to http://www.gravatar.com and create an avatar. It will then automatically appear whenever you post on a Gravatar-enabled blog.
November 10th, 2008 at 4:42 pm
Cars are part of our heritage, but oil is a finite commodity. Automakers became too comfy in their plush interiors and fell asleep at the wheel (pun intended, sorry) . Those who retool their factories for the future will survive, those who don’t, won’t.
November 10th, 2008 at 4:51 pm
“wouldn’t it be cheaper to let the companies go bankrupt” — Isn’t this what was said about Lehman?
“The UAW has killed the domestic industry with onerous wage and benefit packages. ” — Comments like this are absurd. Doesn’t management of the company have the obligation to not enter into contracts that bankrupty their company, or do they just sign whatever the UAW puts in front of their face? Were the unions to blame when these companies were making billions of dollars a few years ago? In fact, has anyone ever said to management “don’t pay me so much, it might hurt the company?” Did the UAW make the decision to focus on trucks to the exclusion of cars? Did the UAW cause management to lobby against increasing fuel standards? Did the UAW design the new Chrysler Sebring? Man, that car is an ugly piece of junk.
November 10th, 2008 at 4:57 pm
Everything lately in the market I think is a confidence problem. how that gets solved I don’t know but I have ideas. Anything done to build confidence will resurrect the system.
November 10th, 2008 at 5:02 pm
Yes to what Dr. Noisewater said… There are several car companies in China that would (and could) easily buy GM. Alas our xenophobia and bigotry will never allow that.
Did you notice during yesterday’s games all the ads pushing the same big a** trucks and suvs? Why is it both Ford and GM say they can’t get the new models, let alone any electrics, on the market until 2010 at the earliest? The big 3 made up the US economy during WW2 and leapfrogged technologies and production platforms in shorter timeframes. They’ve had decades to retool in response to European and Asian competition.
What irks me most about the bailouts is the lack of equity stake. We’re paying billion$ to the Ford family?
November 10th, 2008 at 5:21 pm
Just think, if this were year ago, the stock market would be in conniptions. When GM finally does the honorable thing and stands in front of the train, the market will probably rise for a couple of days.
November 10th, 2008 at 5:26 pm
while i don’t like bailing them out, it would appear prudent and cheaper to do so. But we should have learned from the other bail outs. there need to be requirements that they meet. if this is about jobs (and don’t kid your self it is. its also about keeping our economy from crashing even worse. this is much worse than Lehman’s every could be ) then there must be some guarantees about those. I doubt they are in position to reject them. we should also insist they improve fuel economy. that would one to pay us back for the billions needed. and what are the down sides if we don’t act here? Let see, about 3 million jobs could potentially be gone (to many to absorb with out risking a depression). And while the big cities might still be ab;e to buy cars from the foreign car companies, those out side of those areas wont be able to. And those who think some foreign car company will buy them? Please note none of them haven’t be devastated by this crises (even Toyota. a 73% decline in profits will kill you!) . And if they did buy them, the jobs will be gone ASAP. Along with the consumers. Blaming labor is stupid, they don’t decide what cars to build, they don’t decide to make bad investments, or poor accounting choices, or cover loses by making accounting profits. Now at least some are making good choices, they just need to time to turn their ships around, none of these are small companies, and turn on a dime (which the market has done!).
November 10th, 2008 at 5:41 pm
Electric cars, that’s the key to the U.S. auto industry’s survival. It may take a few years to develop but in expensive low performance electric cars could sell well in the cities. Especially when most urban dwellers can’t afford new cars anyway. And don’t tell me they can’t make decent electrics — they put a man on the moon almost 40 years ago and they drove electric cars on the moon. so that’s my take, Detroit, drop the internal combustion engene and make some money the customers are waiting.
November 10th, 2008 at 5:41 pm
How many people aren’t even considering buying a Big 3 vehicle right now just because their future fate has yet to be determined. I wouldn’t buy one if I thought they might go into bankrupcy in the next three years (length of base warranty).
November 10th, 2008 at 5:50 pm
Mikaeel: Electric cars may be the answer, buy Toyota is light years ahead of Detroit here too. I just bought two Prius hybrids after all my adult life owning Chevys and Fords. I love the car. Never go back.
Averages 46-51 mph, and quiet….very well engineered.
November 10th, 2008 at 6:02 pm
Universal Health Care would be a huge boon to the big three and all our other legacy industries and local governments.
November 10th, 2008 at 6:25 pm
If I were in the market for a new car, I’d be hard pressed to buy anything from one of the American manufacturers at this point.
Even if they are given taxpayer money, how do you know that they are not going to continue repeating all the same bad decisions and mistakes that they have made in the past? How do you know that they will manage to remain in business? If they go bankrupt, will you be able to get parts you need to effect repairs? Will you be able to get service? Even if foreign manufactures buy parts of their businesses, the transition will take some time and there will be certain triage on the model lineup.
November 10th, 2008 at 6:48 pm
Barry, this is from Neil George’s article today…I swear this is the best analysis of GM I’ve read all day:
GM says it has $16 billion in cash on its books, but that’s not enough. It reportedly needs $11 billion to $14 billion in working capital to operate. The threat is that it will go bankrupt without a huge influx of Uncle Sam’s cash. This company must think we voters are indeed rubes.
What you didn’t hear from GM or the media is that late last week, just as it was whining about going under, it cut the ribbon on a new manufacturing plant in St. Petersburg, Russia. Using its own capital and that of investors and partners, GM is building new plants and rolling out new cars in Russia. That doesn’t sound like a company ready to implode; the situation certainly isn’t as dire as the media and certain politicians would have us believe.
In fact, if you look at GM’s sales figures, you’ll see that, exclusive of its new Russian division, revenues from Europe are climbing. At 2-plus percent it’s modest growth, but with the core economies of the European Union already in or at least headed to recession, that’s not bad. And in Asia and Latin America, GM’s production and sales are soaring by more than 35 percent.
What gives?
In other countries GM is actually operating on the real world principle of designing and building products the market wants. In the US the company is still living in the past, making lower quality, less desirable products that fewer customers want. It’s trying to spell out a dismal future for us to buy into, one that would mean no GM and countless thousands of unemployed workers killing our economy–if it doesn’t get a pile of cash.
And we’re buying it.
November 10th, 2008 at 6:49 pm
Meanwhile, what about the rest of the US automakers? What about Honda Motor (NYSE: HMC), Toyota Motor (NYSE: TM), Porsche Holdings, Daimler, Bayerische Motoren Works (BMW), Nissan Motor (NSDQ: NSANY), Hyundai Motor (Korea: 005380, OTC: HYMLF) and, soon, Volkswagen (OTC: VLKAY)? These companies have continued to bring in their own capital and have built and expanded their manufacturing in the US. And their products sell.
So to GM we should simply say, “Tough. Go fix yourself.”
But that won’t fly in the current political environment. We want to reminisce about how GM and others used to be. We’re also keyed up to look to the future, which is being framed by lobbyists as horrifying without Uncle Sam’s cash.
Guess what this means: GM is going to get its cash. And as for financing for GM cars, GMAC, which is majority owned by Cerberus Capital Management (which is headed, of course, by former Treasury Secretary John Snow), will likely get US Treasury cash as well as credit from Uncle Sam’s financial division, the Federal Reserve Bank. Look for 0 percent down/0 percent financing on giant GM SUVs sooner rather than later–made possible by Uncle Sam Inc.
This is just the beginning. And it won’t be too long before we look back at these moves and wonder what we were thinking. Hopefully by then we’ll have moved on to a period where Uncle Sam isn’t a partner in a seemingly endless stream of businesses and industries.
November 10th, 2008 at 7:07 pm
For those blaming management — given that they had about a $3K-$4K cost disadvantage per vehicle thanks to Union obligations, do you think that had something to do with not being able to come up with better cars? Kind of hard to compete when your employees are tying your hands behind your back.
November 10th, 2008 at 7:34 pm
Yeah, let’s train them all in vo-tech schools. There will be no jobs but who cares. After all as Honda and Toyota sales increase , they will not repatriate those earnings to Japan.
What universe do you guys live in? We do not need to just throw money at these guys but we do need someone to think outside the box on this one. The auto industry looks like LEH to me with many unintended consequences to letting them go BK.
November 10th, 2008 at 7:48 pm
Bailouts’ Unintended Consequences
Within the next 12 months the yields on treasuries will begin to rise. This is because the fools (China etc.) who have been willing to accept low interest rates will be tapped (China has a stimulus package of their own to fund etc.) out.
This will cause all interest rates to rise, which will make the housing market worse. If it gets too much worse then the stability of the financial system will once again be the main concern.
Shorting treasuries seems like a rational investment, but yields may decrease before they increase.
November 10th, 2008 at 7:53 pm
On another note, AMEX is now a “bank holding company”. I guess “we’re all bank holding companies now”. How can I change my status as well?
November 10th, 2008 at 7:57 pm
Ah, yes, you can count on the Wall St. Journal to give a axe grinding analysis, sure to benefit management.
So here’s a question: if management is so irrelevent to the performance of large corporations, just exactly why are the paid so much?
Sure’n thar ain’t no way the difference between the two auto worlds is management, tain’t possible no how. everybody knows our leaders are perfect and infallible.
The basic problem with all communication from right wing organizations is that it is fundamentally disengenous. In an article about executives, their importance is touted. In an article about problems facing corporations labor unions are blamed. Every issue becomes an excuse to grind their axes, and every problem is rooted in the things they don’t like. There is a similar disingenousness with respect to technology — ‘the key to our strength’ — the actual creation of which we fob of on people from asia, paying our engineers less than our hairdressers.
Unfortunately for the Wall St. Journal the cost structure of labor at both foreign owned and domestic owned auto manufacturers is a very well studied issue, and the reality is clear: the cost structures are very, very similar. The difference is that japanese management regards their job as making the company successful, while american management regards their jobs as making themselves rich. And, oddly enough, they are extremely good at their jobs.
November 10th, 2008 at 8:58 pm
We are talking about symptoms only. Any business needs to be able to anticipate the needs of customers then develop products which satisfy those needs at a profit. The US auto industry has consistently failed to do this and, frankly, does not deserve to survive.
Part of the problem has been that only US consumers will buy US autos. As Jeremy Clarkson, presenter of UK car programme “Top Gear” put it in reviewing a new Cadillac model, “Idon’t know what it is, you can’t put your finger on it, but it just feels cheap” Anyone who has ever owned a German or Japanese car understands this would never go back again.
November 10th, 2008 at 10:32 pm
I love Top Gear!
In fact, I am a huge BBC America fan.
November 10th, 2008 at 10:36 pm
Barry,
He’s a very funny guy. You should also try and catch “Have I got news for you”
November 10th, 2008 at 11:22 pm
I got a 07 Camry and I love it. Most of my friends have American cars and they feel cheaper even though they cost a few k more.
For as much as I think the big 3 should fail, how bad would that be for the rest of the economy? I am a little bit scared of losing 3 million jobs over night. What would be the actual ramifications of bankruptcy in a 3 month, 6 month and 12 month perspective?
November 11th, 2008 at 12:55 am
BTW- as a Celtics fan please refer only to Larry Legend, K. McHale, and the Robert (”the Chief”) Parish as the big three. They at least would not get blown out by the Japanese.
Thank you.
November 11th, 2008 at 1:03 am
I think this talk about losing 3 million jobs is a scare tactic. Even if GM, etc. go bankrupt, they will reorganize. They will not close down and stop manufacturing cars suddenly. Too many people look at the worst possible scenario and assume that it is the most probable. This leads to reacting out of fear, which is not something one should ever do in a crisis.
November 11th, 2008 at 2:46 am
I was just listening to Roubini over on RGE Monitor and something that no one seems to be talking about is the amount of CDS’s that are probably taken out against GM. I say probably of course because no one knows how many contracts are out against them (thanks OTC) but we can assume their are at least some.
Well, who owns these swaps? What is the notional value of all of GM’s CDS’s contract? How much of the counter party risk would cancel itself out? How much are these trading at? If their were a market we could see how the market is valuing the risk. Does anyone have any clue of how much it would cost to insure $1,000 of GM bonds? This information would be interesting.
Thanks,
Ted
November 11th, 2008 at 6:05 am
Regardless of whether GM/Ford/Chrysler file bankrupcy, I will continue to buy American. You will never see me in a Toyota, Honda or Nissan.
Maybe, we will look like Cuba over the next few decades; but, there are enough American-made cars around that I will be able to drive an American vehicle for the rest of my life and that is exactly what I plan to do. If Americans don’t support American businesses, don’t be surprised when your day is up as well.
Personally, I think buying foreign vehicles is nothing more than vanity and the “Look at me” generation. I have a Ford truck that I bought at a very good price years ago, which has never had anything of any consequence go bad with it. It has 218,000 miles. The quality is there, the price was right and the serivce is excellent. If you love this Country, you’d better start acting like. Buy American products and quit trying to impress your neighbor. We need to come together as a people for the benefit of us all.
November 11th, 2008 at 6:15 am
I don’t work for GM, but am in my final days at a supplier (non-union) and I do know how the numbers shake out in the car business. Since I can’t give them away, all I can do is draw on some public examples. At least a little raw data should help. Based on the 2007 numbers found here, it takes between 30 and 34 man hours of labor to build a car.
(http://www.mlive.com/business/index.ssf/2008/06/harbour_report_detroit_3_erasi.html)
Now, SaneInSF thinks there is a “$3K-$4K cost disadvantage per vehicle thanks to Union obligations”
According to 2007 figures given here (http://www.autoobserver.com/2007/09/gm-uaw-strike-a-deal.html) “GM’s current labor costs are $73.26 per hour” and “The cost is $25 to $30 per hour more than the labor costs of Asian rivals such as Toyota and Honda that have plants in the U.S. The creation of the VEBA could eliminate as much as one-half to two-thirds of the gap virtually overnight.”
To be wild and crazy, take the $30/hr difference, cut it in half (because the VEBA was agreed to), and you have $15/hr * $34 Hr/car = $510/car max. Not thousands. Are people actually expecting that breaking the UAW or moving a plant south would suddenly turn a $23k car into a $19k car? As much as the UAW has made my life difficult at times, some honesty is due in the discussion.
I would love to spout off on all of the urban legends of this business, like quality differences (1 - Who do these people think makes all those parts you touch when you sit in the vehicle? - hint: it isn’t the company whose logo is on the outside of the car. 2- How many of those companies would people guess there are out there who do this work? hint: not nearly as many as there are car companies) but that is all for another day. Marketing has won emotion over truth on that one. Why are people still surprised to learn that GM actually shares a vehicle and an assembly plant with Toyota?
I want to draw the best comparison I can for the people who complain about product mix. If this was like trading; in the typical car business, you can only change 10% of your holdings per year, positions have to be held for 5 years each (no more, no less) and from the day you call your broker, the money is gone and it is a market order that takes the broker at least 4 years to execute. At three years into launch, if the market isn’t going your way, there would be a tremendous incentive to have people post position pieces in public places like your blog.
Let’s say you and I had decided that there is profit in the market for a “healthcare special mobile” focused on the soon to be old boomers, complete with O2 tank holders and storage in the doors for folding walkers. We’ve spent the last year crafting plans for 72 units/hr production (~126k units) of the Nuclear Fusion Grandfather (NFG) Edition that is factory fueled for life. No gas, no maintence, no emissions, and you don’t have to worry about forgetting to stop for gas on the way to Florida. We have already hand built one, the design is complete, and we know that it meets gov’t regs. If we commit to it tonight, the earliest we could possibly put it on sale is 2013 and each one will have to sell at our target average of $x until the end of 2017. No turning back.
The point is, even when you know how the business works, it takes big brass balls to steer a car company (obviously bigger than a certain soon to be failed, in-over-their-heads, financial brain trust has), and this post has been little more than bait for the arm chair QB’s who thought the *specifically targeted* (can only be used for meeting new regs yet to be decided) $25B had already been funded. At least someone corrected that clown. You have a great blog because you present the facts and call out the position pushers like the NAR. The car business is full of these clowns and Jim Press (especially before last year) and Rob Lache are the NAR equivilents. Don’t be fooled, the data is out there, the domestics are hurting, but not for the reasons most people have been told to think.
When people post off-base stuff in response to your regular topics, you usually step in to add a correction. It would be nice if you did the same when you post about the auto business then it attracts the “finger snap solution”, the “my 2004 Corolla is built better than your 1986 Delta 88″, and the tinfoil hat 300 mpg carb crowd.
Thanks for your time.
November 11th, 2008 at 6:39 am
All the big 3 solutions are listed above in one form or another. Some of them create even greater problems than they solve. Some have hidden benefits that are not immediately obvious. Some are completely self-serving. Many are bone-headed and if they pass, will only kick the can down the road. They will keep on life support machinery an entire industry which is rife with vastly overpaid (no business model could survive this long without artificial respiration in one for or another) labor and management. In many other industries they would be carcasses by now and rightly so. Thousands if not tens of thousands of businesses have become extinct during the last 40 years and somehow we managed to survive till now. Many more will also go into the long night with nary a peep. 10 million people are out of work now. Another million autoworkers and their suppliers aren’t going to finish off the United States. A hundred thousand Investment bankers and traders are now having to re-invent themselves even with the huge bailouts to their bosses, the Masters of the Universe. Many more millions have to begin the hard work of training for new positions and they should have started that 10 years ago, 5 years ago, a year ago when the fate of (auto) manufacturing was hammered in stone with the arrival of low cost producers. They have had more than ample time to get going instead of awaiting a government takeover so that they would not have to change. I have not an iota of sympathy for one of them.
This idea that something is too big to fail, that the problems it will cause are even greater than the cost of bailouts is Communistic. That’s a lie. We are saying in effect that there is no other work for these people
to do but in reality what is happening is that they are all overpaid 2-3 times what their real skills are worth in the marketplace. To sustain that kind of artificial pay and benefits scale with so little contribution to productive efforts is only something a government can get away with. Look at how little value we get for the 40% of our productive efforts that the GOVERNMENT now confiscates. Look at the damage that the 40% of our efforts causes us as taxpayers and we have no recourse but revolution.
Let every business fail that cannot produce something at something over their cost to produce it. No other intelligent long lasting solution exists. All the others are strictly politics and politics is what has invaded every nook and crany of our lives because government has become an industry of its own and the growth of GOVERNMENT is plague of boils on all of our backs.
November 11th, 2008 at 7:16 am
“Auto Industry Insider” thanks for taking the time for that insight.
“flipspiceland” your explaination and the previous was a lot of food for thought
if I had the ultimate answer I wouldn’t be here in a booth in the midwest … but I’ve got time to say thanks and throw this ball out to the people
“Markteteers” do what they do for a living … “Automobile Manufacturers” do what they do for a living
I think America should stop treating business like adults that can and should stand on their own
and more like children that need help every hour of the day everyday of the year
24 x 365
November 11th, 2008 at 8:34 am
ps - the pots and pans are washed, waiting for 9am, the phone, and an imaginative money making idea
imo the titans of industry will whole heartedly switch to the new design when:
a. they have devestured from all the sub-structures their golf 4somes are into
b. they own the patients on the new tech and are in at the bottom
c. the oil shortage threatens plastics and the play via a. will now return a return on the buy backs
d. demoralized but not yet down-and-out workforce will be most exploited
do I have it down?
November 11th, 2008 at 9:40 am
The same thing can be applied to Financial Industry also. Why do they want to bailout banks like Wachovia. I know people working there. Most of them are morons. Same thing about Fannie/Freddie. The list goes on…..
November 11th, 2008 at 12:28 pm
Regardless of whether GM/Ford/Chrysler file bankrupcy, I will continue to buy American. You will never see me in a Toyota, Honda or Nissan.
So you’ll buy an Aveo (built in Ko-rea) before a Honda Accord (built in Marysville, Ohio aka ‘Real’ America)??
http://www.ohio.honda.com/manufacturing/map.cfm
To quote T. J. Watson: THINK.
November 11th, 2008 at 12:31 pm
Regardless of whether GM/Ford/Chrysler file bankrupcy, I will continue to buy American. You will never see me in a Toyota, Honda or Nissan.
So you’ll buy an Aveo (built in Ko-rea) before a Honda Accord (built in Marysville, Ohio aka ‘Real’ America)??
To quote T. J. Watson: THINK.
November 11th, 2008 at 12:55 pm
Another point to be made:
Every bailout creates political pressure for yet another bailout. It becomes a vicious cycle.
November 11th, 2008 at 12:58 pm
Insider - your analysis presupposes that GM is as efficient as Toyota and Honda. Union obligations ossify job titles and processes as well. It’s more than just per hour labor costs.
Also don’t forget the multiplier effect as products move through the “value” chain — what starts as “$510″ (and it’s probably more than that) at the factory increases as people in channel and distribution “take their cut.”
November 11th, 2008 at 1:11 pm
your analysis presupposes that GM is as efficient as Toyota and Honda. Union obligations ossify job titles and processes as well. It’s more than just per hour labor costs.
EXACTLY.. And it’s not just push from above as well when it comes to work practices, Toyota culture rewards workers for finding efficiencies and better work practices from below, on the line itself… Some improvement found in one plant quickly spreads to all, and in a shop that mandates strict work practices that can’t happen, and Toyota can’t take advantage of those productivity gains, so their business loses out. THIS as much or more than anything else is why they don’t want to become encumbered by UAW.
November 11th, 2008 at 2:03 pm
@BG (November 11th, 2008 at 6:05 am )
“Regardless of whether GM/Ford/Chrysler file bankrupcy, I will continue to buy American. ”
Me too. In fact, I bought my last pickup truck from the closest American pickup truck factory — the Toyota factory in Indiana. I suppose my next one might be from the Republic of Texas, though.
November 12th, 2008 at 8:18 am
Auto Industry Insider:
I’m not sure what the point of your comment is. Are you for the bailout? Are you arguing that we should feel sorry for GM because they produce worse cars, both in design and quality, than Honda? Honda’s management clearly has the “big brass balls” to steer their company in the right direction.
November 12th, 2008 at 9:41 am
AutoIndustryInsider is a shill, folks. There’s a reason people interested in reliability don’t accept anectdotal reports or jokes like the JD Power survey and instead rely on reports with large sample sizes like the ones CR does - and there is still a large gap between GM, at least, and Toyota and Honda. (Ford, they mention in the most recent issue, has made admirable strides and now has quite a few models which can be expected to at least be decent on this metric).
If GM made small cars that were as good as the Civic and Corolla, they would at least be losing a lot LESS money than they are now with the ridiculous Cobalt and offensive Aveo (a small car that actually doesn’t even get very good mileage) simply because they could charge a comparative premium, as the Civic and Corolla do. To believe that their woes are due to their cost structure is to fall for a red herring.
November 12th, 2008 at 9:43 am
Oh, and the idea that GM couldn’t see this coming a long time ago is ludicrous too. They, and to a lesser extent Ford, actively fought against CAFE and generated loopholes and tax preferences for the monster SUVs that enrich the people who are trying to kill us (and succeeded in one notable instance). To me, it’s borderline treason to keep pushing those vehicles knowing what they do to our environment and our security, yet even today, even after $4.00 gas, they’re still doing it.