By on July 14, 2008

(courtesy are.berkeley.edu)Things are bad for Chrysler, Ford and GM. The Big 2.8 are burning precious cash, shedding valuable market share, choking on unwanted trucks, attempting to nurture (or excise) damaged brands and outmoded models, and struggling to bring relevant products to market. Bankruptcy looms large. And yet, there’s a silver lining to the recent, calamitous downturn in the U.S. new car market. But before we reveal the sliver of hope, let’s check in with the main engines of their destruction: Honda, Nissan and Toyota…

For Toyota, whose annual profits are more than twice GM’s entire market capitalization, the American consumer’s switch from light trucks to lighter cars is extremely annoying.

After investing some $2b in a brand new pickup truck plant in Texas, ToMoCo had to slash prices to the bone to move the metal. Now that their sales target is a cruel joke, they’ve backed off on discounting. Sales are sinking fast. Although Toyota’s still selling over 100k Tundras per year (at current rates), the plant was designed to build more than twice that amount.

As ToMoCo shuffles and “right sizes” production, the prescient addition of Camry production in Subaru’s space is paying off in spades. The “extra” capacity has allowed an increase in U.S. rental sales. Even so, the increase in total sales means the fleet percentage is well under 20 percent for the Camry/Corolla, which bodes well for maintaining the vehicles’ re-sale value (historically what kills fleet-queens). 

In this not-so-brave new market, Toyota’s biggest obstacle to further growth is structural; they can’t build popular models fast enough. The vehicle that best exemplifies gas-sipping, the Toyota Prius, can’t be constructed in anything other than a purpose-built (or highly modified) assembly plant. Equally important, battery suppliers must expand to meet the demand. Back when Toyota announced a target of over 200k Priora per year, there was talk of them being too ambitious. Turns out, they weren’t ambitious enough.

If the pickup truck debacle dented Toyota, it gutted Nissan. Even matching mad pricing only moved 80k Titans last year. With the ’08 numbers plunging off a cliff, Nissan is looking to get out of big-truck building (sourcing the Ram, if Chrysler’s still around). Meanwhile, the company’s juggling output to keep their factories busy. This is the first major market downturn since Nissan merger with Renault; it’s time to find out if they can thrive in adversity. 

The biggest issue Nissan faces in the U.S.: a lack of “first choice” vehicles. The Quest is off most minivan buyers’ radar. As good as they are, the Altima/Versa are on the tip of no one’s tongue. The Murano, one of Nissan’s only “stand out” vehicles, is slumping badly. The model’s thirst, extra size (without a compensatory third row) and cannibalistic smaller sib (the Rogue) have done it in.

So, while a truck-liberated Nissan will have the production space to grow, there’s not much hope for growth in the near future. 

Right now, Honda is the only major manufacturer increasing U.S. sales over last year– by about five percent. Offering a small-car heavy line-up has helped their bottom line. But so did limiting large vehicle production.

Last year, Honda changed over one line from making Pilot/sized vehicles to Civics. That left them with a natural cap of around 200k Pilots, Ridgelines and MDXs, and a similar limit on Odysseys. If the Odyssey outsells the Dodge Caravan this year, it will be a result of the Caravan falling (which it has been), not increases on Honda’s side.

All this shuffling freed production space to increase the sales of Civics, Fits and CRVs. The Accord is selling well enough, but there is a natural “cap” of about 450K. Given strong TL and Inspire (JDM US-style Accord) sales, they may not reach that. The limit on Civic sales are much higher; half a million would not be a shock. 

Even better, Honda is getting ready to open a new assembly plant in Indiana. While it has been listed to build Civics, it may directly or indirectly allow higher Fit sales. Even with a new plant online, Honda’s U.S. sales cannot get much above two million units per year without even more investment and time.

The good thing about this market-share-loss is that it’s mostly relative. Chrysler, Ford and GM have too many factories for what they sell, but they are also the only companies that could fill the gap if/when one of them shuts down. 

And there’s your silver lining. Assuming Chrysler's the first to go, assuming the American market doesn’t contract even more violently than at present, Ford and GM will be uniquely positioned to increase production to take-up the sales slack; which could be measured in hundreds of thousands. No one else has the necessary plant capacity. Last man standing. Dead cat bounce. Silver lining. Take your pick.

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44 Comments on “Detroit’s Silver Lining...”


  • avatar

    Apologies. For some reason, the WP software decided to bar comments. Sorted now.

  • avatar
    86er

    Wow, feasting on the carcass of an expired compatriot is a silver lining is it?

    I wonder how even this excess factory capacity will matter when all the paperwork for closure is being filed and the pink slips handed out.

  • avatar
    holydonut

    Your silver lining assumes that an auto-firm and those with a vested interest in the firm will just give up and allow the competition to quickly pounce on a freebie pile of market share.

    We all can picture some every-day metaphors when other firms go out of business; however, when the bankruptcy happens in a large scale, it’s rarely a free-for all. The “going out of business” liquidation sales at your local furniture marts cannot be applied to a situation where a major automotive firm were to have a significant liquidity crisis.

    When TWA, KMart, CompUSA, Global Crossing, Zenith, etc had to file – they didn’t vanish off the face of the earth in one day. Their decline is slow and painful. So instead of a long list of “death watches” we’d have dozens of “dying watches.”

    A bankrupt company still has positive cash flow from its ability to continue building cars that it has sunk investment. But it would remain operationally bankrupt if it attempted to commit money to develop future product. And there’s the catch – you don’t really need too much additional funds to produce and to sell Ram trucks or F150s. There’s no way that the tooling at all those plants would be as valuable as the cash flow that could be generated with the same assets being used to churn out discounted trucks.

    What’s more likely would be a situation painted in the previous Editorial. A firm that wants a cheap way to gain business tools would acquire the operations that are on the table. And most likely this type of agreement would occur well before a bankruptcy filing.

  • avatar
    Stingray

    Ummm… but under current conditions… even the imports might feel tempted to flood the rental lots. Starting their fall.

    The big question is how the public will react to the fall of one of the Detroit’s 3… they may end stopping buying domestic iron, or as said, go to the remaining 2.

    Take also into account that maybe the japanese are becoming aware of their market dominance… and something like what happened to Detroit will happen to them… in the long term.

  • avatar

    The Nissan Altima is remarkably popular in the L.A. area. As far as new-ish cars go, I see more of them than I do new Accords, probably because the Altima has been cheap ‘n’ cheerful, bought by buyers who like the size and power and aren’t too picky about interior plastics. I assume that doesn’t translate as well into the hinterlands — what were the Altima’s 2007 sales versus Accord and Camry?

  • avatar
    Pch101

    Your silver lining assumes that an auto-firm and those with a vested interest in the firm will just give up and allow the competition to quickly pounce on a freebie pile of market share.

    That’s a good observation. Toyota isn’t going to sit still if there is a truck/SUV revival. Nissan may not be a player, but the 2.8 won’t be alone in chasing buyers.

    What’s more likely would be a situation painted in the previous Editorial. A firm that wants a cheap way to gain business tools would acquire the operations that are on the table. And most likely this type of agreement would occur well before a bankruptcy filing.

    Just as we saw today with the sale of Anheuser Busch to a European brewer, foreign investors see the US as a cheap place to buy assets. (You can thank the weak dollar for that.)

    Cerberus’ plan to outsource production is going to fail, but they’ll be able to sell out to a foreign company that wants the infrastructure. My guess is that the result won’t match their original projections and that they’ll take a big loss doing it, so it won’t be so much of a strip-and-flip as it will be a bump-and-dump.

  • avatar
    Ronin317

    holydonut,

    It’s unfair to compare the airline or retail industry failures and patterns to the Auto market. Principle similarities aside, with the retailers in particular, they are not selling product that they manufactured, and that even goes for Z as well, and the airlines are service industry. The Auto market with it’s dedicated dealers, is quite unique amongst the examples.

  • avatar
    gamper

    argentla Says:
    July 14th, 2008 at 1:50 pm
    The Nissan Altima is remarkably popular in the L.A. area. As far as new-ish cars go, I see more of them than I do new Accords, probably because the Altima has been cheap ‘n’ cheerful, bought by buyers who like the size and power and aren’t too picky about interior plastics. I assume that doesn’t translate as well into the hinterlands — what were the Altima’s 2007 sales versus Accord and Camry?

    Funny, the Altima probably has a nicer interior than both Camry and Accord now. The most recent Accord was a step backward, many of Honda’s recent offerings have been a step backward in terms of interior refinement/materials. Probably trying to differentiate Honda vs. Acura.

    Anyway, I wouldnt necessarily call it a silver lining, I am sure any of the Detroit 3 would love to have Honda’s problems right now.

  • avatar
    NickR

    Wow, feasting on the carcass of an expired compatriot is a silver lining is it?

    How *expletive* sad is that?

    Talk about an era of diminished expectations.

  • avatar
    holydonut

    Ronin317:

    If that’s the case – can you name any precedent situation that we could draw a similar comparison? My point is large companies do not pack up and vanish overnight. You could argue that no industry is like the auto business since the conventional manufacturer/retail relationship is unique.

    Even with revised assumptions – keep in mind that Studebaker took 3 years to finally exit the auto market after their auto business was spun off. Nash was “merged” with AMC which later turned to Renault for help shortly after AMC encountered its own liquidity crisis. And as it turns out – Renault encountered its own problems and just sold their holdings in AMC since they viewed the troubled automaker as a bottomless pit.

    I suppose history has a tendency to repeat itself…

    Anyway, there is much more risk to the ‘survivors’ in a post-bankruptcy-filing world since the bankrupt automaker buys itself a few precious months of time to reorganize without having the vultures pick at its assets. Bankruptcy isn’t supposed to be a leg up on the competition, but the auto industry is far from normal.

    But what’s most likely is that we don’t get to bankruptcy. The market share and developed vehicle designs remain very valuable when marketed properly. Does anyone wonder how a good PR staff and spinmeister adds value?

    Speaking of which – where is the Mitsubishi Motors Death (in the USA) Watch? They’re at much more danger of exiting North America than any other major automaker that currently has a retail network in the USA.

  • avatar
    SherbornSean

    I guess the only play left for Chrysler is to lay off all development staff, and use joint ventures with ‘Bishi, Nisssan, VW, Fiat, etc. to develop new car models.

    In essense, Chrysler converts itself into a marketing and manufacturing company, with revenues that shrink slowly, and costs which hopefully shrink more quickly.

    I suppose its a viable plan, and might even result in some profit-taking in the medium term. Sad, but viable.

  • avatar
    mel23

    Let’s say GM files; I don’t see how they sell any significant numbers at all. As has been repeated many times, it’s a completely different situation between a $20k purchase, or even 24 month lease from a 2 hour plane ride. OK, so would Honda/Toyota want to use GM’s idle plants? I’m not at all sure. AFAIK, not a single closed 2.8 plant has been acquired by anyone else. Ghosn has talked, but done nothing so far. Yes, Toyota has hooked up with Subaru in Lafayette, IN, but has there been anything else? Even if Toyota/Honda did want a plant, it would be a long time to negotiate the purchase/use and then retool to get something out the door. Toyota and Honda might be working up some contingencies or maybe things are so unpredictable that they’ll just deal with it when it happens. Getting all the tooling in place, the suppliers lined up, employees screened, hired and trained would take lots of time no matter what. It would/will be very disruptive to the society I think,

  • avatar
    OldandSlow

    More good news – the Japanese Yen and the Korean Won are appreciating against the US dollar.

  • avatar
    Pch101

    I guess the only play left for Chrysler is to lay off all development staff, and use joint ventures with ‘Bishi, Nissan, VW, Fiat, etc. to develop new car models.

    Add some Chinese and Indian players to that list, and I think that you’ve described the original game plan. That wouldn’t be a compromise, that would be fulfilling Cerberus’ original mission.

    At this point, this plan is not going well. That’s exactly the problem — they can’t outsource it fast enough to make a difference. Product cycles are too long, and the outside partner has far more control than is suitable for a relationship like this.

    It’s OK to outsource a model here and there, but replacing most of the lineup with outsourced product is dangerous. Sounds good on paper, though, particularly to a bunch of Wall Street guys who don’t really understand the product that they are selling.

  • avatar
    SherbornSean

    PCH101,
    Great point. Chrysler is also looking to get out of manufacturing. Which leaves them with marketing and dealer relations as their core competencies.

    Competency being a relative term.

  • avatar
    jurisb

    The silver lining can turn to be rusted. When Bush wanted to save sinking US economy by tax return, he also said people should go shopping to boost consumer confidence. What did those people buy while shopping? Of course imports. Import DVDs, import tv sets import cars. How can you boost economy by selling more if you don`t manufacture things with the biggest added value. Can you imagine how many tupperware plastic containers or zippo lighters you have to sell just to counterweight a single japanese 50 inch LCD screen? And now you believe that when Chrysler is going belly up ,people will line for Gm or Ford products? Chrysler went belly up mostly because of quality and reliability issues, the same issues that chase GM and Ford. Why on earth should people repeat the mistakes? They will go to japanese, you can bet on it! If they can get a genuine korean or a japanese one that gets 40miles a gallon, why should they go for Detroit one, that actually is the same korean or japanese under domestic badge and management. Do people see any differences in quality among domestic brands?

  • avatar
    lzaffuto

    I see tons of Nissan Altimas here around Marietta and Atlanta GA. I have a long and mostly city bumper-to-bumper commute so I get a pretty good idea what people are buying nowadays. One thing I don’t see among the sea of Impalas, Accords, Altimas, and Camrys is new Chevy Malibu. I have seen 4 or 5 so far, all of them with the Enterprise-rent-a-car green “e” logo.

  • avatar
    KatiePuckrik

    Wow! That is a very thin silver lining in a cloud the size of Naomi Campbell’s ego!

    Potential problem 1: What if the market had an upturn but consumer liked their small cars (much like people like their hybrids) and not many people wanted to go back to SUV’s and Pick up trucks? Detroit are still knackered.

    The factories which are getting shuttered are the SUV and pick trucks lines (i.e Oshawa, etc). So for them to build small cars would need retooling, which means money invested in these plants. Money which Detroit are checking behind their sofas for!

    A good solution to this problem could for Detroit to hire out these factories as third party manufacturers (e.g Magna-Steyr manufacturing the Mini Clubman). Tokyo gets the extra capacity they need, Detroit can keep the factories without the expense of shuttering them and no-one loses their job.

    Potential problem 2: What small cars do Detroit do which are any good? The Chevrolet Aveo? The Dodge Cailber? This market segement is growing and growing and Detroit don’t have a viable competitor in this market (Ford might win this one with the Euro Focus and the Fiesta). By the way, if anyone say “GM have the Vauxhall Astra!” I’ll kill myself laughing. The Astra isn’t that efficient at fuel consumption and the interior is pretty shabby. It’s an OK, but that’s the problem, it’s OK. Not great, just OK.

    For the “fuel guzzlers” to rise again, the price of oil per barrel would have to drop by $80 at least, to stimulate that market again. That looks extremely unlikely considering Japan, China and India are increasing their oil consumption which will keep prices high.

    The only thing which will save Detroit (in this scenario) is a diverse portfolio. This brings me neatly onto another benefit of organically growing one or two brands, rather than GM’s “A car for every price and purse” philosophy. The Toyota brand stretches from small cars (Aygos and Yarises) to Pick up trucks (Tundra and Hilux). If the market sways (in this case to fuel sippers) then the Toyota brand can up production of the Aygos and Yaris, contract the manufacture of Tundras and Hiluxes and no damage to the brand has happened, plus, the brand can still grow. Now with GM, if pick ups decline it could potentially destroy a brand. Worse still, if sales of pick ups do pick up (did you like my joke?) GM’s brand for that market segement might not be around allow the “dead cat bounce” (what does that mean?) effect to take place to the detriment of GM.

    I know I’m being pessimistic against Detroit, but let’s be realistic, if the only plus point Detroit has is that “They have capacity IF they need it”, then maybe things are more bleak, than we first thought….?

    P.S. “This is the first major market downturn since Nissan merger with Renault….”

    This. Is. Wrong. Renault and Nissan have NOT merged. They have formed an alliance. If they merged, then they would be selling shares in “Renault-Nissan plc” on the stock market. They don’t Nissan’s shares are sold and Renault shares are sold, separately. Look at the Renault-Nissan literature and the word “merger” is never used. In fact, Carlos Ghosn loathes mergers. He believes that they “destroy value”.

  • avatar
    ihatetrees

    mel23:
    Let’s say GM files; I don’t see how they sell any significant numbers at all.

    Everything moves at a price. How about ~$10K for a new, nicely equipped, 4×4 Silverado?

    The bankruptcy court conditions:
    No warranty — although Three Dog Head Warranty LLC will sell you one after an inspection.
    No local dealer — you must buy thru the manufacturer’s web site.
    Delivery in 2-3 weeks — at a locally rented parking lot where 1000 other units will be dropped to ‘customers’ that day.
    No show penalty. — If you fail to show, you get only $9K back. There’s a $1K ‘restocking’ fee.

  • avatar
    factotum

    Altimas are popular here in NorCal. I see at least one or two hybrid ones every time I drive US-50.

  • avatar
    jaje

    No one will want to buy an old D3 plant (sans maybe the TN Saturn plant) b/c of the investment it will take to make if flexible – plus the workforce in the area will be tried and true UAW lifers who will want the same level of benefits they’ve been getting and quite possibly unionize just b/c it’s all they know even if treated fairly by the new owner.

  • avatar
    ZoomZoom

    KatiePuckrik Says:

    …Carlos Ghosn loathes mergers. He believes that they “destroy value”.

    And Carlos is correct! Most mergers, if evaluated 12, 24, and 36 months AFTER the merger, can be shown to have reduced the value to something less than the sum of the original parts.

    But such analysis is very rarely done, and almost never sanctioned by management / board of directors; because it would show that more than 60% of the time, management’s big idea of merging was not so good. Investors would begin to question management’s competence…and of course, we can’t have that, can we?

    This is something that most investors don’t know; yet everybody gets all excited when talk of a merger happens. It seems that memories are very short indeed…

  • avatar
    ZoomZoom

    I have concluded that this “silver lining” is not so silver for Detroit.

    If GM goes away, I can probably expect that some GM managers will go to work for Ford or Chrysler.

    Becuase of the insularity of Detroit, I think it’s not as likely that they will go to work for Toyota, Honda, Nissan. Possible, but not as likely.

    Except for the Prowler and Viper (both of which are outside my budget anyhow), Chrysler is nonexistent to me. I have sworn off GM, but not Ford. Ford lies way down the list, however, and only if you count Mazda as “part of Ford.”

    So take my example…GM management being hired at Ford. Or in a Michigan Mazda plant.

    Please explain to me how I might be MORE inclined to buy a Mazord product if I can assume that Mazda/Ford have gained more of the poisoned lifeblood of General Motors’ inept management?

    Nay, I say…Nay, nay, nay!

  • avatar
    Pig_Iron

    GM’s making a restructuring announcement tomorrow. Does anyone know what it is?

  • avatar
    John Horner

    “AFAIK, not a single closed 2.8 plant has been acquired by anyone else.”

    There is one example I can think of, and it is an old one. General Motors closed it’s Fremont, California factory sometime in the late 1970s or early 1980s. Toyota later set up a joint venture with GM to establish NUMMI, and GM contributed it’s Fremont plant as part of the ante. NUMMI opened in 1984 and continues cranking out cars and trucks to this day. Supposedly the volume was to be shared 50/50, but GM has never done a good job of selling it’s portion of the output. Today Corollas, Tacomas and Vibes are still being built there. NUMMI was Toyota’s first attempt to do manufacturing in the US and obviously they learned a lot. I’m not sure what, if anything, GM learned from the adventure. Toyota manages the factory, designs the product and takes most of NUMMI’s output. GM’s role is, er, minimal.

  • avatar
    97escort

    In the Post Peak Oil world in which we live (even if few want to admit it or even talk about it) there is no silver lining for Detroit.

    Oil prices will continue to rise long term with minor setbacks short term. The gas guzzler plants Detroit has shut down will not be brought back on line unless gas prices fall dramatically.

    The only thing that can produce a big decline in gas prices now is a very severe recession/depression in which case demand for gas guzzling pickups and SUVs will be small.

    There is no silver lining. Only a big, dark, ugly, threatening cloud indicating the perfect storm of Peak Oil is coming our way.

  • avatar
    holydonut

    I think it’s foolish to write off mergers and acquisitions completely. It’s a bit myopic to cite examples of failure of a strategy as the reason why you would never consider it.

    What about successful mergers? Many US banks consolidated in recent times to more mimic how banks are set up in most other Westernized countries. Do we blame the over-zealous dependence on sub-prime borrowers as a result of the mergers? I sure hope not. Many of these bank mergers turned out very well. But when there is no turmoil then it isn’t newsworthy.

    When will a TTAC writer get bored and write about the BMW/Rolls merger or the Mack/Renault S.A./Volvo-AB merger? These are successful mergers in transportation… but then they’re relatively boring as a result.

  • avatar
    John Horner

    I don’t think it will be very many years until hybrid technology of some sort is no more of an option on new cars and trucks than is air conditioning. Remember when air conditioning used to be an expensive option? Now almost no vehicles are available in the US without it. Maybe Rick is going to announce his agressive get-in-front-of-it move to make this happen. Hah!

    Being a battery maker is going to be a very, very good business.

  • avatar
    mikeolan

    Yeah, I also see Altimas everywhere- they’re especially popular in the 2.5 trim with the sunroof (so they can’t ALL be rentals.) I can see why they are popular- the quality has improved vs. Honda & Toyota and they have better performance AND get better gas mileage.

    Surprisingly I haven’t seen a whole lot of Malibus, which is surprising given that they’re nice cars.

  • avatar
    jerry weber

    There is talk of gas prices coming back in the future, and mothballed truck/suv plants of the Big 3 will then be back to normal. That happened after the oil crunch of the 70′s but don’t count on it this time. In fact, it would be a bad thing for gas prices to come down for hisotory just to repeat itself. The US must get itself prepared for the future and join the World allocation of fuel. We need to get discipline in what and where people drive, not to be a totalitarian state but rather a once again prosperous one. We need people in and near cities using public transportation and people in the outlying districts to radically downsize, car pool and ration trips. Our first mission is to take the pressure off importing fuel and thus stabablize the price, it we can get it somewhat lower, we should prevent ever again the profligate use of fuel swizzlers. Trucks must go back to what they did fifty years ago, haul things. SUV’s must be replaced with fuel efficient wagons and hatch backs. And we Americans have to get over the binge we were on for a half a century. Like a recovering alcoholic, we need to dry out and build a solid future with energy. This means our homes, factories, offices everything must be made to sip fuel, remember, cars only use a percentage of the stuff. If we can rebuild along a western European model, we have a chance to improve our quality of life for our childrens sake.

  • avatar
    MBella

    British Leland would be a good comparison for what is happening to the Detroit 2.8, It’s pretty much dead, the Chinese have rights to MG, but that’s about it.

  • avatar
    indi500fan

    How does a Dem pres, house, and senate elected with UAW support affect things after Jan 2009?

  • avatar
    Geotpf

    When Chrysler goes out of business (there no longer is an “if”, just a “when”, and we are talking a total or close to total shutdown, not just a chapter 11 reorganization), it will provide a “dead cat bounce” to GM and Ford. It will also help Toyota, in that they now have extra capacity to build more Tundras and a few other things (that wasn’t the case until very recently; a year or two back, Toyota’s domestic plants were running at 110% of capacity or so).

    I’ve used this analogy before: The Detroit 3 are like three guys running from a bear. Two of the guys don’t have to outrun the bear; they just have to outrun the third guy.

  • avatar
    Geotpf

    indi500fan Says:
    July 15th, 2008 at 7:41 am
    How does a Dem pres, house, and senate elected with UAW support affect things after Jan 2009?

    Aw, but they are/will be also elected by enviromentalists. So there won’t be any major attack against Toyota and Honda (higher tariffs, for instance). They are seen as enviromentally friendly, and attacking them would piss off the greens, who probably matter more politically to the Dems than the UAW at this point.

    Now, there might be a bail out of some kind. But I think it’ll be mostly up to Obama (as opposed to Congress), and he hasn’t really sounded that enthusiastic about a straight bail out (or even a Chrysler-style loan guarantee).

    Plus, I think Obama will win in such a landslide that he won’t feel beholden to any particular group.

    Of course, this all depends on his personal internal feelings and specific nature of the collapse of whichever Detroit 3 company has trouble. It’s simply too unpredictable to make a really good guess at this juncture.

  • avatar
    jerry weber

    Let’s be careful where we assess blame for the fuel crisis in America. If the environmentalists had their way (and they don’t in the Bush administration), there would be less driving of large gas consuming vehicles and if they had any say in India & China, the stuff they are doing, building pollution laden vehicles in polluting plants would not go on. The net result would be less use of fuel and a crimp on the amount of fuel needed in the World. What really set off this crisis is the falling dollar. We now no longer have the strongest World currency to buy up 25% of the Worlds oil every day. We are slowly (maybe not so slowly) going broke trying to keep up our energy use at prior levels. In one week the hallowed Chrysler building in NYC and Budweiser were sold to foreigners as the natural response to overseas interests holding all of those low valued dollars. The Europeans are close to buying stuff like breweries at 50cents on the dollar. If our dollar were still strong, fuel would be no more than $3.00 a gallon today.

  • avatar
    tiger260

    KatiePuckrick – thanks for your analysis, as well thought-out as ever.

    You ask about the term “dead cat bounce”. My understanding is that it originates in stock market circles. It is used to describe how the price of the stock in a doomed company will exhibit a slight recovery near the bottom of its decline at the point where it gets so cheap that the most speculative investors pile in to buy on the off chance that the company might miraculously recover. The dead cat analogy is black humor – the fact even a dead cat will bounce back up a little off the floor if you drop it off a tall building!

  • avatar
    Zarba

    Jerry Weber has it right.

    The devaluation of the dollar was engineered to keep exports up and the economy humming. What the Fed and The Bush administration didn’t see coming was the spike in global demand for oil by China, India, Russia, etc, and the credit market collapse. They created a “perfect storm”. As Jerry correctly pointed out, gas would be nearer to $3 a gallon if the dollar had remained strong.

    We created a huge problem when the dollar fell due to rampant deficit spending, lax oversight of the mortgage market, artificailly low interest rates, and a systemic decision to allow the dollar to drop to shore up exports.

    Because of the oil shock, we’re now in a situation where only drastic action will stem the fall. Watch for The Fed to act within 90 days to push up interest rates as they try to shore up the dollar. Which will lead to even more foreclosures, more bank failures, and more pain in our pocketbooks. It’s akin to the early 80′s when the Fed had to push interest rates to 20% to bring inflation under control. It’ll be very painful, but it will have to be done.

    Which means that Detroit will suffer even more, and higher borrowing costs push more buyers out of the market. Oh, and further devaluaing Cerberus’ foolish investments in GMAC and Chrysler.

    Chrysler is done, it’s just a matter of time. GM will have to file Chapter 11 within 12 -15 months, or they’ll run out of cash. If Ford can hold on, they’ll inherit the domestic market, but all that depends on what happens with GM’s bankruptcy. If GM is smart and files soon (fat chance), they could emerge as the strongest player. As has been pointed out before, the first to file is likely to be the one that comes out strongest, as they’ll be in a much better position competitively compared to the Other Two Detroit carmakers.

    In the story, one point jumped out at me. Toyota’s annual profit is more than GM’s market cap. That’s the most illustrative point yet about the fall of GM, once the greatest manufacturing and marketing company in the world. Toyota could buy them outright for chump change.

    TOYOTA.

    What level of incompetence does it take to destroy the most successful manufacturing company in the history of the world, so completely, in less than one generation? To be fair, the same can be said of Chrysler and Ford. The great shame is that the folks who lead these companies will walk off with bankrutpcy-proof pensions, while they will have destroyed countless thousands of lives, communities, and companies that sell to them. In WWII, we could build a Liberty ship in 4 days. Now, 60 years later, we are on the verge of wiping out a vast swath of America’s manufacturing capacity, because of the sheer stupidity of the execs that ran these companies into the ground.

    The Law of Unintended Consequences. It’s a bitch.

  • avatar
    Pch101

    The devaluation of the dollar was engineered to keep exports up and the economy humming.

    It really wasn’t. The Bush administration allegedly maintained the strong dollar policy that it inherited, but then claimed to have changed its position once the dollar began to devalue on its own.

    It’s the markets that have determined the value of the dollar, not the federal government. The markets have been punishing the dollar ever since it became clear that the insurgency in Iraq was strengthening and not going away. The markets don’t like the war-induced budget deficit or the threat that the war poses to the US’ status as a superpower, and downgrades the value of the full faith and credit of the US government (that which backs our money) accordingly.

    Until the US starts paying workers thirty cents an hour and stops using imported oil, there is no way that the US can do anything but flounder without a strong dollar. Since that it isn’t ever going to happen, we should know better than to think that we could ever fix the trade deficit with a weak dollar.

    The US is import dependent because imports allow us to effectively export inflation — the wage growth goes to low-cost markets like China instead of expensive markets like here. Since 1979, Fed policy has been to prioritize fighting inflation, and we use the trade deficit to accomplish that.

  • avatar
    Zarba

    pch 101:

    You are correct, the market does rule. I think you have a good point here, as uncertainty is one thing the financial markets don’t abide.

    I’ll take my slap and move on…

    My main point, if I had one, was that the cost of gas at $4/gallon owes as much to the drop of the Dollar as it does anything else, and nobody seems to be paying attention to that.

  • avatar
    rtz

    The Honda Fit just doesn’t do enough for me. Just like how all the Scion models are. Average and typical, low power, average mpg, just bland and boring, nothing exciting or innovating. Wake me up when things get exciting.

  • avatar
    mikeolan

    I think the only domestic company that’s going to benefit from a big three bankruptcy (and by that I mean a Chrysler bankruptcy) is Ford, and it’s going to be very brief. Chrysler is a shell of a company compared to where it was 10 years ago (thanks in no small part to the DC Merger). The fear of bankruptcy is going to drive a lot of Domestic holdouts to the Japanese. Consumer confidence in GM is probably going to plummet.

    @RTZ, the Honda Fit, like every other car in the segment, feels like it was ‘rushed’ for the U.S. market sort of halfassedly. Honda had a nicer product than a lot of its competitors, so it’s not a miserable vehicle, but it’s nowhere near as polished a vehicle as current mainstream transportation options, or even a lot of vehicles bearing the same price tag (Mazda3, Civic, etc.) A Honda Accord with such slipping of the details (no telescoping wheel, weak A/C, cheap materials) simply wouldn’t sell. But right now the Fit’s only real competition is the Nissan Versa, which isn’t as fun to drive, and the Hyundai Accent, which is Korean.

  • avatar
    Geotpf

    The Scion xD (and previous xA) is a direct competitor to the Honda Fit. And I don’t think either the Fit or the xA/xD were rushed to market.

    I also don’t think the xA/xD is “bland and boring”, either. Of course, I own a 2006 xA. Also, the xB (old or new) is many things, but “bland” isn’t one of them.

  • avatar
    Busbodger

    Anybody looked at any of the decaying Detroit picture websites?

    Sort of parallels the American auto industry. Wonder if a person could tie the poor choices of the industry and the fickle nature of the American consumer to the decline of Detroit.

    America is too temporary… They’ll take old Detroit and tear it down and someday replace it with more sprawl – fast food joints, malls, strip malls, and big box retailers surrounded by suburbs after suburbs and all that history will be lost. Shame we can’t be more creative to save it and put it to use.

    If the American auto industry fails too or simply moves out of the USA entirely there will be many, many more buildings like this.

    I want a domestic vehicle but few classes of vehicles that interest me are made by the big three. Last time I wanted a small wagon and went to Honda b/c Detroit had quit them. This time I want a small wagon or hatchback and I can’t get any closer than Volvo or the Astra to Detroit’s bank accounts.

  • avatar
    seabrjim

    Yes I have, busbodger. It makes me sad. Remember dodge main? They cast crankshafts and stamped body panels there! Had their own phone system too. Alot of history is down the memory hole.


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