Even though news of the breakdown in talks to bail out the Big Three Automakers will send stocks lower at the opening on Friday, is the news so bad? I don't think so. What good does it do to bailout companies with an operating model and cost structure that has failed. The Big Three will only be back to the bailout window again, and again.
The US automakers are hamstrung with thousands of dollars per car in so called legacy costs: costs associated with generous pensions and other benefits that have been agreed to by management and labor over the years. There is one small problem with these legacy costs -- Americans and world buyers won't pay them. Instead auto buyers the world over have, increasingly, switched to foreign based cars, many of which are manufactured in the US.
Toyota is now the largest car company in the world. Nissan, Honda, and Hyundai have all made huge gains in the US and around the world. The common denominator of these companies is that compared to the Big Three US auto makers, they all produce cars that have lower costs feature against feature, offer better gas mileage, and possess better customer satisfaction ratings. It's tough for the Big Three to compete against those kinds of results, and it is not likely to change anytime soon.
The Big Three auto makers need a new, lower cost structure, and the only way to get it is probably to seek bankruptcy protection. Under bankruptcy, they will able to renegotiate all contracts and debt. Bankruptcy may seem a harsh pill to swallow, particularly in these tough economic times, but bankruptcy does not mean an end to the US auto industry; it just means a time when the industry, creditors, and the unions can put together an operating model that has a chance to succeed in the global market.
You and I have all flown on bankrupt airlines. In bankruptcy, planes still fly, most employees still have jobs; indeed, business is conducted pretty much as usual. It just means that management gets protection from creditors and contracts that are draining away their viability.
Importantly, it is a time when management, creditors, and unions are under the gun of a bankruptcy judge whose job it is to keep the pressure on all the players to agree to a plan that has a chance to survive in the market place. The current high-cost structure cannot and should not survive. The US auto industry needs a complete overhaul. The breakdown in bailout talks may offer all the participants an opportunity to get it right.
The markets won't like the uncertainty, but the markets will, ultimately, ecstatically embrace a plan that has a chance to survive.
There may still be a reprieve and a bailout deal may be yet struck, but in my mind any deal that leaves the current operating and cost structures in place is doomed to ultimate failure.
Friday, December 12, 2008
The Collapse of the Auto Bailout: Not As Bad As It May Seem
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5 comments:
Your ignorance is amazing! If the auto industry fail so do all the suppliers to the auto industry. GM owes 10 billion to its suppliers. A majority of those are small businesses that can't afford to write off that kind of loss.
The really appalling part of this is that the Gov't gave 1 trillion dollar to the banks and Wall Street with no question asked. Most of the same idiots who caused the problem in the first place retained their jobs and got their bonuses. The best part of the wall Street bail out is they don't have to pay a cent back. The auto industry is asking for a loan.. Lucky for you, you are in the financial and probably never had a hard days work in your life.
It's always interesting what people will say under the Anonymous moniker. If you don't think Greg D and all at DCM don't work hard, think again. And that goes for almost all people who earn "comfortable" incomes, except maybe for the Chicago pols. I was against the auto bail-out, and called my Senators and congressman (and also I was against the Wall St b/o). Toyota, Nissan, et al will step in and absorb the suppliers output, etc.
Steve Nichols, St Louis, MO
OK, Anonymous did not leave a card, but I will. I am David Grantz, a client. The anger of Anonymous's quote overrode the facts he/she was trying to present, and which were also ignored by Beth and Steve, I might add.
Consider the following:
Anonymous has raised legitimate concerns. Why would the government exend White Collars a generous helping hand, but not the Blue Collars. Remember that the lenders, hedgers, and speculators also supported an unsustainable models, and much of this based upon graft. But it's the Blue Collars who have been under seige for a couple of decades now. They used to make a good wage with secure benefits, benefits that can still at least simulated even in revised structures (loss of pensions) in the White Collar world.
The point that Anonymous should have made rather than accusing Mr. Donaldson of never having "a hard day's work" is that manufacturers, unlike workers in the financial industry, produce an increased value material product. If our country continues to export manufacturing jobs, we will have lost our core economic vitality. This simple lesson goes back to the times of mercantilism, when our own country demanded the right to make products, not just produce raw materials. Cheap foreign labor has temporily turned mercantilsim on its ear. How clever of the Chinese! They have taken us over without firing a shot. Think about it. They own us because they have acquired our manufacturing economy. And they own our debt. Don't think that they will stop at that. When they are diversified enough, they will finish the job. Once they have adequately diversified their own markets, we are toast.
Now that manufacturing workers are asked to compete with the entire world, their standard of living is dropping like a rock. Only easy credit has masked this hard reality. The service sector is even worse. And surprise, surprise! Even the White Collars are losing investment value as core economic constructs crumble.
As for auto workers, much of the so-called legacy costs have been conceded, especially on the wage front. New hires cannot expect the same deals that the old structure provided.
But much more important are the ramification of bankruptcy for the auto industry. With the economy already reeling (and it may not make it, Mr. Donaldson), the last thing we need is bankruptcy in the automotive industry. It may be true that GM, Ford, and Chrysler will emerge in some form, but it no certainty. Meanwhile, what else has happened?
1. At least half of the dealerships go down. Many are on the edge right now. Hundreds of thousands of jobs are lost.
2. The state and local revenue, already in a downward spiral, if further depressed. State and local jobs are lost.
3. Many domestic parts manufacturers fail, pressing Honda, Toyota, etc., to open new plants (Guess where!) to supply parts. Many, many jobs lost.
4. All companies, steel, glass plastics, etc. with automotive debt in arears lose their money. Many more layoffs.
5. Everyone with American-made vehicles has trouble getting parts. And who wants to buy a product if its support evaporates.
6. The cumulative effect seals the economy's fate. Great Depression II. If you do not see this as a possiblity, maybe we need to go to cash in the money you manage for me.
7. Very shortly after Depression II is declared (or even before if you're reading this), it occurs to the financial community that the world has just lost another eight trillion dollars in wealth for lack of a hundred billion dollar (the real cost of saving the industry) bailout of the auto industry. This scenario will prove once again that hindsight is 20/20. But wait! It hasn't happened yet. So how about some foresight?!
Yet many still hope, and where does that hope lie. First, a smart, progressive leadership in Washington, D.C. supporting new manufacturing construct based on alternative energy. Will it be enough? Combined with infrastruture improvements and incentives to halt and reverse the exodus of jobs overseas, it just might salvage our economy, but not before a protracted recession lasting at least three years.
no matter what is fair, blue vs white collar bailouts...
re: the auto industry.
if NO ONE BUYS the US cars, because they 1. cannot=no money, no credit
2. don't want the US autos that are for sale
3. feel forced to wait for hybrids that Congress has mandated..thus will drive old cars longer
THEN, the US auto industry cannot survive the present product mix nor negative cash flows.
IF NEW HYBRID autos, from new startups and foreign competitors have no "legasy" cost associated with them (and they won't) then US big 3 newest hybrid products burdened with "old cost structure hangover" still cannot price compete. If US tried to sell via trade tariffs, they will lose on the global economy through retaliation against other US industries.
Bankruptcy with NO direct bailout is the only hope to PRESERVE the mess that the industry is faced with.
Next point:
dealerships. The US automakers are overdealershiped already by almost 4 times too many. With the decreases in 2009 units projected, the sales will not support the existing dealerships. So many dealerships are already broke, they just have not recognized it.
suppliers: if GMC owes suppliers $10 Billion already, those suppliers are already in a huge loss, as GMC cannot pay them. Should GMC take bankruptcy, those debts are not necessarily lost, they just are not able to force GMC to pay what they cannot pay, and be FORCED into a liquidating bankruptcy. In fact, the suppliers would HAVE to CONTINUE to produce to GMC new orders to ever get ANY of their money back. The court appointed trustee would be able to make an orderly vendor/purchaser transaction take place. Key, however, is whether the suppliers can get credit for themselves to be ABLE to supply the 3 automakers. Without credit to the SUPPLIERS, not even under consideration by the current US government or treasury considerations...even if GMC is bankrolled, the suppliers can go out of business, dooming forever the Big 3 from producing ANY new cars.
This situtation is politicized, and made to seem like an impassioned plea to save jobs. But the loaning of a few bucks cannot held a totally sick business recover. That is, after all, what bankruptcy was invented to do.
Problem, the Unions don't want bankruptcy....only because they lose their deal and bargaining strength,
the management do not want bankruptcy because they lose their stock and their jobs
stockholders do not want bankruptcy because their equity is wiped out.
wall street does not want bankruptcy because investment losses are recognized in all portfolios not yet marked to market.
so the only folks that are infavor of bankruptcy are:
experienced turnaround executives with no axe to grind
the taxpayer who is about to get totally screwed with throw away loans of HIS money to a lost cause, without total reorganization of the industry and its Congressional mandates.
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