By on May 14, 2009

Don’t look at me. I already gave at the office. Gentlemen, I refer you to the $5 billion already allocated to prop up automotive suppliers attached to domestic car makers with an umbilical chord made of piano wire. OK, that particular area of the bailout buffet table is shrouded in red tape at the moment. But do the suppliers seriously expect Uncle Sam to stump-up some $8.3 billion per year for the next four years to help them keep the lights on? That’s how much cash they’ll need, according to a new study by A.T. Kearney. And Kearney’s boys reckon they’ll get it. “A disorderly wind-down of key suppliers could also potentially shut other OEMs,” A.T. Kearney partner, Dan Cheng, said in the PR release accompanying the tome. And he expects the government will do “everything it can” to help the industry. Ready for the kicker?

They’re low-balling. As Automotive News [sub] reports, the estimates are based on some decidedly optimistic thinking. “The Chicago-based consulting firm expects U.S. auto sales to rebound to more than 16 million vehicles by 2012 from pent-up consumer demand, though the firm expects 2009 sales to drop 24 percent to 10 million units.” Drop to? Aren’t we below that already?

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10 Comments on “Bailout Watch 531: U.S. Auto Suppliers Need $33.5 Billion to Stay Solvent. Or More....”

  • avatar
    Steven Lang

    Unless there is a fantastic breakthrough in fuel efficiency or price, I would put the probability of a 16 million vehicle year in 2012 somewhere around 1% to 3%.

    We have a monsoon of oversupply and the stigma against buying new has been largely lost. Throw in double digit unemployment and sky high deficits, and it looks like an 8 million to 12.5 million annual volume is far more reasonable.

    They should all be C11’d…. right now… the more you fund excess capacity the worse it’s going to cost everyone in the end.

  • avatar

    We have a monsoon of oversupply and the stigma against buying new has been largely lost.

    First part I agree, but don’t overestimate the second factor. Roughly speaking, most cars, even clunkers, go until they cost more to repair than they’re worth. So, roughly speaking, the population overall can’t “decide to buy more used cars and buy less new” over the long run. Every used car was new once. Every used car purchased decreases the inventory of used car at dealers. If that goes on, eventually someone has to buy a new car in order to add another car to the system.

    Now of course people can own fewer cars or change their own car less often, and that can have interesting effects. The latter doesn’t decrease the number of new cars sold, though; most people who buy a new car before they have to thus produce a new used car (their old one) that someone else then buys instead of a cheap new one.

    We even saw some of this effect earlier, where a sudden shift towards used car sales ended up raising the price of used cars (and making dealers pay more for trade-ins) at the same time as new car prices were slashed. The effect eventually balances each other out.

    So the issue is oversupply. But the oversupply issue is just another way of saying that people are buying fewer cars.

  • avatar
    Old Guy Ben

    $30 billion sounds like a lot, but keep it in perspective compared to how much we’ve already spent on failing banks (AIG anyone?) in what was a decidedly HORRIBLE investment.

    At least investing in manufacturing there is the potential they could build something useful.

    As long are real estate keeps crashing (it has a way to go before we bottom out), and jobs keep disappearing, I don’t think we’ll see a rebound in car sales. I hope I’m wrong.

  • avatar

    We have a monsoon of oversupply and the stigma against buying new has been largely lost.

    Steven, don’t you mean the stigma against buying used has been largely lost?

  • avatar
    Stu Sidoti

    Quote Robert Farago: ” . Gentlemen, I refer you to the $5 billion already allocated to prop up automotive suppliers attached to domestic car makers with an umbilical chord made of piano wire.”

    Ain’t it funny…the Feds cough up $5 Billion to support suppliers of GM and Chrysler (remember the $5Billion is not to be used by anyone else, only GM and Chrysler’s bills) and then they let the automakers hold the cash-neat. Then dog-gone-it,low and behold both GM and Chrysler announce that they’re shutting down nearly all production for the summer…Hmmm-it’s kind of hard to get paid out of that $5 Billion kitty if you’re not delivering any parts. That $5 Billion might just as well be sitting in a lock-box on the moon.

  • avatar

    @Old Guy Ben:

    I’m tired of seeing this “two wrongs make a right” crap. “But they were worse,” does not justify a course of action.

    Throwing billions of dollars at nothing more than “potential” is a bad idea. I have the potential to “build something useful,” but no one sane would give me billions of dollars to realize that potential.

    It’s not credible to claim on this of all sites that no one saw this coming years ago. These suppliers are industry insiders; they should have known better than anyone that their main customers would go down eventually. Failure to recognize that is incompetent. Recognizing it yet staying the course is incompetent. Rewarding incompetence with cash will perpetuate incompetence.

  • avatar
    Old Guy Ben

    It seems to me, after there should never have been a single dollar “invested” by our government, they are at least trying to salvage something out of this mess.

    I’m not trying to justify it, just trying to say that it’s possible we (the taxpayers) won’t end up with nothing but debt.

    I don’t think it’s likely. I think this is all a ridiculous exercise so (fill in the blank) can say at the next election “Well, I tried to save some jobs” or some other bullshit. It’s mostly futile.

    Sure we saw it years ago. Same as we did in the mortgage / hedge fund / banking sector. I contacted my legislators and said “hell no!” to any and all bailouts. As did a lot of people.

    Did they listen?

    $30 billion is peanuts compared to the total being wasted.

  • avatar

    @Old Guy Ben:

    Your scare quotes around “invested” are appropriate. The government is committing the sunk-cost fallacy, also known as “throwing good money after bad.” Sometimes, an investment can’t pay off.

    On the topic of scare quotes, anytime I email my Representative or Senators about something, I “enjoy” the response. My Rep. at least has the courtesy to send a mostly on-topic form letter/email. Usually, I get it about a week after Congress has voted on whatever I spoke up about. My Senators give me a “your email has been received” acknowledgment, but that’s all.

  • avatar
    Old Guy Ben

    Okay, those are scare quotes – thanks.

    It sounds like we have the same representative.

    “Thank you for your concern.” If I’m lucky.

  • avatar

    I agree with the “two wrongs don’t make the auto bailout right” POV, but in any case it is worth pointing out that several of the major TARP banks have attempted to give back the money and have been rejected by Geithner.

    Yes that’s right. In contrast to the auto company “loans”, most if not all of the TARP money is gonna get paid back whenever Obama decides he is done making the banks his bitch. This means the relative size of the numbers doesn’t matter compared to the auto bailout numbers.

    For the record, I was against the bank bailouts too.

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