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A Modern Interpretation of the Famous Fable, the Ant and the Grasshopper

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October 15, 2008 – Comments (2) | RELATED TICKERS: GM , TM

To work today is to eat tomorrow

It is best to prepare for the days of necessity 

These words come from the famous fable of the ant and the grasshopper.  A couple of stories that I read in Automotive News yesterday brought this tale to mind.  In the story, the grasshopper wasted the warm months singing and dancing while the ant worked hard and intelligently worked to store up food for winter.

For years, General Motors (the grasshopper) frittered away what was essentially the spring and summer time of the auto industry.  Sales were booming and good automakers were printing money hand over fist.  Not GM of course, which bungled its way along while the best automakers like Toyota (the ant) built up its coffers and its credit rating.

Now winter has arrives for the auto industry.  Times are tough, but fortunately for our ant, Toyota, it has built up a huge cash reserve and a stellar credit rating that it will use to help it ride out this cold period.  Toyota is one of only two AAA-rates auto lenders out there (the other is GE Capital).  After watching its sales fall by a stunning 32% last month, Toyota has decided to go on the offensive...and it has the cash to do so.  This month it has launched a huge wave of new incentives and commercials, which some estimate will cost the company in excess of $250 million, in an effort to stop its sales slide and to steal market share from its American competitors.  Through its new "Saved By Zero" promotion, Toyota will offer special interest rates as low as 0% on eleven different vehicles.

While our grasshopper is living off of its reserves, our ant, General Motors, is literally starving to death.  It's tough to say whether the ant will have enough food, er uh money, to last the winter.  At the same time that Toyota has launched aggressive financing promotions, GMAC (General Motors captive finance company) announced that it will cut way back on lending.  It essentially pulled the plug on leasing several months ago and it now will no longer lend money to consumers with credit scores below 700.  Analysts estimate that this will reduce the number of loans that GMAC will provide by at least 25%.  This, when combined with the elimination of leasing (which Toyota still offers) will be devistating to the General's U.S. sales.

The fact that Toyota has been conservative in who it lends to all along, never extending its best interest rates to consumers with credit scores of less than the mid-600 range, has enabled it to continue to do so.  GM on the other hand over the past several years offered 0% financing essentially to anyone who has a pulse, opening it up to its A, B, C, D, and even its dreaded S tier customers.  Of course, that is just the tip of the iceberg in terms of the mistakes that GM has made (I've ridden it down nearly 80%, or 50 points in CAPS, and it would have been worse, but I shorted it too early).  Now the chickens are coming home to roost. 

GM is burning through its cash fast and it has been unable to get anyone other than the U.S. government (you and I grumble, grumble) to loan it money.  Auto sales are going to be reeeeeeally ugly in October.  I have a feeling that they may fall to a level in the U.S. that we haven't seen since the early 1980s.  Ouch.

Deej

2 Comments – Post Your Own

#1) On October 15, 2008 at 3:20 PM, MarketBottom (29.38) wrote:

Yep, their 20 year slump will slowly end as they again become our largest trading partner, and our largest worthless debt buyer. Goodbye China.

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#2) On October 16, 2008 at 10:40 AM, zzlangerhans (99.85) wrote:

Oops, you forgot who was the grasshopper and who was the ant halfway through. Therein lies the risk of metaphors. Point taken though.

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