Tuesday, December 23, 2008

What The Auto Bailout Does Not Do

No Money, No Buy

Whatever so-called "viable" business restructuring plan Detroit's automakers concoct, they will continue to require federal assistance to survive 2009. No one can manufacture a car no one can buy. No one can buy if the banks won't lend. Even the financial credit arms of the automakers are hard pressed to lend. And, the more jobs are lost, fewer cars are bought.

The drop in gasoline prices from more than $4 a gallon to $1.65 national average this week has had no apparent cause and effect. Consumers with money are saving. Those less fortunate can't borrow.

It's as simple as that.

This tailspin applies not only to Detroit but also to foreign automakers assembling their cars in our country. Toyota lost money for the first time since 1941.

The sales slowdown, and some of the accompanying business problems, that have engulfed the Detroit automobile makers are rapidly spreading to the world’s strongest auto companies. To cope, Toyota, Honda, Nissan and Hyundai are all slowing American production, and many foreign auto companies are putting off plant expansions.

For the most part, the so-called auto transplants have deep pockets and ample credit, and they are not facing potential bankruptcy like General Motors and Chrysler. But none of the foreign companies have proved any better than the Detroit Three at predicting how gasoline prices would gyrate or the extent to which demand for cars and trucks would collapse in a deepening recession.

Conditions on the ground are unlikely to change until the credit market loosens and unemployment decreases. These are market factors. The rest is politics.

President Bush temporally saved thousands of jobs in the U.S. automobile industry last week when he agreed to provide General Motors and Chrysler with $13.4 billion from the Troubled Asset Relief Program. The following is an excerpt from an editorial in the Los Angeles Times:
  • "The main piece missing from the administration's plan is the one government is particularly ill suited to provide: a way to restore Detroit's ability to innovate and improve faster than its competition while also designing models that are more compelling. Those issues are a function of management and marketing skill, neither of which are much in evidence in Washington. Thus far, lawmakers' main impact on Detroit has been to press for more high-mileage cars that the Big Three haven't been able to sell, while also deterring them from importing the small cars they make successfully overseas. Those kinds of political judgments won't help the automakers transform themselves in a way that restores the confidence of consumers, investors or the capital markets. Without their support, GM and Chrysler will never make it off the public dole."

It is curious why the government refuses to allow GM and Ford's profitable divisions in Europe and Australia to pay for their domestic fixes. Afterall, they used their own capitol to build those plants.

Toyota Sales Off 50%

Without getting into the political bullying and posturing between Southern Republican Senators and the United Auto Workers union, the Bush bailout sours any future private investment with the Detroit automakers.

Among the restrictions is bondholders receive only one-third of the debt they are owed and investors receive no dividends until the loans are repaid. That places the burden solely on the taxpayer.

Meanwhile, it is worth taking a look at the problems the best-managed automaker is facing -- Toyota. According to the Wall Street Journal:

  • Early on, the (Toyota) Tundra met expectations, winning Motor Trend magazine’s Truck of the Year award and falling just short of the company goal of 200,000 in sales in 2007. But sales of the Tundra were off 50,000 over the first 11 months of this year compared with last. Last month, Toyota sold 6,607 Tundras, compared with 14,988 in November 2007.
  • The Tundra’s poor sales performance is by no means exceptional. The Prius did only marginally better, with a sales drop last month of almost 50 percent. With total United States sales down 13.4 percent over the first 11 months, Toyota is cutting production days at plants across North America.
  • ...Toyota’s labor practices contrast with those of the Detroit Three. Typically, during temporary factory shutdowns like those Chrysler announced last week, workers are paid about 70 percent of their salaries, which comes from unemployment benefits and a contribution from the company. Until recently, when plants were closed permanently, workers received their full salaries and reported to a room until a new job was found, in an often-ridiculed system called the “job bank.
  • Some auto analysts think it is only a matter of time before Toyota and other transplants change course, because it is too expensive to pay workers who are not building vehicles. Many of the transplants’ factories are not union shops, and workers receive less generous pay and benefits than their counterparts in Detroit — total compensation, counting benefits, runs about $45 an hour for the foreign companies, versus $55 an hour for the Detroit automakers."

Holiday cheers to motorists where ever you are hiding.

(Sources: The Los Angeles Times, New York Times, The Wall Street Journal)

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