naked capitalism

mxq says:

Via Detroit Free Press:

“Only in America are automotive companies being subjected to the disdain displayed by Congress and the country in recent weeks. Foreign governments generally provide broad support to their home-based auto companies, which employ thousands. In Europe, Japan and elsewhere, the governments usually provide health care coverage for workers, and in some cases, they even own a stake in their auto companies.

…

“There is no way that France, Italy or Germany would let their auto industries disappear for lack of government help,” said Paris-based veteran automotive journalist William Diem. “European countries are not afraid to invest in the industry.”

eh says:

Considering the time it will take to redesign and retool it is also a safe bet that GM will continue to lose market share, which will further complicate any recovery efforts. Thisis why in terms of bailout money people say all the numbers talked about so far are just the start of what will be needed.

Richard Kline says:

I ‘preciate the back of the envelope summation of a ’survivable’ GM by the commentor hoisted to the post. I lacked the background myself to go brand by brand, but it sounds about right. GM has been for years like a huge tree, most of which is dead wood, which threatens to topple in any modest storm crushing the few swatches remaining with actual growth. Their own overcapacity overshadows what would be better and growing brands on their sheet. This is one of the real problems with being too big.

So take the estimate that three-quarters of GM should be cleaved off of the stump; add two-thirds of Chrysler, and perhaps one-third of Ford to that. What remains is the potentially profitable core of the US auto industry _as presently configured_. Selling overseas plants makes no sense; they aren’t survivable on their own, but are profitable, and hence could provide cashflow to get the re-organizing core corps back on their feet. Forget about dividends, these won’t be paid for years.

The question, then, is what to do with the brands/plants/capacity now salvaged as core? Combining them with other existing automakers is ridiculous: the major problem in the auto industry is oversized behemoths which can’t remake themselves. If the markets don’t limit the size of individual carmakers, than governments certainly should. —But what we need is more diversity of autos. The industry has made infantile, for-visuals-only efforts to bring wholly new designs to markets for decades, with very little actual result. And this is no surprise, since in the over-marketed, market-share-hogged retail environment there is no space for any new brand to sell enough to scale up to the point where they can get costs down into competitive range. Innovation in the auto industry has been _structurally_ impossible in this environment unless a Big Player chose to subsidize a new line. No Big Player has been willing to cannibalize existing lines through such an effort, so they did not, and would NEVER make the effort, much of why they have just about killed themselves.

Sooo, it would be interesting if some of the existing capacity being cleaved off from the present automakers, which for our sake as an industrialized nation we need to preserve (sans their failed equity and management), might be offered on the [real] cheap to speculative _smallish_ investors who wanted or could be induced to try their luck in putting out new designs. The list above means that more than half of existing capacity could be available on a pick-n-choose basis. Tax credits from the US and certain kinds of subsidies for smallish pieces of this might make sense over the near-term. Not all of it, but some of it. If, down the road, these ‘baby autos’ didn’t make it in the market, we would at least not have all of the employment loss and supply chain impact at once while trying to save the core of the existing companies. And if one or two or more of the ‘autolettes’ came up with a popular new design, then the get in the game for potentially far lower costs than starting from scratch. The downside is that existing plants many not be particularly well-tooled and sited for new designs, but there it is. We need to think big here; not Big, but broadly different. Just huddling around our existing core isn’t much of a future. We need more, small producers, and much more innovation, so let’s shape the environment for that. Oh, and I suspect that the unions would _jump_ at such a proposal, since the alternative is walking away from a locked gate with unmarketable skills.

locust says:

The back of envelope calculations don’t seem to take into account fleet and commercial vehicles which at one point accounted for 25% of sales.

fresno dan says:

“A telling issue is that European car manufacturers, who in theory ought to welcome the elimination, partial or complete, of competitors, are instead very worried about the way damage to the Big Three could hurt them.”
Nothing of substnace to add, but being a cynic, could it be that the Europeans want to compete against a “bloated, mis-managed, struggling with debt competitor”?
BTW, being a particulary cynical cynic, I don’t really buy the above characterization (except for the debt part). GM made cars – er, Truacks (SUV’s) that the American people gobbled up. They made generous deals that are in hindsight overly resrictive and generous, but at the time were thought to be progressive.
What the best way to make US automaking sustainable takes someone much smarter than me to figure out.

patrick neid says:

As posted yesterday, I think we can agree that GM, no matter the plan, will be 1/2 its current size at the end–if it exists at all.

If we take that as a given then the discussion simply moves to how to get there. Before starting the journey we can also admit that GM currently loses about $1500 per car produced and has lost that amount for years. Obviously its current business plan is a failure.

Unless you believe that all the disparate parts have now got religion and this one last loan will produce a come to Jesus moment under government tutelage, Chapter 11 is the only current process that guarantees such a result–if a result is even possible. I think it is preposterous to think that a government body led by the “Car Czar” would be capable of such an outcome. Only the draconian aspects of Chapter 11 will bring all the parties to a resolution, admittedly at gunpoint.

Under government supervision what I think you would see are rats abandoning a ship, such that the company would be gutted right before our eyes on the public teat no less.

Stephen says:

mxq,

You are correct that there is a disdainful view of the car companies. Some of it is because the car companies ceased being about engineering and design. Their brands are associated with value, comfort and indulgence.

The workers are seen as spoiled, rightfully or wrongfully. History of strikes, high wages, outspokeness (especially in Canada)fuelled by a perception of priveledge.

Dealer experiences suck in NA. And finally, the problems have been known for a long long time. I have heard about global overcapacity for about 20 years. But every time it comes up the union and car companies lock arms and run to the government, and fundamental change doesnt take place. The union and management are locked in a co-dependent relationship.

So from a Canadian perspective it is hard to say that there hasnt been significant “investment in the industry”. To some degree we have been successful, producing 14% of the cars in NA based on 10% or less of the sales.

The question is, with a blank sheet of paper would you build GM to look anything like what it looks like today, and the answer is a clear no. Would you have the labur contracts you have today, no. WOuld you have the capital structure you have today, no. There are lots of assets but they are completely buried.

I think building auto’s well is an important function, the strategic elements to society are the toll and die and supply chain capacities. Once again, dealers are a dime a dozen and not to be cold but who cares, there is no speaialty other than access to capital there.

The transplants show that a good wage is paid but less than a union wage….and the effective wage, which is based on production without the work rules and big bennies is lower. There needs to be an adjustment.

Another back of the envelope. Even if Labour is only 7% of the cost, at an avergae cost per vehicle of 25000 to dealer then then labour reps about $1,750 per vehicle. Assuming a 20% cut in effective wage and at a low sales volume of 12,000,0000 cars (they normally sell 17,000,000) then the car industry saves 4 billion a year! at normal sales thats almost 6 billion a year.

So in 5 years the car companies save between 20 and 30 billion, which is about what they are asking for now. Labour MUST participate. The bondholders can easily take a haircut…they are the ones who SHOULD take a loss for making a bad investment, suffer the consequences of this. Maybe capital suppliers will learn to restrain themselves and management better and earlier. Finally the health and benefits and other mgt overhead, land, mkting, lawyers yada yada. There are cuts there.

It is all doable, the money is there….but oxes need to be gored.

If there are loans or money it should be to pay the parts suppliers, the real industry.

If this is SUCH a crisis and will cause SO much pain then the government can move with its power. The two large targets are Labour contracts and Bondholders. Government should gore both and remove recourse.

If that is too draconian then maybe the crisis isnt as big as being indicated. If you are going to do it, do it right (clearing out structural problems), do it fast (buy the companies for $1, then refloat immeadiately relived of all responsibility…i.e. new legal entity).

If this doesnt warrant that action then let the process of CH 11 take its course. The players have put themselves in positions they cannot abandon, a stable worst case equillibrium.

tompain says:

This idea that there is no going back after Ch 11 is simply not true. All options that the government has to support the companies are still available to the government after Ch. 11. If it looks like Ch. 11 is somehow “morphing” into Ch. 7 (no way, in my view), then the government can inject whatever it is now planning to inject and the only difference will be that bond holders and equity holders will have picked up some of the tab. The essential component of Ch. 11 is not to screw the unions. It is to wipe out equity and hand ownership over to the bondholders. Breaking the dealers would be pretty helpful as well. THere’s actually not that much that can be saved on labor – it’s the legacy costs that need to be fixed, not the wages. The wages are only a little higher than in the south. Over time if you want to try to force parity you can but there is no reason to assume that wages everywhere in the country will be the same, since the cost of living differs and the supply/demand balance of labor differs. Allowing the Senate compromise to fail over the wage issue was stupid.

Stephen says:

Fundamental problem with government support is there is NO COST.

Capital suppliers must learn that a government bailout means they get SCREWED big time…All capital suppliers. Once this lesson is learned then maybe they will starte exercising more discretion over who they give money to.

The fact that GM was able to stumble around for 20 years destroying capital is reason enough to teach them a lesson.

We are at this point BECAUSE the market was coddled for the last couple of decades. The only creditors who deserve anything are the parts suppliers. Everyone else deserves to the loss, and unless the union can justify the reason its workers deserve the pemium (productivity, quality) then the union should be de certified as well and the workers can make the transplants wage….beats no wage at all.

mxq says:

Stephen…I don’t disagree with your points.

I think that “the car companies ceased being about engineering and design [and] their brands are associated with value, comfort and indulgence” is a symptom of a fundamental disadvantage the Big 3 operate from.

The cost structure that haunts the big 3 is and has been jointly borne by foreign gov’ts and private enterprises since inception(not unlike FRE and FNMs in the US?!).

Big 3 can’t take care of their brands b/c they’re busy taking care of their workers…in EU, Japan, etc. that’s not even an issue b/c the gov’t has been JV’ing for years.

Now, i’m sure the US gov’t has helped Big3 out quite a bit across the decades, but not in the same capacity or with the same consistency with which other countries’ gov’ts appear to do.

Non-US auto makers can feel passionate and prideful b/c they don’t have to worry about the same things that US companies do…they have the explicit guarantee of their gov’t.

mxq says:

sorry…just to add…i’m not implying that the US needs to bail out the auto makers.

what i am saying is, after this all gets sorted out (if it ever does), the US gov’t needs to set aside laissez faire and enter into a long-term partnership w/ auto makers. that is not to say they are another FRE/FNM. I think the risk expectations are a little more realistic w/ cars vs. homes(everyone knows that 99% of cars depreciate from day 1). Plus the US has case study upon case study of how Germany, Japan, etc. have managed to pull it off.

Stephen says:

mxq,

the biggest JV that happens in Germany and Japan is healthcare and pensions. When companies are relieved of that task, probably a task best left to governments anyway, then they are freed up to focus.

GM defintiely has too much mgt overhead as well, per someone elses point.

My point ultimately is, if this is the serious situation that means that CH 11 is unacceptable, because of time uncertainty, then it means a radical solution driven by the sovereign power is required. If that is deemed unacceptable, then maybe Ch11 is such a bad idea.

Governments are the most powerful actors when they are focussed and unleashed. But they require a reason to generate the legitimacy of action. Waving a legal wand for a specific solution is well within the power of the US government, shortening time etc, the question is does the situation demand it. To me, if you dont allow Ch 11 then you are advcating a government dictated solution, and if so, then lets do it quickly and deal with the consequences later. If not let the companies follow their course to Ch 11 or otherwise.

K T Cat says:

After thinking about it for a bit, I’ve decided that I’m not terribly interested in taking advice about car manufacturing from a country that produced the Renault.

mxq says:

“if you dont allow Ch 11 then you are advcating a government dictated solution, and if so, then lets do it quickly and deal with the consequences later. If not let the companies follow their course to Ch 11 or otherwise.”

I agree…this sort of ambiguous signaling (no pun) by congress and the executive branch is doing more harm than either solution offers. uncertainty is about the worst thing in this environment.

ps says:

What never shows up in these discussions of GM bankruptcy vs. bailout is the balance sheet. At 9/30/08 GM had
$110 B of assets, $170B of liabilities leaving a shareholders’ deficit of $60B. They need at least $60B of equity (not debt) to be bailed out. We need to just let this puppy die by taking into bankruptcy, selling off plants and product lines. Parts suppliers may need to go through bankruptcy too if their GM A/R are heavy enough but if they can operate profitably at market volumes they can survive.

Anonymous says:

I didn’t include SUVs because their sales have cratered so much. Will their sales pick up now that gas in cheap? My guess is probably not. They are expensive, people won’t get loans for them, and they have moved out of fashion.

Well the marketing people call them something else but have you actually seen an Enclave/Arcadia (same vehicle, BTW)? Not on a truck frame but they encapsulate everything that people claim they buy SUV’s for – they are simply monstrosities designed soley to impress the neighbors as far as I can tell.

This is not to pick on you at all, just the opposite – it illustrates how hard it is to figure out what people actually want in the automobile market.

– a different chris

Juan says:

plschwartz,

think i’d use the term class rather than culture, though decades of ‘market knows best’ neoliberalism has certainly infected culture and beliefs.