I can’t figure out any solution to this problem. I think in 6 months we are facing a problem more difficult to solve than the banking problem with some terrible land mines. The problem: 1) They are leaking cash like crazy. 2) Nobody is buying their cars. 3) Their market share has been steadily dwindling for years. It needs to turn around, but it’s a juggernaut with no reasonable plan to turn it around. Meaanwhile, foreign competitors keep coming out with better and better products (I drove the Hyundai Genesis a couple of months ago and was really impressed. An f-ing Hyundai was a great car - powerful, comfortable, seemingly excellent quality, great warranty, nice looking, etc.). 4) Despite years of advantage, GM and Ford have few brandnames that are worth anything. This boggles my mind. If you want to buy a small fuel efficient Honda suitable for two people and occasionally a kid what do you buy? (Civic) Somewhat larger and more expensive? (Accord) Similar questions for Toyota? (Corolla, Camry) Similar for Ford? (uh, Pinto (no), Focus (maybe), Taurus (great brand name! uh, wait, discontinued)) Similar for GM? (uh, let’s see, first I have to figure out if it’s an Oldsmobile, Pontiac, Chevrolet, Cadillac, or whatever and then there’s uh, I dunno). Shopping for GM and Ford cars is just too complicated for people. Ford at least has the F-150 - same name for years and America’s best selling vehicle. This problem is nearly killing. 5) Their plans for introducing new cars is bizarre. GM seems to be hanging their hats on things like the Volt (nice idea, I’m not driving an electric car until everyone else has one), and the new Camaro (lots of coverage in auto magazines, I might rent one). 6) Their CFO says they are going to get out of this by cutting needless expenses. If they haven’t done this yet as their credit rating has been dropping as steadily as their market share over the last 7 years, they are the stupidest people in the world. The expenses they have left to cut probably shouldn’t be cut or they are complete morons. His other plan is “We are going to get creative, really creative”. Yeah, like what? 7) Gov’t bailouts don’t work well because it’s just good money after bad. If we gave them $100B without some new plan, they would just burn through it and come back asking for more. Furthermore, every other stupid hurting CEO would come asking for money by saying “Well, bailing out the travel agency industry is important because we employ tens of thousands of people and it would be much cheaper” I want the auto industry to survive, but I would be really opposed to the govt handing them $50B (BTW - Handing the auto industry $50B is hopefully way different than using $50B to buy illiquid MBS but that distinction is probably lost on half the members of Congress to say nothing of most Americans. Another unintended consequence of this stupid bailout). 8) Protectionism - So if we could get Americans to buy American and not buy Toyota instead, things would be better for GM and company. A really obvious solution to the problem is to use taxes and tariffs to dscourage Americans from buying foreign cars. This would get lots of support from Americans. Unfortunately, this is just Smoot-Hawley all over again. Smoot-Hawley was a similar attempt to protect Americans during the Great Depression. It backfired horribly as other nations retaliated and protectionist costs were included in numerous products. International trade dropped by 70% during the Depression, in large measure due to Smoot-Hawley and the fallout. Protectionism as a way to ameliorate the effects of global economic slowdown is a really, really bad idea but something that seems vaguely likely. (BTW - If you asked Sarah Palin about Smoot-Hawley, I would bet at 1000-1 that she wouldn’t have any idea what that is, but people actually voted for her. Now imagine askiing Bill Clinton about Smoot-Hawley and you would get a 50-minute off-the-top-of-his-head lecture). 9) CDS - I’ve posted about this before, but the outstanding CDS on US automakers is mind-bogglingly huge. There are some people out there sweating bullets about GM CDS defaults because they don’t have the cash to pay. The economics about Chapter 11/Chapter 7 means that GM and company will do everything they can to avoid default, but this will burn all the recovery value. The amount of cash exchanged hands in that default will be enormous. This is a serious source of contagion. 10) This is a really bad time politically to try to get this straightened out. GWB is the lamest lame duck I have ever seen and it’s really hard to believe that a lame duck Congress wants to handle such a tough problem. President-elect Obama needs to be a little careful in trying to lead now because that silly Constitution doesn’t make him more than the junior Senator from Illinois until he takes the oath of office. The solution: 1) I don’t have one. I think the gov’t can do little things like back warranties so people actually feel responsible buying their cars. I think we are in for a bigger problem than the banks.
With union expenses you CAN’T CUT EXPENSES. It’s not that simple due to the contract, labor boards, etc. A lame duck congress/pres can take the heat for something and might be the best one to handle it. But they can just as easily pass it to Obama.
You can’t cut union expenses, though if GM survives to 2010 their new union deal kicks in and their heaalth care expenses will drop. They seem to think that laying off white collar workers is healthy. Apparently, the company doesn’t need accountants, risk management, HR types, marketers, engineers, designers, etc… Also, there were some comments on a different thread about the availability of the bailout to GM. I don’t see wht GMAC (with massive MBS losses) couldn’t take aadvantage of some of that.
Great post, JDV. With the dollar rising, things do not look good at all. Sales in the last 5 years have been helped a lot by a weak dollar. True, the yen is rising now which could offset some of that, but still, a weak dolar is good. There is no easy solution, I’m with you on that, but money can come from soverign funds if we would stop being too paranoid about that, like what happened with the Dubai port deal. Save the darn companies and retain your workers and your industry regardless of who ends up owning GM, that’s one way. Another way is to institute a policy whereby if you buy American cars, you get free gas for 5 years, and have the rich oil comapnies pick up the tab, sounds fair to me.
"2) Nobody is buying their cars. " I know this is hyperbole, but the reality of the situation needs to be addressed. GM is still the world’s second largest automaker, and sales of every other automaker are down 20-30% as well. This situation is not entirely their fault, although they certainly didn’t position themselves well.
i take it that you’re in the “to big to fail” category?
Not really. What’s the problem with having them go chap 11 reorg? Half the airlines have done it in the last 5 years and I haven’t noticed a big problem there. I also disagree with the sentiment that their brand names aren’t worth anything. “Chevy” and “Cadillac” are worth a lot, even if you can’t name the specific model. Also, as a guy who spends a decent amount of time in rural middle America, I can tell you the “Made in America” brand is still extremely strong.
Maybe we need Toyota and Honda to take them over just before they go bust. Of course, that didn’t work so well with Daimler and Chrysler. That’s my best hope for it all, which, as you can see, isn’t very hopeful.
Corporate taxation, support for powerful labor unions, strict environmental standards–none of these are “evil” policies or instituted with bad intentions. But let’s be honest–it has made the “Big 3” completely incapable of competing with Asian car manufacturers, particularly the powerful labor unions. What was the stat? American car companies are at an automatic $2,500 per unit disadvantage compared to foreign competition due to labor unions. Inferior products sold with no cost advantage? This is a recipe for disaster.
NakedPuts Wrote: ------------------------------------------------------- > Not really. What’s the problem with having them > go chap 11 reorg? Half the airlines have done it > in the last 5 years and I haven’t noticed a big > problem there. > The CFO of GM was speaking about Chapter 11 last week and brought up this point. For most airplane passengers, you spend $300 and fly next week and that’s that. A car purchase is $25,000 and it lasts 7 years. Big difference. In GM’s own consumer research, 80% of people said they would not even consider buying a car from a manufacturer in bankruptcy. According to him, Chapter 11 is out of the question. > I also disagree with the sentiment that their > brand names aren’t worth anything. “Chevy” and > “Cadillac” are worth a lot, even if you can’t name > the specific model. Also, as a guy who spends a > decent amount of time in rural middle America, I > can tell you the “Made in America” brand is still > extremely strong. I agree that Chevy and Cadillac are worth something but not nearly as much as they ought to be worth. In particular, Cadillac used to be synonomous with quality (“the Cadillac of lawn mowers” meant you got a great lawn mower). “Made in America” matters to red-necks like me too.
NakedPuts Wrote: ------------------------------------------------------- > "2) Nobody is buying their cars. " > > I know this is hyperbole, but the reality of the > situation needs to be addressed. GM is still the > world’s second largest automaker, and sales of > every other automaker are down 20-30% as well. Well, GM is losing market share at a really steady rate. Other manufacturers are also getting hurt, but that does little to relieve the pressure of GM’s debt. > This situation is not entirely their fault, > although they certainly didn’t position themselves > well. I blame lots and lots of this on high fixed costs from union demands. If your fixed costs are $4000 vehicle, are you going to build $40000 vehicles or $14000 vehicles? It just happens that global downturns and oil price increases nail the market for $40000 vehicles more.
If GM does go out of business, does that really mean that there won’t be anyone making parts? I thought other companies actually built a lot of the parts and GM would just put them together? Just because GM goes out of business, doesn’t mean that production of parts will cease (there will still be a demand for them if there are still cars on the road). When I was in HS, I had an ’87 chevy nova. When you opened the hood, you would see a Toyota engine. Of course, people would stop buying “new” cars… any new cars would be under a new name which would happen with restructuring. no? my “to big to fail” question was actually for JDV
“Made in America” matters to red-necks like me too." I agree - though “made in Japan” has more cache in my mind. That said, my last 3 cars were all manufactured in the US: my Mitsubishi, Nissan, and Acura (seriously).
I think the whole “made in america” ideology is somewhat elastic- whereby most will gladly pay an extra couple bucks to lower ticket items to make themselves feel good, but when it comes to a real investment that includes years of additional costs in terms of repair, maintenance, etc… the rational pocketbook calculations trump altruism. I’ve owned 3 honda civic hatchbacks and now have a toyota (never lost money on an old civic). After seeing what my friends went though with american vehicles I didn’t want to deal with it.
akanska Wrote: ------------------------------------------------------- > I think the whole “made in america” ideology is > somewhat elastic- whereby most will gladly pay an > extra couple bucks to lower ticket items to make > themselves feel good, but when it comes to a real > investment that includes years of additional costs > in terms of repair, maintenance, etc… the > rational pocketbook calculations trump altruism. > > > I’ve owned 3 honda civic hatchbacks and now have a > toyota (never lost money on an old civic). After > seeing what my friends went though with american > vehicles I didn’t want to deal with it. How did you never lose money on a car?
well when a car is 10+ years old and goes for about 3k the $500 bonus you get for washing it before selling turns into a profit I always bought out of obscure ads in inland empire in california and sold in Newport Beach. My last civic made me 50 bucks after a year and a half of ownership.
Wow. That is pretty good. The only guy I know that makes money on cars gets his wholesale. I certainly never have…
JDV’s point about credit default swaps adds a nice twist to the disaster…sweet way to amplify the damage. Ouch. Seriously these players are such dinosaurs. What other option is there but to let them fail? The govies would need to pump in cash for what, 5-10 years to give them time to become competitive, and if they were capable of competing why wouldn’t they have figured it out by now?
akanska, can you advise me on how i can sell my Honda prelude? It’s been sitting in my garage and no one is really calling it about it ;(
sorry- that thing is just plain ugly for a non-super economy car. No amount of wax and engine cleaner can help those lines. before ppl get to impressed w/ my skilled my calculation includes only purchase price and sales price- its not like I made $ taking into account registration, insurance, etc. But I think there is a sweet spot for cars that are old, cheap to run/maintain, reasonably good looking enough for a mass appeal, and known as being highly reliable where if you buy and sell over the course of a couple years you won’t lose >$30/month. (assuming you are not putting mega miles on it).