By on February 6, 2009

It’s T minus 11 days before Congress does the thumbs-up thumbs-down thing on the artist formerly known as the world’s largest automaker. GM is up shit creek without a paddle. The United Auto Workers aren’t going to agree to parity with the transplant assembly workers, as required. The bondholders aren’t going to exchange debt for equity, as required. The company doesn’t have a clue what to do about its brands or products, as required. There is no way whatsoever for GM to prove to your elected officials that it has a hope in hell of repaying the $13.4b loans already made—never mind the $100b or so needed to keep the ailing American automaker in business for another year. So GM CEO Rick Wagoner is doing the only thing he knows how to do, that he can do: cutting expenses. This time, it’s white collar workers for one simple reason: that’s all that’s left. Bloomberg tells of the $14m per year CEO’s decision to throw his remaining management to the wolves . . .

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By on February 6, 2009

OK, so the latest GM Fastlane PR exercise is actually entitled “What Is GM Doing With The Money?” Defensive much? Anyway, coming from Fastlane, there’s obviously no mention of giving Cadillacs away. Or throwing cash down the Delphi hole. Or paying Brazilian workers to sit on their hands. No, having received $13.4b, GM’s Steve Harris reveals that GM’s plan is to (wait for it) comply with the terms of the loan! In other words, “prove that we can repay the loan, achieve a positive net present value, and meet federal fuel efficiency and emission requirements, and manufacture advanced technology vehicles in the U.S. ” And with the federal money, GM is “making progress,” says Harris. How? By building concepts like the Cadillac Converj. And announcing vehicles like the 2010 Equinox (Saturn Vue cannibalism!) and the 2012 Spark and Orlando (which debut after the loan is due). Hallelujah!  And though Harris mentions the UAW Job Bank shutdown and “discussion” of plans to reduce dealers by 400 per year, his effort to “do a better job of communicating our successes (and) how we will be changing going forward” leaves out all the interesting bits.

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By on February 6, 2009

CNN Money reports that Sen. Tom Harkin (D-IA) has pulled the “Clunker Culling” proposal from the economic stimulus plan making its way through Congress. The provision would have provided up to $4,500 in tax credits for scrapping a used vehicle with under 18 mpg and replacing it with a new car. The bill would have cost taxpayers up to $16b, according to CNN, which notes that lack of support from Republicans doomed the bill. Why? Apparently, “the provision required that the [new] vehicle be assembled in the United States.” Who knows, maybe common sense even had anything to do with it. President Obama did not take a strong position on the Clunker provision according to the Detroit News, but he is vocally backing $2b in battery development spending and a $600m purchase of fuel-efficient cars for the government fleet.

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By on February 6, 2009

If you’re familiar with Delphi—a former GM division with the words “bankrupt since October 10, 2005” over the door—then you’ll know that they’re a not-so-hidden cancer on GM cancerous corpse. Even as The General seeks to survive with a federal IV stuck in its metaphorical artery, it continues to peel off just enough cash—now your cash—to keep the parts maker making parts. For vehicles no one’s buying; but that’s how the industry doesn’t roll these days. So, some bad news from the oracle then. First, GM’s told their pals at the SEC (accounting scandal forgotten) that they’re accelerating a $50m payment to Delphi. [NB: Delphi had asked GM for a $100m hurry-up.] Can you say running on fumes? Delphi can. “The Company believes the amendment and accelerated GM support will enable it to preserve available liquidity given the difficult economic environment, particularly in the global automotive industry,” Delphi said in a filing with their pals over at the federal bankruptcy court. Judge Robert Drain, no less. And the cutbacks keep on happening!

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By on February 5, 2009

So it’s the dealers’ fault if Chrysler goes down in flames. Nothing to do with Daimler, who gutted the company like a fish. Or Cerberus, who wanted to gut the company like a fish, but found itself without a fish to gut. Or the company’s current management, who have lied, stonewalled, mislead, cut backroom deals with our elected representatives and generally manipulated honest, taxpaying Americans into supporting their stupid selfish schemes. As Chrysler’s backers, as their only means of survival, let’s think about this. ChryCo dealers are sitting on a 151-day supply of new vehicles (provided new car sales have stabilized). Even if Chrysler dealers didn’t order another car, truck or minivan, they’d have five months’ supply. There’s only one reason for them to take any more vehicles: to help justify the company’s desire to milk/bilk/fleece/con Uncle Sam for more “loans.” And still Cerberus point blank refuses to reveal to us, their supposed paymasters, who owns the company. No matter what you think of a ChryCo Chapter 7 or 11 or car dealers, this is an unseemly, disgusting clusterfuck. Look what they done to my Chrysler, ma.

By on February 5, 2009

Or so goes the logic of Brent Snavely and friends over at the Detroit Free Press. Sales down 37.1 percent? The lowest seasonally adjusted annual selling rate (SAAR) since 1982? No way is it going to get worse before it gets better! “This is not real. This is artificially low,” says Jesse Toprak, executive director of industry analysis for, who goes on to warn that “the industry might not recover without some sort of external stimulus.” Not here, not now! And yet in the midst of all this turmoil, a strained and unconvincing optimism abounds. Well, at the Freep anyway . . .

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By on February 5, 2009

Here’s a surprise: American cars hold their value much better than other major markets, including Japan and Europe. Cost of ownership is the culprit. In the US, owning a car generates relatively little in the way of year-to-year expenses. Registration is usually about $30. Inspections are infrequent and rarely costly. While the repairs required to keep a “beater” on the road can reach four figures, they rarely exceed the value of the vehicle itself. As a result, it’s unusual to see a used vehicle in America (even “heaps”) listed for sale under $1k. Also as a result, the cash-for-clunkers proposals, as envisioned, are a horrible idea.

In an effort to boost sales, the German government has been running a “cash for clunkers” program. The government is offering 2,500 Euros for any eligible old car traded in towards a new car purchase. After some initial cheering, the program has been leaning toward scandal land. The reason for this nexus: gaps.

Gap number one: used car values. Overseas, licensing and stringent test regimes make the cost of auto parts a far more daunting proposition than it is in The Land of the Free. Tax laws favoring company/fleet purchases create [even] dramatic depreciation for mass market models. These factors mean that the market value of a “tradable” used car is much less than it’s “government” trade-in value.

The other gap—and the source of many of the “issues” surrounding the cash-for-clunkers program—lies between a car’s “inflated” trade-in value and the cost of a new car.

At best, the money garnered from the government for a clunker represents about a 25 percent down payment on a new car. That’s at the low end. For a more middle-market car, the clunker check accounts for less than 10 percent of the cleaner, greener machine’s purchase price. On top of that, the sort of person who would be buying a €10K car is the one least likely to get financing to close the “gap”.

The sharp end solution to this gap is simple: People who can afford new cars will buy (from a private owner) a “junker” to trade. The junker’s former owner will take a fee (maybe 1000 Euros) and use the money to buy a non-tradeable old car. Hopefully a better one, but not necessarily.

Despite/because of these economics, it seems that everyone wins (and the old cars get taken out of circulation). In practice, no.

The biggest problem with Germany’s cash-for-clunkers program: it takes something that is normally not very valuable (a German jalopy) and increase its value several-fold by attaching a couple of documents. Throw in the fact that the money “pool” supporting the program is “first come, first served,” and you get fraud on an impressively large scale.

TTAC’s Bertel Schmitt has been connecting the dots between the environmentalists’ and the mob’s green dreams. Apparently some of the trade-ins are doing it the Chicago way (early and often), and aren’t even getting scrapped. This makes a mess of the real purpose of the program (culling clunkers), while doing nothing to increase sales (the spoonful of sugar to make the green stuff go down easier).

It’s a stark warning to Americans contemplating the wisdom of the whole cash-for-clunkers concept. But is the devil in the details? Could CforC be done “properly”?

First, you’d need to make the scrap credit what it is: a simple payment above salvage value to take a heap off the road. Second, you need to make the payment lower (say $1,500 or even $1,000). Third, you need to extend it to ALL eligible vehicles and run it through salvage yards (therefore only one set of books to check).

In effect, the goal would be to get “heap” drivers into a slightly newer, slightly nicer “heap.”

Aside from aesthetics and a marginal pollution reduction, the greatest benefit would be to reduce the total vehicle population on the road. This will eventually help the new car market but not for a few years and not for the reason you’d think.

While new vehicle sales had been running high until last year, the “scrap rate” has held steady at about 12.5 million a year for the last decade. Sales have far exceeded that rate; that is one reason the US has 250 million cars for 200 million licensed drivers.

A targeted cull would aim to increase the scrap rate, to 15 million annually. Make no mistake, doing it right would not be cheap, I reckon $5b dollars a year (3.5 million times $1,500) ought to do it.

Reducing the absolute number of cars would help heal the damage years of “fire sales” have had on used car prices. Getting used car prices back near “normal” would help sales down the road. But would it be worth the cost? In Bailout Nation, cost owns you.

By on February 5, 2009

Ever since bailout measures for the auto industry were first mooted, free market detractors whispered “WTO.” Nobody took it seriously. True, according to the World Trade Organization’s rules, direct subsidies are not allowed. But it’s equally important to note that the 153-member quango has never put a single issue to a vote since its birth in 1995. Consensus governance means that as long as nobody complains, and especially, as long as everybody plays the same game, the WTO hangs fire on principle. Auto industry loans? They’re all doing it. Still, there is a line a WTO member mustn’t cross. And America almost crossed it.

Recent amendments to Uncle Sugar’s near-as-dammit trillion dollar economic stimulus package would require US firms to use local steel and other components in state-funded projects. The provision kicked sand in the face of the WTO’s raison d’être: the most favored nation (MFN) rule.

Under the terms of the MFN rule, a WTO member must apply the same conditions on all trade with other WTO members. The provision also applies to trade within and without a given nation. “Imported and locally-produced goods should be treated equally (at least after the foreign goods have entered the market).” To do otherwise constitutes blatant protectionism.

Similar buy local protectionist measures have been adopted or considered in Argentina, China, Indonesia, Ecuador, India, Russia (re: imported used cars) and Vietnam. All seven WTO member nations have landed on a WTO ­surveillance list.

The Guardian writes that the European Union (EU) is pissed with the “buy American” bailout provision. They’ve threatened legal action and retaliatory measures against the US if the Obama administration enshrines this clause in its multibillion-dollar economic stimulus package. Brussels said it could take the US to the World Trade Organization for breaching treaty rules.

The warning came just a day after Joaquín Almunia, EU economic and monetary affairs commissioner, pointed to “clearly protectionist measures” emanating from Washington. The EU ambassador to Washington has expressed similar concerns. A spokesman for Lady Ashton, EU trade commissioner, said: “If the provisions that are finally passed by the US Senate and approved by President Obama infringe the provisions of the GPA [general procurement agreement], to which the US is a signatory, then this is something we will have to consider taking them to the WTO over.”

Compared to previous hints and “concerns,” this amounts to a barrage of warning shots. Amid fears that the US and other countries could trigger a disastrous 1930s-style “Great Depression” trade war through protectionist blocks on trade, the European commission highlighted similar moves in Europe.

A French €10b aid program requires firms to source components solely from France, keep only the French plants open and scrap plans to “de-localize” jobs to elsewhere in the EU. Neelie Kroes, EU competition commissioner, will warn French ministers in talks in Brussels that state aid must not only comply with competition rules but also with EU laws on freedom of movement and capital. “They have to realize that once they start down that protectionist path it’s a descent into chaos,” her aides said.

On Tuesday, U.S. President Barack Obama signaled fear that Buy American provisions—supported by Democrats in steel-producing and economically distressed states—would trigger a trade war at a time when the global economy is in dire straits.

On Wednesday, lawmakers voted to soften the controversial “Buy American” provisions in the proposed U.S. economic stimulus package. The amendment, approved by the Senate, requires the Buy American provisions be “applied in a manner consistent with U.S. obligations under international agreements.” Which is like saying you can burgle a house as long as you don’t break the law.

The bottom line for carmakers: even if America’s avoided a trade war (for now), they can’t win.

If the feds restrict the bailout buffet to The Big 2.8 and domestic production, they run the risk of retaliatory measures from neighbors—and markets—around the globe.

And don’t forget it’s a small world after all. In the run-up to the meltdown, Motown’s automaker practically demanded that its suppliers outsource abroad. By now, keeping the suppliers’ share of the domestics’ business within U.S. borders will be more about spin than compliance. Especially if those suppliers receive their requested $20.5b bailout.

On the other hand, if the feds don’t limit their largess to domestic producers, they run the very real risk of alienating whatever voter and/or union support exists for the pork barrel parade. A billion dollars of TARP money for Brazil? Esqueça-se.

On a practical basis, a truly “fair” bailout would put the domestics at a disadvantage.

Think of it this way: the existing Chrysler loans are equivalent to a current subsidy of $10k per vehicle sold. If, instead, you offered American car buyers $10k off a car, they wouldn’t buy a Chrysler. Clearly, you couldn’t offer the discount certificate just to Chrysler buyers. What kind of country would that be? Welcome to Bailout Nation.

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