Is this how Americans think of the Auto Industry? (my response)

[nthfinity]

Originally Posted by sammyb I wrote this article for my Four Wheel Drift site, but figured that my fellow FChatters would find it interesting. I'm sure many will disagree, but the math and history is interesting. Bailout the Big Three? History Suggests “Don’t Do It”! originally published Nov 11, 2008 on http://fourwheeldrift.wordpress.com It would be catchy to lead with something like “I’ll give you fifty-billion reasons why the US government shouldn’t bail out the Big Three automakers.” Instead, I’ll just write: don’t do it. I need to make something crystal clear here. My views are not ideologically-based. If you’d like some Republican versus Democrat, free market capitalism over big government socialism, Apple against Microsoft rants, you’re not going to find it here. What you will find is a simple statement: history and common sense intersect at a point with a big marker titled “STOP”. The Meat Of the Deal Congress has already given General Motors, Ford and Chrysler around $25 billion so they can retool for production of more fuel-efficient cars. Last week the three CEOs returned to The Hill to ask for as much as $50 billion more to keep their companies floating while they hemorrhage cash in the down economy. It is true that consumers are not buying new cars right now. That’s a huge problem for all automakers, not just the Big Three. When they start buying cars again, fuel-efficient vehicles like hybrids and compacts will be in demand. Actually, if we’re being truthful here, these vehicles are in demand right now. Just go try to find a Prius on a dealer lot.

In demand? Your inflection is based on intuition that is simply not supported by the facts. So far in 2008, ALL hybrids make up 2.6% of all vehicles SOLD. Another 6% are flex-fuel vehicles, while over 90% of those vehicles have never filled up with E85.

So the Big Three CEOs have the audacity to go to Congress and say “give us money so we can ride out the bad economy and have what the consumers will want when they are ready to buy.” Audacity? Why did I choose that word?

The 25B is already appropriated for retooling costs. The industry is asking the money be used for more than just that. Additionally, meanwhile, foreign automakers building plants in the US have been given tax incentives, loans, and free money to do just that; while the domestics are giving nothing. Also, we have the Japanese government subsidizing much of Toyota itself in Toyota City. The people of japan paid entirely for the development of the Prius. The domestics have entirely been required to develop everything on their own accord. Finally, we are not given the same equal playing ground on foreign land against their competition. Like for Like markets should exist.

Simple, because unless you’ve been living in cave for the last decade, you’ll know that even when GM, Ford and Chrysler were selling SUVs and trucks faster than a Ramones drum beat, they were largely losing money. Keep in mind that building and selling SUVs and trucks was a hell of a lot more profitable than compact and hybrid cars.

Again, you are going on your intuition, and not the reality. The Domestic industry were doing quite well up until the beginning of the credit crunch started hitting home (earlier than the rest of the country).

Imagine if the CEOs told Congress: “we need money, because we couldn’t make profits when we were selling high-profit vehicles. Since we pocketed that money in salaries, union deals, benefits, and executive bonuses, and got drunk on cheap gas (although in our hearts we knew it wouldn’t stay that way, but we hoped we’d be retired by the time it hit $4 per gallon), we never spent enough on R+D, so we didn’t have vehicle products ready to go for this current marketplace.” Unfortunately, that’s the truth.

never spent enough in R+D? Surely you jest. Yet again, you have intuition that is far and away from the reality of the situation. The domestics have the highest level of technology in the world. Guess where the worlds auto makers, and race teams come for talent, innovation, and expertise? Michigan. Why did Diamler merge with Chrysler? Chrysler had the highest tech. facilities in the world to bring Mercedes into the 21st century. When Mercedes transferred the cash to Germany; and brought that technology "home"; they left. The amount of forward thinking happening at GM, and Ford... and cutting build cost at Chrysler are simply staggering. All while giving fantastic wages to the people who assemble the cars. Drunk with greed? Maybe, just maybe... they were bringing everybody up. The 4$ / gallon price was nothing more than a bubble. The market reacted, and reacted quickly.

The level of R+D in the domestics is extreme. Just for example, to bring a car to market takes 4 - 5 years. Much of this is due to regulation. EPA, CAFE, Kalifornia's own independant smog/ global warming laws; DOT crash standards, etc. etc. etc. .... and the union's blocking way to kill existing cars, and start new lines.

Here is a scary reality If Congress gave $50B directly to American consumers with the condition that we went out and bought new cars, here’s what would happen: $50B would buy 1,666,666 cars, based on the current average price of around $30,000 each. Given the current market share, GM at 22.4 percent would sell 373,333 vehicles, Ford (14.8%) would move 246,666 units, and Chrysler (11%) would sell 183,333 units. In other words, with fifty billion dollars going directly into the hands of consumers to buy a new car, the best any of the Big Three could do would be to sell a group of additional vehicles equating to less than one year’s worth of Honda Accord sales in America. (392,231 Accords were sold in the US in 2007.) Think that’s enough to keep them (or dealers) from failing? Nope!!!

Averaging $30k WTF. Pull another number out of your ass, it will be more accurate. 50% of all vehicle sales are trucks on the domestic side, and trucks are still the no. 1 selling vehicle in the world. After incentives, based F150 Fx4's are about 20,000$ ... perhaps less. And they are still pulling a profit. The no. 1 selling car (excluding trucks) right now is the Lincoln MKS; not a Toyota, not a Honda.

Average cost/car in the Domestic industry = $30,000 LOL. Puhhhhhhhlease. Keep in mind the volume of Focus/ Cobalts/ Saturns/ Stratus/ etc. etc. that sell for 10k or less. Competing right against the POS korean cars; with better build quality (at least in GM and Ford).

Inevitably, there are those out there who will say the Big Three are “too big to fail”. Television news channels are already reporting huge job loss potentials if the companies go out of business—from a few hundred thousand to somewhere around 3.0 million. For every one job at GM, Ford and Chrysler, there are seven positions at vendors providing parts and services for domestic auto production. Many stories assume that if the Big Three fail, all the jobs associated with GM, Ford, Chrysler, as well as all of their major suppliers go up in smoke. In other words: if they fail, we’re in a depression with millions of unemployed workers.

The number of unemployed people if the smallest of the Three fails is nearing 2,000,000 ... Just Chrysler, and increase that when including suppliers, dealers, private repair shops, fleet companies, etc. etc. Today, 1/5 people in the US have a job related to the Auto Industry. AIG employed 100,000 worldwide; and received no conditions of the bailout. The Banking company also received no conditions. Back in 2002, the Airline industry received no conditions; and was much smaller.

As we increase regulation, force Unionizing, we will be a service economy serving the new 1st world... China/ India which have no such regulations... Japan is taking losses too; but the Gov. already subsidizes most of their mfr. industry already in Japan. Why are we not so "proud" to buy American based on principal? Especially now as we have equal, and better vehicles than they do. GM offers more 30+ mpg vehicles than any other company in the WORLD. Additionally, 30 US MPG = 37.5 UK MPG.

The logical conclusion, claim these folks, is to keep the government money flowing– no matter how long it takes, otherwise the companies will implode, everyone in the industry will be out a job, and a depression is unavoidable. To these people I have just two words:

Some people say that. They have limited comprehension of the Automotive and Manufacturing world. If the credit markets hadn't imploded, they would have borrowed in the private sector if necessary... as proved by past actions. The biggest issues is that there is almost no domestic solution for raw goods anymore thanks to Clinton era EPA edicts. The general move is to eradicate Manufacturing from the US altogether; diminishing our ability to excersize our freedom. That does scare me.

BRITISH LEYLAND Allow me to follow up those two words with a description of why this is critical history for every Member of Congress to know. England used to be tied with America as the automotive powerhouses in the world. We had Ford and Chevy, while they had Austin and Morris. Just like the contraction of companies in America that formed Ford-Lincoln-Mercury and General Motors, Austin joined Morris in BMC. Standard joined with Triumph, which was joined with Jaguar. Finally, by 1968 most British-owned brands were rolled into British Leyland.

British Layland proved that the Gov. should not be consulted when building cars for consumers.

Thanks to equal parts ineptitude, greed and lack of ethics, BL drove the British car industry into the ground. BL executives blamed the economy (including an oil crisis) and labor. Everyone else pointed the finger at products that were inferior to foreign competition, as well as short-sighted contracts and profiteering.

Ahem. It was their inability to build cars that people wanted. You are just hammering in points that seem like they are intuitive; but they are nowhere near the reality. You are short-sighted, and unable to accept that the company was top-heavy with it's gov. control over what was built... group think, cross platforms that were equally crap. If they built good cars that people wanted, they would exist today... stronger than ever.

Despite selling forty percent of the vehicles in Great Britain, by 1975 British Leyland was broke. The British Government sank millions into the group and became the majority shareholder. The corporation was reorganized, and millions more went to cure production and labor problems. The company was again reorganized into saleable units. Jaguar-Daimler was sold-off in 1984 (two years later it went to Ford). The Leyland truck and bus unit was merged with Dutch DAF in 1987, which later sold bus operations to Volvo. Just a year later the Rover Group (including most of the remaining car business) was sold to British Aerospace, which turned around and immediately sold this remaining part of Great Britain’s auto industry to German BMW.

Gov. control fails, and so do companies that fail to build cars people want... all the while, during that era, new gov. controls nearly destroyed the auto industries WORLDWIDE. The same thing happened in the 2007 legislation in the US to up CAFE as happened 33 years ago. And guess what, it is causing the same issues all over again. Is it any guess?

You are missing such a big part of the picture with your analysis, it would be funny if times weren't so dire. I fear too many people think along the same lines you do.

Which puts us back to GM, Ford and Chrysler If Congress simply let nature take its course, there is a strong chance that all would fail. In this case, do we honestly think that everything the companies owe would simply be auctioned off to the high bidder in front of the local courthouse? All three companies own valuable plant assets. All still have cash. All own products and technology that are profit centers. There is certainly a big financial value to Chevy’s Volt, as well as Chrysler’s flexible plant locations, or Ford’s Mustang brand. The comapany and all jobs associated with them don't simply evaporate, because the valuable assets (and the people who create and maintain them) will be purchased.

Again, you are showing a short-sighted view that I fear too many Americans have. The plant's have value, the machinery has value, the brand has value. But after buying a firesale of all this material, who will pay the necessary R+D to bring either a new vehicle to market, or bring an existing vehicle up to EPA/ DOT/ CA SMOG etc. standards and certifications? Who will pay 100,000,000 to do that? A single line alone cannot survive alone.

Considering that Porsche just tried unsuccessfully to buy VW, it puts them back in the market for an entity that will enable them to meet 35-mpg CAFE standards. By the way, Porsche has also been one of the most profitable automakers of the last decade. (Turns out that selling overpriced sports-SUVs is a cash cow.) So even after the botched buyout, they have money to burn.

You must not have heard; Porsche own over 80% of VW now.

Hyundai is also a strong competitor without a good hybrid play, as is Mitsubishi. Both have money. Mitsubishi’s dedication to cars might be questionable, but Hyundai’s certainly is not. Honda could use a more diverse product range, especially upmarket. Even Toyota could make a case to buy one of the Big Three — Chrysler for flexible production facilities or GM for Volt plug-in technology (since it could take a big bite out of Hybrid Synergy Drive sales).

Strong competitor? LOL not based on market share, or competing vehicles. Mitsu have been building low-quality and low reliability for longer than I've been alive. They've been competing with Nissan and the French for poorly made cars for the last 20 years.

Then there’s BMW – the same company that at one time or another has purchased Rover, MG, Rolls-Royce, Bentley, Austin/Morris/Mini, and still retains the rights for Triumph. They have cash and good credit…not to mention a pretty good history of acquiring, absorbing, improving operations, and remarketing companies. (We’ll give them a pass on Rover, which was a debacle, only because nothing short of a neutron bomb could have solved that company’s issues.) Finally, BMW has banked way too much on hydrogen over plug-in hybrids, so they could benefit from buying the technology, rather than developing it in house.

Ford have far more cash than BMW. People forget how much of the company is owned privately. Nobody has credit today. Another shortsighted statement. BMW have had quality issues since the beginning of the Bangle era. They are on the forefront of automotive design. They don't have enough market share, or profits to buy a major company...

Don’t count on Mercedes to get involved. The company is still sore from its marriage to Chrysler. It turns out Mercedes was ill prepared to deal with the complexities of a merger with such a dysfunctional corporation at a time when it was challenged with its own operational and technical issues. Consequently, Mercedes lost more money than a drunk billionaire trying to impress the hotties at the high roller baccarat tables.

Sore? Again, short sighted, and "intuitive" thoughts. Chrysler had $36 BILLION in cash when they "merged" and left only enough to cover legacy costs when they sold to Cerberus. Mercedes have a TON of money, and technology out of the merger. They lost nothing. Locally, we call Diamler "Crimeler" do to their treachery.

Hyundai, BMW, Porsche…Any of these companies could benefit by buying GM, Ford, or even Chrysler.

The Chinese are more likely to make the high offer.

All have experience designing, building, marketing, selling, and servicing in America already, and do so with high profit margins.

Their profit margins come from cheap labor, and raw material prices in sweat shops; not from the domestic sales/ servicing/ manufacturing. These companies are happy to take a loss on the US side with plants; and happy to take our talent in their tech centers. But don't kid yourself; the profits come from obsessively cheap labor with little legacy costs.

No doubt each and any foreign buyer would bust the unions and negotiate dumping retirement benefits on the US government. Then the companies would kill poor performing legacy products, as well as the people who continued to push losing strategies. Good niche brands and solid future technologies would be exploited, while albatrosses like Hummer would likely be closed down or sold to a greater fool.

WTF are you talking about? Much of that would not happen until bankruptcy. Buying a company cannot force the unions down. Diamler couldn't, Cerberus couldn't. China can't, and neither can the Koreans. Only bankruptcy can. Obviously you seem to have missed a lot of the announcements. Amid the current market, GM have announced they are postponing truck based SUV's indefinitely. A self proclaimed analyst who doesn't know freely available information such as this scares me that you have a "voice" on the web as an expert, or that people are

+1

your thoughts truly scare me.

In the end, America would have to let go the concept of the American Big Three. One could get caught up in buzzwords like “failure”, but the goal is to save money and jobs.

I see it the failure of the American government, and education process that allow somebody like you to chop it up to the industry failing. They didn't fail in the 70's, they didn't fail in the 21st century. The government has even more then the unions.

No matter how we look at it, American jobs will be lost. The difference is that if the US Congress pushes the Big Three to sell, more people will actually be able to keep jobs. Granted some will do so at reduced wages and most at decreased long-term benefits. Wouldn’t it be better, however, for these people to work for a competitive company again – one that isn’t in jeopardy of needing to make more layoffs or beg for more government money next year? Congress might still decide to throw good money after bad at GM, Ford and Chrysler, just like the British did for BL, but the best course of action is to allow these dinosaurs implode under their own weight sooner rather than later, and work to convince German, Japanese and Korean automakers to bring them back to life as more efficient, better targeted and longer-reaching versions of their old selves using the American workers and suppliers who are willing to adapt to a new world with a view far beyond the self-interests of Michigan and D.C..

The Germans have no interest in the Big 3, and Ford is in no place to consider selling an option. The only thing that the Asians would do is steal the technology to build better cars, and leave the US "high and dry" forcing the manufacturing industry to be a tiny facsimile of itself.

Editor’s Note: We here at the Four Wheel Drift realize that this whole bailout issue is far more complicated than can be summarized in one article. We expect that if Alan Mulally or Rick Wagoner read the above article, they’d accuse us of missing important details. (We’d expect that Bob Lutz would say we’ve got our heads up our asses if we thought it was that simple.) The fact is that it isn’t simple. It took nearly a century for GM, Ford and Chrysler to create the mess they’re in, and there are no easy answers. We are simply taking a stand that might prove unpopular with car folks, especially those emotionally tied to the long history of American auto producers, and suggesting that the only way to stay competitive is to admit that there is no way to stay competitive by just taking government money and tightening belts.

The cop out statement that says "hey, we aren't the experts!!!" that the little people will overlook. 100 years to get the mess we're in? No, it's taken 100 years for the Government to try to kill it.

I'm not entirely "for" the bailout, but not entirely against it. If they were serious about it, the 2007 CAFE legislation, and DOT crash reg. would be suspended until the industry is ready to meet the next challenge properly.

I hope you take responsibility for your article, and put my challenges to it in your next issue.