Editorial: Bailout Watch 371: The Moon's a Balloon
In fourteen days, GM and Chrysler will submit realistic plans for viability to Congress. See what I did there? With January’s sales slaughter revealed, it’s obvious neither automaker can survive without a huge and ongoing injection of working capital from the nation’s working capitol. Even if Uncle Sam provides this staggering amount of money (more than enough to start a car company from scratch), GM and Chrysler wouldn’t make enough profit to pay the interest and the principal during the loan’s term. The plans the automakers are about to present to your elected representatives are a fictional moon shot—with a make-believe launch vehicle that couldn’t propel a chimpanzee ten feet.
Chrysler will point to its deal with FIAT as their lifesaver. In truth, it’s nothing more than a “free look” for the Italians to figure out what pieces of Chrysler they want to buy when the liquidation sale begins.
Worse, if Congress bails out Chrysler with more of YOUR dollars, the deal gets even sweeter for FIAT. Entry to the US market on the back of the taxpayers, a significant ownership stake and eventual control (for $25m) of Chrysler and the time to try and make it all work. That’s some plan. For FIAT.
But here’s the kicker. Nardelli says Chrysler needs “only” three billion dollars more of your money to get there. Are Bob Corker and Dick Shelby the only two guys in Washington that can see the sheer and utter stupidity of this? It’s as clear as daylight that this dog won’t hunt.
What’s the point of throwing $7b (or more) into a company that has no reason to exist in the US market? A company that needs import technology for small cars and engines to meet the new standards from the Green Party? Heck, save our money and let FIAT come in on their own.
In GM’s case, the plan will look like everything else Wagoner and his team have presented in the past. Goals and actions that have no hope of realization. So far, the UAW hasn’t made the accommodations required—and never will—to the terms of wage/benefit/work rule parity with the transplants.
The unsecured bondholders and other financial creditors might take a cramdown BUT . . . one of the most skillful members of this group (PIMCO) has already pulled out of the negotiations. How about restructuring of the brands and dealer network? They’ll reveal their latest “no plan” plan (i.e., “we’re still reviewing all options”).
The facts are self evident. GM alone lost 122k units of sales in January 2009 versus last year. At an average wholesale to GM of say $24k/unit, that’s a loss of nearly $3b in revenues for the month. Or a run rate of $36b/year. Throw in the drop in sales in Europe and elsewhere around the world, and it might be another $1b to $2b dollars a month in lost revenues. Combined, it could be as much as $50b revenue hit (annualized) for the first half of this year. GM simply can’t cut its expenses fast enough.
As for Chrysler, it’s worth repeating what Jim Press told his dealers. (“Without orders, the company has to liquidate.”) Uh Jim, your dealers have over 350k units on the ground and you sold 62k units in January. Do you really expect them to “stock up” now?
Bottom line: the car market will suck for the next six months, if not longer. It makes no sense for Congress, the President or the Car Czar to try and craft a plan that saves Detroit with taxpayer dollars without a bankruptcy.
GM and Chrysler have no viability plan that can work in the current sales environment (not that they had one during better times). If anything, now IS the time for bankruptcy, not later. Let the bankruptcy court system do what it’s designed to do best: figure out what’s worth saving (GM) and what’s not (Chrysler).
When the market does come back—and it will—a restructured and reorganized GM will be well suited to offer a smart and sensible line of brands, cars, and dealers that will all earn substantial profits. Parts of Chrysler will still exist (Jeep, Mopar, a couple of others). And Ford might be able to survive on its own as it gains share from the pieces shed by its Detroit rivals.
Why go to all this trouble of proving a case that doesn’t meet the sniff test to the most junior financial analyst on Wall Street? Is it pure politics to save union jobs and avoid the shame of bankruptcy? Or has Washington, DC and the Messiah Crew (Obama, Pelosi, Reid, and the Democrats in Congress) simply lost all sense of the common good with your tax dollars?
Forget it. Let’s not spend any more taxpayer dollars on a moon shot from Detroit.
More by Ken Elias
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geeber: "BDB: If you think a bailout is expensive, try having no domestic auto industry. Last time I checked, Honda, Toyota, Nissan and Hyundai are making vehicles here, and will continue to do so." tom: “And the profits they make continue to leave this country and go to Japan.” "What are you talking about? These companies actually took their profits and invested them in the US to build factories and employ Americans. And the more successful they are, the more they invest." Well let's look at Honda. Honda started building cars in the US in 1982. They just produced their 20 MILLIONTH car in North America. They have I think 4 assembly plants in the US, One each in Canada and Mexico. So they are really (North) American, right? But they still import 22-23% of the vehicles they sell here. That's a lot of vehicles folks - build in Japan, paying Japanese workers and suppliers. And some of you complain that the Fusion is made in Mexico? Like the Civic (unless it's made in Japan)? ---- 200k-min: "And Chrysler would still be going strong had Daimler not screwed them over. Before the merger, they were the most profitable car company in the world IIRC." Most profitable in America…not sure the world. At the time they were doing well on the LH cars (another credit to the AMC takeover), the “new” Ram and the ongoing success of the minivan. "That said the only resounding success of the good times was the minivan. The LH cars never outsold the Taurus, Accord, Camry which they were meant to compete against." The LH was a large car not a mid size like those mentioned above and it was very successful, perhaps the best selling large car fwd platform at the time. "The Ram never came close to the F-series of Silverado. Even the Jeep Grand Cherokee never came close to selling in numbers like the Explorer." The Ram went from 80k a year in sales to 400k, enough to keep two factories humming. Those are huge numbers for any vehicle. It didn't have to sell more than Chevy or Ford to be successful. By your logic since the Camry (also 400k in sales) doesn't outsell the F150 Toyota should just give up. "The new and flashy vehicles did pump up market share slightly but since the product quality didn’t back it up my guess is that repeat sales would’ve been tough without Daimler’s intervention." Dumbler didn't do Chrysler any favors and that mkt share increase was several percentage points. A auto executive would sacrifice his firstborn for numbers like that. ----- geeber: "BDB: Do you realize how impossible the government there makes it to sell foreign cars? The German companies sell a fair number of vehicles in Japan - they are considered status symbols there." Status symbols? Yes. Fair number? Only if you think a few thousands units out of millions of units a year is a fair number. So no, they don't sell a lot of German or other European cars there. "Meanwhile, the U.S. companies couldn’t even be bothered to move the steering wheel to the other side of the vehicle. Imagine how successful Toyota would be in the U.S. if the Camry and Corolla had the steering wheel on the opposite side of the car." This is an old argument that is not true for the most part. The Neon was available with left hand drive, so was the Grand Cherokee (maybe the regular Cherokee). Left hand drive Saturns were available too. Also the German cars are sold as right hand drive. So that's not the reason for lack of foreign car sales in Japan. --------- tom: "I googled for some information on import quotas in Japan, but didn’t find anything. The only thing I found was an article from 1985 which said that the US imposed import quotas on Japanese cars in 1981. And apparently, it was a failure. There’s nothing that indicates that Japan has import quotas on cars. Maybe you can produce some evidence?" Tom, there's no import quota on lettuce either. But you can't buy American lettuce in Japan. You see Japan doesn't use import quotas. They use "inspections". You can't bring anything off the ship to market without it being "inspected". Got a boatload of lettuce? No problem we will inspect it for you - eventually. What? It rotted while it was waiting for us to get to it? Gee, that's too bad. I'm afraid we are going to have to reject it for importation. Better luck next time! Korea also uses this tactic. For autos, you just inspect for safety and quality and if it doesn't pass your stringent requirements, you don't pass it. These same requirements are not used for importation of Toyodassans to the US (yes they all import here as well as manufacture here). There are other barriers to entry that are used, just do a little research. Hint, googling "import quotas" will not do it for you. ----- CommanderFish: "Ah, Chrysler. Chrysler is definitely an example of an amazing engineering and design crew lead off of a cliff by it’s incompetent leadership. I would argue that they were making the best cars of any domestic company in the 90’s, and had the capability to compete with the likes of Toyota and Honda. ‘95 Neon, ‘96 Stratus, ‘94 Ram, Wrangler, Cherokee, ‘93 LH, ‘96 minivans. All were vehicles that were well-received upon release but soon found their honey moon to be over. Cost-cutting drove quality into the abyss, hence why the B&B would not speak fondly of these cars." Agreed. The ringleader of the cost-cutting at Chrysler in the 90's was the man they hired to lead them, Bob Eaton, a GM man. He's also the one that sold them out to Dumbler. Without a doubt one of the worst auto CEO's of all time, with hardly anytime in the CEO position! ----- John Horner: Re: Chrysler: 'The same leadership that lead to the failure of otherwise good cars then sold the company’s soul to Daimler.' "And good old Bob Lutz was right in the middle of it at Chrysler back then! Man that guy has been on deck during many a disaster." That's not correct. Of all the senior leadership, it was Bob Lutz who understood what the "merger of equals" really meant. He was the only one who spoke fluent German, who was raised in Europe, had worked in Europe, and worked for a German automaker (BMW). He left Chrysler shortly after the deal was approved. Bob always felt that Chrysler could go it alone and resisted Lee's efforts to merge with FIAT (history does repeat itself!).
Can anyone comment on how many American dollars goes to China courtesy of our favorite big box retailers vs how many dollars goes to Japanese car company headquarters??? Is it possible to own stock in a Chinese goods manufacturer if a person is American? My point is that maybe we are barking up the wrong tree. While auto profits may go back to Japan, at least there are ALOT of people making a good solid working wage here assembling those cars. With big box retailers there are a few people making a good solid wage (managers) and alot of folks just getting buy (everybody else). Meanwhile alot of American dollars floats right out of the country to China. I'd rather the manufacturing that goes on in China be done here (minus the pollution) and have it sold by a Chinese big box retailer than the way we have it now. At least alot of families could make ends meet and buy durable goods like automobiles and appliances. Maybe the trick is not to waste time pointing fingers at each other and instead point fingers at the financial elite of this country - the ones running the gov't (the poor need not apply), the top level management positions (the poor need not apply) at the car companies, Wal-Street, and retailers. These are the folks ruining our economy by using suppliers outside the country because they are so cheap and profit is the number one priority at the expense of everything else. The world's stockholders are priority number one while our towns, workers and moral obligations come much lower on the list. We consumers are nickel and diming ourselves to death chasing cheap stuff. The Chinese prices do indeed enable some cheap prices in the big box retail stores but at what price? A big race to the bottom is what it is - not the bottom prices, I mean the bottom wages here in America. We want ever more stuff. Too much of this same stuff lasts a very short time before it is broken (non-repairable) or out of date and we are back for another round of buying. Throw it away and buy something else. We need to figure out how to have creative products at a reasonable price with reasonable quality MADE IN THE USA. I see no reasonable way to legislate this. It's a question of the folks at the top having enough good taste to limit their income a little. Take a few million out of the paycheck pool for the folks at the top and spread it down to the workers in the middle and bottom in these companies. The $14M CEO makes $40K a DAY. Wow... I don't want to see this happen with taxes - it has to happen because the people at the top see that wages have stagnated for 10-15 years and folks can no longer afford (without credit) to buy houses and cars and stuff. The markets are are trying to right themselves now. Too much stuff, not enough REAL cash to buy stuff with (i.e. not credit). Gov't is working hard to run interference. I don't know if they can create a soft landing or not. I'll continue to vote against the entrenched rich guys. Not a statement of party preference understand. When those people at the very top (power or income) do stupid stuff I am not inclined to enable them through my consumer spending or my vote. I want an American car but Detroit refuses to show signs of intelligence so I'll keep what I've got and save up some more money.