Wednesday, December 03, 2008

Auto makers, bailouts and dominos

The latest piece of the economic house of cards to almost buckle is that of the "big-three" (Ford, GM, Chrysler) automakers. On one hand, I can blame their near-demise on the fact that when times were good (the '90s), they failed to look ahead and failed to realize that all good things do eventually come to an end.

Instead of actually capitalizing on the future demands, they instead banked on the falsehood that gas prices would hover around a buck a gallon and continued to roll out SUVs which seem to look very much the same. While General Motors did actually think ahead albeit, briefly, and produce the GM EV-1 electric car, they quickly un-leased these vehicles and promptly crushed them. Little did they know that in 2003 when they crushed just over 1,000 of the 160 mile range electric cars and bank their future on more profitable SUVs that the tide would change in a few short years and they'd be back to square one trying to introduce an electric car all over again.

Even as gas prices rocketed past four bucks per gallon this past summer, GM continued to roll out SUVs such as the Chevy Traverse and the GMC Acadia.

Chrysler, though, is the worst offender. Their lineup consists of a brand (Jeep) whose stable of vehicles was once simple and utilitarian but has now become bloated and all seem similar in nature.

The big problem is that, as a country, we can't let these dinosaurs of manufacturing go by the wayside. Automotive sales amount to 10% of all sales in America and provide literally millions of jobs. The only logical thing to do is to bail out these behemoths with the condition that they pare down their line-ups, reduce duplicity, shed redundant brands (think GMC, Mercury and Saturn) and increase fuel efficiency while shaving down the number of dealers as well as the inventory they carry.

If even one of the big three auto makers fails, it will cause a domino effect. Think of how many automotive advertisements you see, hear and read during the course of just one day. Imagine if that amount (think 10-15% of all advertising) of revenue were to vanish. What would that do to broadcasters and print media which is already in the shitter? Do you really want to think about that sort of domino effect and what sort of unemployment numbers would result from such a scenario?


Balou said...

Was watching an interview yesterday AM with an exec from GMC. The reporter asked the question about redundant models/brand lines. He got all defensive right away and defended the brands minor differences.

There has to be some major changes. Even if they do get the big check, they can't continue operations as they are. Autos will need to be more affordable with the loss of easy credit. I think busting the auto worker unions makes a lot of sense. How can thousands of assembly line workers make $70/hr? And if they get laid off, they earn 95% of their income for up to two years. Sweet contract huh? Think that adds some cost to the auto prices? Such terms are unheard of in any other industry.

I think our culture is changing and we won't be the massive buying machine we were in the past. Businesses will fail and unemployment will get worse. We need to retool our economic system. What it will be replaced with is anybody's guess.

Memarie Lane said...

i agree with balou. if they have to declare bankruptcy they won't go under, but they will be forced to make necessary changes that they won't make if they get a bailout. if they don't make the changes consumers want, consumers will continue not to buy, and the economy will remain in the shitter. time to prune for new growth. and this is coming from someone whose husband was laid off from a GM dealership last month.

Brian in Mpls said...

You knew I would have to weigh in on this one The few things that are not being talked about are what is making a huge difference.

1.) The Government of Japan paid for almost the entire R&D project of Hybrid vehicles neither Toyota or Honda had to carry that burden in the same way that the big three do.

2.) Government Regulation and Car Quotas force the companies to make cars that they have to sell for a loss, the only way to recoup overall cost for GM is then to try to sell as many High-End cars as they can with as big of a mark-up as they can.

3.) Until the union contracts are allowed to be renegotiated the companies will remain unprofitable.

4.) The unavailability of credit at auto dealers and the tighter standards on credit mean that they will not be able to sell cars even though there is more demand there. If you look at the application for car loans decline rate the actual sales volume of cars that is being reported is artificially low since there is still some demand for cars that the consumers are being unsatisfied.

5.) I am also going to have to weigh in quick on the comments about market differentiation. How many brands of detergent are made by P&G? They all sit on the shelf together side by side with slight variations but all the money rolls up to P&G. This is a strategy used by every conglomerate in America. It allows different pricing strategies, diversions into different markets and insurance especially in high margin products where a failure or tarnish of one name brand still allows you to be in that market with another.

6.) Did Citi deserve the bailout? They created this mess with a much greater responsibility quota then and of the big three.

Brian in Mpls said...

lol...ok one more and I am out

Sornie said...

It looks like Brian in Mpls schooled me with some info I had no idea about but stubborn as I am I still think that a "bailout" with a thick book of conditions needs to happen because too many jobs hang in the balance. The pay scale definitely needs to be adjusted because what other manufacturing jobs pay $70+ with killer benefits?

If the Big 3 are going to combine with foreign automakers whose government funds the tech advances such as hybrids, maybe our government needs to take these advances seriously and not just with cars but all forms of alternative energy because it's only a matter of time before Japan, China or a European nation kicks our ass in the tech field yet again.

As for Citi's bailout, they are one of the shadiest banks/mortgage companies/credit card whores in the nation. I loathe them with every fiber of my being but they also hold my home mortgage so I'm gonna shut my trap now!