By on April 23, 2011

TTAC has always taken pride in its outsider status, and we’ve taken pains to cover the industry from a safe distance in order to continually bring a fresh perspective to developments. As a result, we’re not always on the same page as trends in the industry at large, which tends to be far more given to wild optimism than the average TTAC analysis. But, based on a new study by Booz & Company [PDF], it seems that the “carpocalypse” of recent years has driven the industry to a more TTAC-esque pessimism. According to responses by executives at both OEMs and suppliers, the industry generally feels that the bailout was either a missed opportunity or it didn’t do enough to address fundamental weaknesses… and as a result, executives see challenges ahead.

So, where is the industry now? Not much better than it was at the height of the “carpocalypse,” when GM and Chrysler were going through bankruptcy on the government’s dime. And though OEMs generally benefited more than the suppliers, the automakers themselves are less optimistic about the current state of the industry… although that might be a function of the fact that suppliers were going bankrupt by the 12-pack before the industry recognized that it was in crisis.

So, what did the bailout do right? Cutting capacity, or in less politically-palatable terms, firing people. Ironic, isn’t it, that a policy that’s being defended as a jobs-saving measure did its best work (at least according to the OEMs) when it put people out of work? Meanwhile, feel free to draw your own conclusions about the fact that the industry liked the “capacity rationalization” aspects of the bailout, while feeling like the bailout didn’t do enough. Saving jobs, as we’ve pointed out for some time, is not the same as saving companies… in fact, the two goals often clash significantly.

In any case, both OEMs and suppliers picked the government’s rescue of Chrysler as the least-positive impact of the auto industry rescue. Some 42% of OEMs feel rescuing Chrysler was negative for the industry, while 20% of suppliers sign on to the same sentiments, despite being largely positive about the GM bailout.

And here’s where the rubber hits the road: nearly 30% of the industry thinks another OEM will fail within the next two years. Risk is fundamental to every industry, but the fact that almost a third of industry execs expecting an OEM failure within the next 24 months is a searing indictment of the bailout, which was supposed to create a sense of confidence. And if GM or Chrysler fail again, all those rescue efforts will have been wasted, and every job “created or saved” will be injeopardy again.

So what to do now? Incentive and pricing discipline, long a TTAC hobbyhorse, is identified by both sides of the industry as being one of the most important tasks (the most important for OEMs). Production discipline is also identified as a key consideration, something the bailout also hasn’t been able to change. In short, the easy cuts and consolidation have been achieved, leaving only the tough challenges that require a focused, disciplined culture… and the bailout still hasn’t made a demonstrable difference in the culture of the industry, which has been flirting with a price war since the beginning of this year. The lesson: you can cut, rinse and inject cash, but ultimately, success in this industry comes down to focus and discipline, neither of which can be provided by a government bailout.

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29 Comments on “Industry: Bailout? What Bailout?...”


  • avatar
    jbltg

    Excellent article Edward.  I think the key to the issue in the last sentence is that the bailouts, if nothing else, simply, sadly enabled the same old industry behaviors to continue.  Moral hazard, again.  So we are pretty much where we started.  Anyone can fire people and cut costs in shortsighted ways.  We have to stop coddling big business in the good old USA.  So much for independence and toughness.  And the average guy or gal be damned.

    • 0 avatar
      stuki

      “We have to stop coddling big business in the good old USA”
       
      “We”, as in government, has to stop coddling people, period. Although the starry eyeds like to think coddling means coddling the “weak” (whoever fashion has them being at any given instant), in reality those who gets coddled are those with enough influence to determine who gets coddled. Which are hardly most people’s idea of “the weak.”
       
      Exactly how much useful information can be derived from asking the main recipients of a bailout how useful the bailout was, is also an open question. The people who should be asked, are those who footed the bill, not those who were given millions in salaries and bonuses that they would not have gotten absent bailouts.
       
      So, being a taxpayer who footed the bill for this mess, here’s a referendum from someone much better positioned to judge the bailouts’ efficacy than any of the self promoters interviewed for this study: It was a failure. In every conceivable way. I basically spent a bunch of money on exactly nothing, other than keeping in place dysfunctional management, dysfunctional management/worker relationships, incompetent investors and lenders, incompetent politicians creating an unsustainable environment to run a business etc. etc. Nothing but promoting incompetence at every level amongst all those on the receiving end of the whole mess. In addition to funding the ability of a bunch of economic ignoramuses and ideological throwbacks to pretend contemporary “macro economics” has any more in in common with actual economics than astrology has with astronomy.
       
      In other words, a complete, unqualified and utter failure on every conceivable level. As was, of course, entirely obvious from the first minute the word bailout was uttered by the first self serving half literate promoting it.

  • avatar
    Dimwit

    The overall tenor would suggest that the industry as a whole feels that it was ok to bailout 1 but not 2 companies at a time. Pick one, put all your eggs in that basket and let the other one fail.

  • avatar
    Zackman

    This is to be expected. The last company I worked for sold off our division. What happened? Closed plants to reduce capacity. Then, a private-equity firm that has its fingers in many companies bought our division. That firm held onto us until they could work out the details of the finances in order for a larger company to buy us. They did – when the firm gained majority interest in that large company! Well, our old division was officially taken over, and guess what? more plants closed, mills sold, my job went away to the east coast (I didn’t). Fortunately for me, just as I correctly foretold what was going to happen, I got my resume ready and a headhunter just happened to call and offer an interview for a job locally! I got that job. Many others weren’t as fortunate. Even though my work location will be moving soon and I’ll have the privilege of a 100-mile R/T commute, at least I’ll still be employed – at least until the “For Sale” sign goes up again!

    Great article, Ed.

    • 0 avatar
      golden2husky

      What happened to America?  We now judge ourselves lucky for the “privilege” of having a job…wages go down, or are eroded by the relentless push of inflation…quality of work declines, benefits are going away…the middle class is evaporating, and the government gives the extra fork-over with the AMT screwing over middle class folks like myself…I would so hate to be entering the workplace as a 22 year old today.  Globalization has ruined America.

      • 0 avatar
        CJinSD

        Environmentalism, organized labor, and a government that cultivates dependence ruined America. Globalization is just a symptom of the disease, and actually one that has helped sustain our synthetic standard or living.

      • 0 avatar
        probert

        @CJinSD

        Statements like these always amaze me.

        All other industrial nations have higher unionization and view their citizens as something other than canon fodder, providing them with decent education, healthcare, pensions – and they are doing quite well thank you (excepting the fallout from US fiscal and regulatory (read “none”) irresponsibility.

        Further – the bankrupting of this country took place under a regime that was so pro business it was – for intents and purposes – indistinguishable from it. With the final dismantling of regulations put in place after the great depression big business promptly created a new depression.

        Yet the tin hats continue with this pablum in the face of every bit of empirical evidence of actual events in the real world. And so it goes.

  • avatar
    bwell

    I’m no industry expert, but as I recall there is still about 50% overcapacity world wide. 

    I believe that the intent of the bailouts was to kick the can down the road a bit so that the eventual failure and capacity reduction in the US would occur slowly instead of quickly.

    • 0 avatar
      Dynamic88

      +1
       

    • 0 avatar
      geeber

      Nice theory, but in the real world, it will never be a good time to allow one of these companies to fail, so we will be endlessly kicking the can down the road a bit, all the while saying that the latest bailout represents the absolute, last injection of government cash into a failing company. Until the next time a domestic company teeters on the brink, of course…

  • avatar

    even more than ever having the knowledge of how to sell cars, and possessing the ability to do so, is the critical aspect of the auto industry. Return to Greatness anyone? I guarantee 500,000 additional retail deliveries without investment.

  • avatar
    highdesertcat

    Excellent writing, Ed. I am in total agreement.  Although I desperately want all of the US auto makers to succeed and become profitable again in order for them to repay the US tax payers, at this juncture I am not at all optimistic that this will ever happen, for exactly the reasons outlined in your article.
     
    I also agree with the writings of those who have proposed that the US auto industry is currently in a shake-out, which should be pretty well shook-out by 2015.  It is only then when we all will find out if this really was a shake-out of the US auto industry or merely a shake-down of the US tax payers.

  • avatar
    Omnifan

    The largest omen of deja vu for the American auto industry is the UAW’s consistent drum beating for 100% reclama of givebacks from the last three years and total elimination of two tier wages.  They can’t strike GM or Chrysler, but highly profitable Ford is another story.  Ford will most likely be the next to fail thanks to the union.

    • 0 avatar
      Shipwright

      Unless Ford shifts more jobs out of the USA.

      • 0 avatar

        It would serve everyone who supported the bailout — from the UAW thugs to their political cronies — right, if Ford did exactly that. Posthaste.

      • 0 avatar
        CJinSD

        Rob Finfrock,

        You have too much faith in the current regime. They’d be thrilled if more jobs left the US. Why do you think Osama’s giving Brasil our money and access to our oil resources? Now he’s got his Labor Relations Board hard at work at sending Boeing production and technology to China instead of ‘right to work’ South Carolina.

  • avatar

    I think US as a whole is the worst managed country in civilized world after Southern Europe. Decisions made by US government do not make any sense until you take into account next round of fund raising. US government is not different from GM in quality of management or workforce entitlement expectations.  Obama’s government did not care about companies – they bailed UAW out and the only reason – UAW will fully support Democrats in next elections. If were Republicans in power they would do everything to destroy UAW.

  • avatar
    Beerboy12

    I am not sure that industry opinion is of any value… after all look were they landed up, begging for help from the taxpayers. Price wars? Can’t they just make a good car and let the profits be based on genuine sales?

  • avatar

    Some 42% of OEMs feel rescuing Chrysler was negative for the industry

    Interesting.

  • avatar

    I think there will be more carnage in Europe soon. Opel somehow survived even not being profitable for too long. Volvo survived. Jaguar survived. SEAT, Lancia, Alfa Romeo – all these brand are money losers for too long. Even SAAB refuses to die even though it time came 20 years ago. European consolidation is long overdue IMO and cannot be sustained for long since all governments are burdened with unsustainable debt and on brink of default. Or move them all to China. Wait, Chinese are coming to Europe soon not Russians.

  • avatar
    Aqua225

    As a friend of mine noted: the bailouts of Chrysler & GM insured that GM executives, Chrysler executives, and the UAW, ie. the main actors, learned absolutely nothing at all. I just hope we the tax payers will not let the soft hearts of the GOP or the Democrats from the far left forget the lesson.

    But who am I kidding, right?

  • avatar
    Andy D

    How  can  the  makers  of   expensive products expect  their   market  to  grow  when  they are   cutting  the  jobs that support   the  purchase   of  those  products?   Part  time  workers in paper  hats cant afford Escalades.

  • avatar
    MikeAR

    It will take some sort of Black Swan event for someone to fail within the next two years but after that, it’s a matter of time. I am talking about the domestic companies of course, worldwide it could happen within that time. Ford is pretty safe for time being. If the UAW destroys them it will sow the seeds for the union’s destruction which would help the entire industry out. Fiat actually has a good chance to save Chrysler, not trying to compete with every brand in every segment is a great idea for them. GM is still the mostly likely to have an event at some point.

    • 0 avatar
      highdesertcat

      I think that the domestics still need to put a lot of cash money on the hood to move their stuff. Here are some of the advertised prices for new 2011 vehicles I plucked from today’s Sunday newspaper, for my area, each with dozens to choose from, at various dealerships. Compare and contrast for yourself:

      F150 — $23K – $26K
      Silverado — $22K – $25K
      Ram — $21K – $24K
      Tundra — $32K – $37K
      Malibu — $19K -$21K
      Altima — $18K – $21K
      Fusion — $17K – $20K
      Camry — $26K – $28K
      Accord — $24K – $29K
      Sonata — $24K – $27K
       
      Unless all of those people now choosing to buy a foreign brand choose to buy a domestic brand instead, I think we will see, possibly GM, go under within the next 24 months.

      Chrysler is just not a player any more.  It will serve Sergio in the larger scheme of things for market penetration of the Fiat-owned brands across the world, but I see a diminished market share for the Chrysler brands in the USA. And Chrysler will soon be majority-owned by Fiat, so they won’t count in the domestic tally for US auto manufacturers any longer.

      So IMO these bail outs amounted to nothing, only delaying the inevitable at great expense to the tax paying American public. A helluva way to run a railroad! What a waste of good money.

  • avatar
    CapVandal

    We are already getting much more back from the US Auto bail out than I ever expected.  I had assumed that nothing would be paid back.  The logic was more as a jobs program than an ‘investment’.

    It was the worst possible time for the US industry to implode, and kicking the can down the road wasn’t a negative.  I thought it was a good idea at the time.  It has worked out better than I thought, with a decent chunk of the government money being returned.

    I suggest that the conflict between ‘too big to fail’ and ‘the need for more consolidation’ needs to be considered.  Too big to fail yet too small to succeed?  

    The real story is how Hyundai managed to kick ass during a massive cyclical downturn.   

    As far as the future of GM and Ford, that is up to them, the marketplace, and how they perform.


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