Even the good companies are getting hammered by the slowdown in the auto industry
I have always considered Toyota and Honda to be the gold standard of the auto industry. They are probably its two best run companies (though an argument could be made for some of the Germans). Even these mighty companies have been wrecked by slowing new vehicle demand and a rising Japanese Yen.
Following reductions in 2008 FY earnings guidance by Honda of 42% and by Nissan of 51%, Toyota Motor (TM) announced today that it is lowering its earnings forecast for the financial year ending in March 2009 by a whopping 73.6%! Needless to say, the company's stock is taking it on the chin, down 16% as I type.
The unwinding carry trade, which has caused the Yen to rapidly appreciate, is really weighing on Japanese companies. One analyst estimates that every rise of one-yen versus the U.S. dollar reduces Toyota's earnings by $450 million. Ouch.
I have been saying this for a while now, I have been in the auto industry for well over a decade (1996) and I have never, ever seen anything remotely as close to as bad as the situation that the industry is in right now. If the Japanese companies are getting hurt, the poorly run U.S. companies will be destroyed.
Both General Motors (GM) and Ford (F) are scheduled to report their third quarter earnings (er um losses) on Friday. They are going to be absolutely scary and things have gotten worse since then. GM is getting pounded today, down 13% to $4.80 and while Ford is down 7% to $1.95. It costs more for a gallon of gas than a share of Ford stock now. Ouch.
I don't see any sign of life for GM either. Yes, it cranked up its cash incentives for the month of November, but you can't squeeze blood from a turnip. Cash incentives won't stimulate much demand when things are this bad. Even worse for the company, its lack of cash has forced it to pull the plug on all of its special financing and lease programs. This means that consumers who want a Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, Saturn, or Saab vehicle have to either finance it through GMAC at a terrible rate (and only those with amazing credit scores will qualify) or find an independent bank that is willing to lend them money, which is easier said than done right now.
Things are slow at Toyota, but at least it can still finance and lease cars to consumers.
Write this down, without significant government aid, probably both General Motors and Chrysler will file for bankruptcy in 2009. Ironically, while this would be bad for the country and these companies' bond and stock holders, it would probably be the best move for the companies. Their labor costs and dealer agreements prevent them from making the necessary cuts to weather this downturn. By filing for bankruptcy they would be able to renegotiate a lot of these agreements and emerge in a much more competitive position, cost-wise.
The question is what would bankruptcy do to what little remaining brand equity they have. I suspect that at least initially, a bankruptcy by one of the "Big 3" would be very positive for competitors like Toyota and Nissan. Consumers who are either scared that their vehicles' warranties will not be honored or angry that they or someone that they know who worked in the industry was laid off might be moved to buy a Japanese vehicle.
Toyota Profits Tumble as Yen Soars