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RainierMan (65.62)

Bailing Out One of the Most Important and Inept U.S. Industries



November 07, 2008 – Comments (7) | RELATED TICKERS: F , GM

I haven’t been involved with the auto industry for about 11 years. However, back in the day, I spent every wroking day as an industry analyst, focused on global competitiveness of the industry, and political and trade developments in that sector. I still follow the industry, and I still love cars.

Today I took my 2004 Ford Focus SVT—a delightfully hot little hatchback—into the Ford dealer for another repair. This car has been a disappointment in durability despite Consumer Reports’ “average” reliability rating for the Focus in general. My wife picked me up from the dealer in our 2001 Honda minivan, which has never been in the shop for a non-warranty repair, and has had only one repair under the warranty. My 20-year old Toyota Corolla, now with 200,000 miles on it, has not been in the shop for a repair since 1997, and only had one other trip to the shop before that. Sure, it helps that I do a lot of my own work, but I can't do everything. The Corolla sits in our driveway, now functioning mostly as an around town daily beater (getting 33 mpg just around town, too).

While at the Ford dealer I wanted to check out the new 2009 Focus; Ford’s newest fuel economy car. However, it was raining, and the only cars in the showroom were SUVs and Shelby Mustangs; expensive gas guzzlers. So, I passed on looking at the new Focus. Instead I sat in a $44K Shelby. Yes, I had visions of blasting through highway onramps, while the awesome V-8 exhaust roared like music in my ears. Of course, I’ll never buy that car. Neither will most (of the very few) people out looking for a new car these days.

I was the only person wandering around the dealer checking out cars. The only thing at that dealership earning money this morning was the service center. All the other overhead and inventory is sitting there helping Ford and the dealer burn cash.

I’m annoyed that I keep having to throw money at my current Focus. Although we do not want to take on any debt, I’m considering dumping the car for something even more fuel efficient and reliable. I would be looking at Hondas and Toyotas. I gave Ford a chance, and I feel like they screwed me.

All this while we see the auto companies going to Uncle Sam for a handout. This, from the industry that has always told government that we must let the marketplace determine all sorts of factors such as fuel economy standards and where investment and jobs should go. I used to sit in on hearings in Washington, D.C. where the Big Three executives would tell Congress that they should leave the industry alone to develop the vehicles the market demanded and invest in factories outside the United States.

My experience both this morning and in past years speaks volumes about where the U.S.-owned auto industry is today. Let’s not assume my experience is everyone’s experience, but we all know the themes that my experience represents: lagging quality of the Big Three (or Big Two, is probably more valid now); a preoccupation with larger cars and SUVs; a questionable ability to transition successfully to smaller vehicles; an ongoing need to sell their historically most successful products (i.e., a showroom full of SUVs and gas guzzling cars, while the Focus’ sit out in rain where noboby wants to go look at them); the more attractive replacement for my American car is not another American brand car (though it could very well be built in America). And of course, an industry that wants to be left alone until it needs to be bailed out for it’s own ineptitude.

While Ford and GM continue to disappointment me with their inability to deal with the modern global auto industry, I am torn. I honestly feel that the United States will be moving in the wrong direction if we lose our domestically-owned auto industry. Yes, I know foreign-owned auto companies have invested heavily in production, management, and research and development here. I’ve been in many of those factories, talked with the mangers and the assembly line workers, studied their business model, purchased their cars, and visited their many domestic suppliers. They are good. They provide jobs well beyond just assembly line and low-level managerial positions. If you live in parts of Kentucky, Ohio, Tennessee, California, Texas, South Carolina...among other states, you know that there is some pretty impressive production going on by Toyota, Honda, Nissan, BMW, and others. To a very meaningful extent, they are American auto companies in terms of what is coming out of their factory doors. Yet, I still cannot embrace the new concept of living in a country that has none of the very highest level corporate and R&D activities of an industry with some of the strongest linkages to other sectors of the economy. Any emerging economy seeks to develop it’s own truly domestic auto industry for all sorts of valid reasons, but yet the United States could lose it’s own domestic auto industry. Somehow, this just doesn’t sit well with me.

I know--I am positive--that for economic and political reasons the auto industry will get the handout it is asking for. We just gave the industry $25 billion in loans, but now they want more. And I am well aware of the cynicism that rightfully will accompany that handout. I am 50 percent of the same mindset of those who say, “Just let the domestic industry die once and for all”. I can’t say that I’ll be shedding any tears if that happens. However, the reality is that the government will not let the industry fail. State governments all over the country will support throwing more money at the auto industry.

The question now is probably this: what obligations should the auto industry have to the United States when they are bailed out? My first thought on the matter is that the days of telling the government that stricter fuel economy standards are none of the government’s business should never be uttered by auto executives again. If they had embraced those standards years ago, we might no be bailing them out now. I think we will also face a dilemma; what can we demand of the industry without hobbling it with truly stifling preconditions?

The other disturbing factor is the competition. Toyota and Honda, while suffering from the global downturn, are extremely well positioned to take advantage of: 1. a new emphasis on fuel economy and "green" propulsion systems; 2. beat the living hell out of Ford and GM not just in North America, but globally. Both Toyota and Honda will weather the downturn far, far better than most in the industry. 

I think we are at a turning point with the auto industry. I do not have high hopes that we make a turn in the right direction, but I'll be watching to see where this all goes. 

7 Comments – Post Your Own

#1) On November 07, 2008 at 3:22 PM, jgseattle (26.48) wrote:

My fear is that the taxpayer invests a lot of money to delay the inevitable.  The big 2 or 3, depending on how you look at it, are zombie companies.  They ARE bankrupt and even with US assistance will be bankrupt again.  How do I know this?  Because they have to high of legacy cost and have negociated with the UAW health benefits that will bankrupt them.

What needs to happen is they go into bankrupcy and lay the pension onto the government, think airlines, break the union contracts and start over.  The unions need to think is more of nothing better than a little of something and be realistic in their demands.

The US workforce MUST move up the value chain and most of the UAW members are not that differenciated from Chinese labor.  Lets figure how to build the differenciation and make the US worker more productive.

Look for wage pressures to really start to kick in over the next two years, especially if we continue to see asset deflation.

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#2) On November 07, 2008 at 3:31 PM, Option1307 (30.45) wrote:

Wait, your from WA and it was raining?? haha, jk. I grew up in WA, love it there.

 I share your same concerns and thoughts and I agree we are at a turning point. However, its not jsutthe auto industry, it's also the airlines, rails, fincial industry. They are all at crucial points, the "correct" dirsection they should go is debatable, but they point is that they are in the mist of enormous changes. Maybe not for the better either.

On one hand I say let the autos die. If these corporation were too blind to see the coming massive demand for high mpg vehicles, they are retarded and deserve to crumble. What kind of management did not see this as a "potential" scenario 5, 10, 15 yrs ago? To me this just adds to the long long list of mismanagemnt and horrible planning by these companies. Whyare we going to bail them out now, again, we will only have to bail them out next year and the year after, etc. They are not fixing the fundamental problems, just buying more time.

Although, I do agree with you, that realistically they will be bailed out. No way the will not. And maybe we should. Afterall, the US doesn't produce crap as it is, throw out the auto industry and our production/manufacturing is basically non-existent. We can hardly afford this at a time like now with our crumbling economy. We need real production/assets/etc. Not the crap that the financial industry provides.

So, the question is, which direction to go...I strongly believe that the US is screwed in the short term. We need to restructure ourselves in terms of what we make, spend, do, etc. This will be horribly painful. Long recession, yes. But, what other choice do we have? Keep bailing out every industry, stimulatiing the consumer? When do China/Japan/every country in the world stop loaning us money and start collecting it? And with no remaining ability to produce goods, we won't be able to pay anything back .Thus, we should begin our massive restructuring now. And it starts with the auto industry...

Sorry, I got a tad off topic here. But your thoughts are all related in the larger scope of things. We as a country need to decide, and quickly, which direction we are going to take. Restructure America and long recession, or prolong the inevitable massive/horrid fall of America as we know it...

oh, and have a good weekend all...

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#3) On November 07, 2008 at 5:21 PM, VTEngineer2001 (< 20) wrote:

I come from a family of Ford engineers, starting with my grandfather that designed a clutch that wouldn't wear out. Guess what happened to that clutch? A "thank you very much", smile, promotion, and it was shelved and never seen again. Geeze, think of all the lost revenue from not having to ever replace clutches!! The story ends with my uncle getting laid off as a white collar worker in Detroit and then 2 months later Ford asked him to come back to work at half his salary. Sigh*

There is more wrong with Ford than sub-par quality issues, union issues, and designs that no body likes to buy.........

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#4) On November 07, 2008 at 8:18 PM, rd80 (96.82) wrote:

I see several flaws with an auto industry bailout.

Proponents argue bailing out automakers will save jobs.  I disagree.  Even if the gov't steps in, these companies need to downsize and cut jobs.  If one of these companies go bankrupt, the jobs don't just disappear.  Operations don't cease.  

Since these are ongoing operations, a bankruptcy would likely be Ch.11 - restructuring, not Ch. 7 - liquidation.  A restructuring is just that.  A bankruptcy court hears arguments and restructures contracts and obligations.  Typically, shareholders get wiped out and creditors end up with some reduced settlement.

Those who argue that a gov't bailout will save jobs need to explain how gov't intervention results in fewer job losses than a bankruptcy proceeding.  I don't see any way anyone could predict which approach would result in the smallest number of lost jobs.

The group a bailout helps the most is bondholders and other creditors.  Outside of bankruptcy, the companies have few options for restructuring the debt. 

Union members who keep their jobs are probably the next group who benefits most since it's highly unlikely pay and benefits packages get restructured outside of bankruptcy.  However, because a bankruptcy restructuring might lower labor costs, it's possible fewer jobs would be lost in a bankruptcy.

Shareholders also benefit from gov't intervention compared to bankruptcy.  If history repeats, the gov't will demand warrants severely diluting common stock holders.  Not good for them, but better than going to zero in bankruptcy. 

Management is probably better off with a gov't bailout.  The gov't could demand a clean slate of upper management as a condition for a bailout, but no way to predict how they might do that.  If it went to bankruptcy, the creditors take charge and current management has little say in running the show.

We're being sold a bill of goods again.  There are proven procedures in place for businesses that can't pay their bills.  Bankruptcy would not mean the end of GM or F and a reset might be just what they need to become competitive again.

This needs to stop.  If the gov't intervenes to save auto companies, you can bet homebuilders and others will be quickly lining up with their lobbyists arguing why they deserve a bailout too.

If we're going to break the Treasury's bank, let's at least break it for something we need anyway like repairing infrastructure.  Guaranteed jobs there and if we're going to drive little shoebox cars, the potholes better get filled. Corporate bailouts are nearly certain to cost taxpayers money - not nearly so certain there's any benefit for the dollars spent.

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#5) On November 07, 2008 at 9:54 PM, briyan (< 20) wrote:

We need to let them fail.  No bailout.  If there is no way they can compete on the global market in their current form, and no way to sustain the massive legacy debts, why should they even exist?

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#6) On November 08, 2008 at 8:54 AM, milpo (45.07) wrote:

Harsh reality! The 3 auto giants go under and we add 4.5 million to the unemployment statistic. One of the companies in my town manufactures glass window seals and 80% of their business depends of the big 3 auto giants. The domino ripple effect on employment has to be managed. After all, no job results equals no consumption. And since 60% of global economic output relies on the American consumer, what do you think would happen next? Especiallt when the world realizes that the only item of real value backing the fiat currency known as the U.S, dollar is the labor and consumption of the American worker. Stay cool everyone. This is a very big problem. Let's not use a machete when a surgical scalpel is needed.

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#7) On November 08, 2008 at 11:38 AM, dexion10 (27.11) wrote:

Nice post!

 the U.S. car makers had their chance with me too and the blew it.

My Japnanese cars that have good ratings from (the best site for getting an honest opinon on a car)


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