A WMD next week?
Autos report sales next week. J.D. Power is estimating that unit sales will come in around 12.5 million units vs. 16.3 million last year.
Just Ford and GM accounted for over $350 Billion in revenues last year....or about 3% of our GDP. A 20 plus percent reduction in revenues will have a huge impact on our economy.
Not only that, Ford and GM have managed to accumulate HUNDREDS of BILLIONS of dollars of debt over the past 30 years. This debt is seated in our retirement plans and pension funds.
For most of recent memory the US auto industry has been selling vehicles at a rate of about 17 million units per year. Our auto companies built up an infastructure to support selling at that rate.
In addition, they borrowed billions and billions to build that infastructure. Fortunately for the auto companies, gas was cheap during this period and the industry was able to sell millions of high margin SUVs which permitted the auto companies to cover the debt obligations and meet pension requirements.
Now sales and revenues are coming in way below plan but the debt and the infastructure remain. With revenues on track to come in around $100 BILLION below last year, and the mix of sales towards lower margin smaller vehicles, how will the auto companies be able to meet their hundreds of billions of dollars of debt obligations??????
For tbose of you that are old enough to remember, the bail out of Chrysler years ago occured when auto companies had much less leverage than they have today......thus bailing them out was much cheaper.
Today, the debt obligations of Ford and GM are huge. Their bonds make up a material portion of our nations pension plans. The big question now is whether at 12.5 million unit run of a mix trending towards lower margin vehicles.....how will this play out?
Will our government write Ford and GM checks for hundreds of billions of dollars????????
Will we force F and GM to restructure the debt and bring it down to levels that can be serviced by current sales levels?