Supplier Shock: Explained in Simple Terms for Matt Yglesias
Big Media Matt has apparently no more hung out around the auto industry than he has tasted a quality turkey. He’s struggling to understand why Ford would lobby Congress to help its competitor GM stay in business.
The key–as we’ve discussed here–is that if GM went under, it would bankrupt some suppliers. And the supply chain for automobile manufacturing in the US is so intertwined, this would create supply problems for the other manufacturers–not just Ford, but also the international manufacturers.
Here’s how the Center for Automotive Research (a wonky organization of the sort Matt likes that is cited in just about every article on the crisis) describes what would happen if all three manufacturers had a major contraction.
We assume that domestic production by international automakers in the United States would be seriously affected by a major contraction of the Detroit Three automakers for at least a period of one year due to the high likelihood of many U.S. supplier company insolvencies. In fact, we assume in our 100 percent contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the U.S.) by the international producers also falls to zero. That is because we expect a major wave in supplier bankruptcies or a "supplier shock." The collapse of a domestic market for suppliers coupled with the reality that few auto suppliers serve export markets would result in manufacturing utilization rates below 50 percent, forcing suppliers to restructure or liquidate. The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. U.S. consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. [my emphasis]
In other words, Big Two and a Half bankruptcies would also bankrupt suppliers that got roughly 50% of their business from the Big Two and a Half. And if the foreign manufacturers relied on any one of those suppliers, they would start running out of parts and have to idle their assembly plants.
Now, that’s the most extreme scenario, in which Ford goes under with GM and Chrysler. But as CAR points out, something similar would happen if just two of the domestic automakers had a serious contraction–precisely the scenario we’re talking about here.
We assume essentially the same first year supplier crisis for all automakers in the United States. Production would fall about 50 percent in the first and second years for the international producers.
[snip]
In all contraction scenarios, imported automotive supplies and parts prices are increased by 15 percent because of the probable disruption in the domestic supplier sector.
That is, even with just GM and Chrysler going into bankruptcy or otherwise cutting their production, you’d still have the cascade effect in which suppliers would go under, making them unable to meet commitments to Ford and the foreign manufacturers either.
To get an idea of what this looks like, consider what happened to GM earlier this year when American Axle went on strike. GM had some time to prepare, and so had several months’ stock of the affected vehicles on hand, something which would be true of some, but not all, of the Ford, Toyota, and Honda vehicle lines in question. Yet, as the strike wore on, GM had to idle a number of plants (and sales for those vehicle lines began to fall, though that didn’t affect the supply chain). That, in turn, hurt suppliers that are heavily reliant on GM, as GM’s orders for their parts declined. So one supplier cuts GM’s production, which in turn cuts other suppliers’ production. This was a supply disruption caused by one supplier, doing 80% of its work for GM, supplying a relatively simple product, cutting production for just two months, yet it still set off a cascade in GM and GM’s key suppliers.
Now multiply that by fifty.
If Chrysler or (especially) GM went under, it would just take a few key suppliers to disrupt the supply chains for the other manufacturers.
And understand, we’re not talking just tires and axles and other mechanical items. Some of the parts are highly tailored, involving a year or more of development time, so it’s not as if Ford or Toyota can just go to the nearest hardware store and replace one widget with a similar one.
And, of course, it sort of goes without saying, all those suppliers employ a lot of people who would be laid off in such a circumstance. The cascade hits not just auto manufacture, but real people’s lives all over the country.
This is getting exhausting to keep on explain the balance in the supply chain. How people cannot understand it is beyond me. The cascade goes beyond parts suppliers. It will cascade to large parts of the chemical, raw material and high performance materials industry …and on and on. It is, as I wrote in my Oxdowns, economic disaster dominoes. As Krugman states, no bridge loan, no bailout is a “reverse economic stimulus”.
Matt IS lacking wisdom, common sense, decent research and knowledge.
On this issue, certainly. His commenters thumped him, twice, pretty hard about his seemingly willful ignorance on this.
Incidentally, I see that the President of Johnson Controls is testifying along with the 2.5 today. Hopefully, that’ll help the Senators not be such idiots on this issue. Johnson Controls is precisely the kind of supplier that would be the one that pulled down Ford and Toyota if GM went under, I’m guessing.
Willful ignorance? The guy wasn’t sure of something and said so out loud. The tone here is uncalled for.
I’m not talking (just) about Yglesias. But this is an example where there is an abundance of readily available wonkish information–like CAR, whose reports are all available for free and (as I pointed out) are cited in most articles talking about this.
So why–from many many people writing about this–the insistence on ignoring the available materials and ignoring people who actually have some expertise on this?
It would not be acceptable on any other subject, so I’m absolutely mystified why it’s acceptable here.
The left has correctly noted the myth of the $73/hour wage. But many of those same people are happy to spread other myths, easily accessible facts notwithstanding.
Oh, please.
Matt’s been posting ignorant nonsense about the auto industry for weeks now, without seeming to make any effort to actually find out any actual information.
Then he writes a ridiculously ignorant post, citing Econ 101 truisms to suggest that Ford would obviously benefit from GM and Chrysler going under, and that when they suggest otherwise, they are either dishonest or mistaken.
Then his commenters tell him that he’s wrong, and patiently explain why.
Then he posts another post saying basically the same thing. His commenters again (somewhat less patiently) explain why he’s wrong.
In the first place, why make blegs on a blog with comments if you’re not even going to read the comments? In the second place, I don’t see how this can be described as anything but willful ignorance – I’m no expert on the auto industry, nor have I made any particularly extensive effort to educate myself about it, but I’ve had a basic sense of the issue of suppliers going out of business and so forth for weeks now. Matt, on the other hand, has been bloviating about “zombie industries” and how it would be better to just let the Big 3 fail for weeks now, without understanding any of the basics of the situation. It’s tedious, and it seems to me that it’s virtually the definition of “willful ignorance.”
The auto industry is going to be a zombie industry. I still think the loans make sense, but the overcapacity in the system is going to lead to a zombie industry for a while. 30% drop isn’t all finance related, Chrysler was still able to finance a lot of its customers and its sales fell by 47%. The industry is broken, not the 2.5, the entire industry. It’s also not alone, we’ve had growth fueled by credit expansion for decades.
Citizen Specer Ackerman:
I agree with you, there has been a lotta heavy handed or,rather, heavy worded snark and inside baseball smack goin’ down in the left bogoshpere since early in the primary season and especially since the election. It seems that many of the Clintonista foot soldiers have taken lots a shots at folks with whom they’ve had ongoin’ battles and many of those folks are beatin’ Obama up pretty hard about not bein’”progressive” enough. But I’m with you, the left bloggosphere’s most important function is to initiate and cultivate duscussion of majors issues of political economy to allow public education from the mass of people. I have been disappointed in Marcy’s knuckle-draggin’ grudge holding behavior for a long time…and in the case of discussions of topics like the auto industry economy it is important that the folks with the microphones get the hell outta the way of honest discussion of the issues.
Need coffee…
should be:
to keep explaining the balance…
As goes GM, so goes America. It once was a slogan, now it is the brutal truth.
Darn, I cannot get the live C-SPANcast to play…
It was VERY smart to bring on Keith Wandell. Johnson Controls is the largest supplier of hybrid car batteries…as well as high performance recycled materials for car interiors…
That is a nice “you’ll be shooting yourself in the foot without a bridge loan,” in term of further greening the automotive technology.
Try this one.
I started a live thread.
EW – What you’re describing is like a Train Wreck Model, where one of the heaviest cars – the GM Car – suddenly has its Freight (the Corporation and its Eco-System) spilling-off into dissolution – causing its wheels to lighten and start clattering on the tracks…
…all the other Freight Cars *should be nervous* about the twists and turns ahead for this Economy.
Especially with Casey Jones Bush still driving the Train…he’s not lookin’ back.
But EW, if the industry wide sales are down >30% won’t this end up killing off some of the suppliers? Will they need loans?
I’m pro-loan, but I just don’t see the endgame right now looking good for anyone in the auto industry.
Trust me, the suppliers have been cutting back as much or more than the manufacturers. Though to be honest, it’s a little easy for them to move production offshore, so there’s been a lot of that.
And a lot of it depends on whether a supplier works with everyone–and in multiple countries–or just one of the manufacturers.
and, of course, this flows down to all the little fish…the machine shops, the people who supply the machine shops, the uniform guys, the other people. Complete and utter constipation of the system.
Congress must have their heads in the sand if they think the country can survive this kind of economic impact. Depression here we come. There are too many factors that are already severely depressed. I was personally against the TARP bailout because it had no evidence that it would do anything to spur lending…well we know how that ended up. This proposed bailout at least has credible evidence that it will have a huge affect on the real economy. This will affect the people that buy the everyday stuff that makes our economy go round.
OT but I just saw for the first time an ad for Plan B over the counter. I must say that really gives me hope.
If there were literally no new vehicles imported into the United States for two years, and none manufactured during that same time frame, only then would used car pricing rise to a level to justify the cost of a new vehicle relative to a slightly used one.
If there were literally no new homes built in the United States for two years, only then would the used home price stabalize.
We are an overconsumed, overcarred and overhoused country, and no amount of spending will change that.
Another option is to burn the empty houses and crush all the new and used cars for sale.
It’s very basic supply and demand, and the imbalances have never been greater. No amount of “spending” can remedy overspending.
Again my two cents…Obama needs an economic plan, about 8 to 10 trillion American over 10 years. We need to recall bank monies and start over. Imprisoning the ‘tricky dick’ economists and enabling thieves would restore confidence to American people and real-time economy.
Seems to me that the manufacturers in Alabama would suddenly lose a large part of their competitive advantage if they were having to import parts from Europe or Asia because they couldn’t get parts made in the US.
Well, and AL would lose out even more if Dongfeng bought Chrysler, since they’d be facing legitimate Chinese competition.
But that may happen anyway.
I’m, a recently retired 54 year old 34 year veteran of the auto industry. Long story short, just prior to my retirement I was laid off and subsequently eligible for Trade Act Assistance (TAA). This provides federal benefits for re-education. During my monthly (Tuesday) visit to the MO State career center where this is administered, I asked my “counselor” what he was seeing as the ripple effect of the local closing of my plant (Chrysler Fenton mini-van plant, closed 10-31). He said for every autoworker, 6 to 7 support employees were laid off. He added that his did NOT count employment such as waiting tables, local store clerks, etc. He said they are currently swamped and many laid off folks are experiencing delays in getting processed. We’re just seeing the tip of the iceberg here folks…
I feel your pain (worked in the auto parts sector in GR growing up), and yes, the knock-on affect is tragic, spreading to every person in every town in Michigan, Ohio, Illinois and beyond.
The crash has already occurred. The Greatest Depression has already started. Don’t wait for the media or the government to tell you. They waited a full year to admit the Recession.
The entire sector was unsustainable, and the approaches taken by labor and management over the decades were simply tied to an unsustainable inflationary fiat system that can only grow to its maximum potential, and then, no matter how much money you cram down the system, it simply must deflate.
I have family and friends who whose world will be rocked by the failures of this industry, but pretending that we have any control over “fixing it,” will not make it so.
It’s broken.
Then ALL of industry is broken! Not just the auto industry. What you say about “inflationary fiat system” represents the model for our supposed free market system. I agree that it is a fallacy, but you can’t blame that on the management and union. They played by the rules and now the rules have been changed. No excuse to ruin people’s lives after playing by those rules for 30 plus years. Funny, but Wall Street is even MORE broken, yet we sent $700 billion their way. Why can’t we afford to send way less to a more important sector?
Precisely. ALL of industry, and the economy is broken. All fiat-backed systems are specifically designed to inflate, then fail. It’s what they do.
I don’t single out the auto industry as the culprits, I single out the Federal Reserve, a private criminal enterprise.
I was not in favor of sending any taxpayer money to any banksters for any reason. The system has already crashed. All of this distribution of “money,” which is actually nothing more than debt, is an exercise in futility, designed purposefully to let the pigs get their hands on the final tranche before they shut this sucker down.
Afraid I share your sense of doom there. I guess I’m trying to limit the damage for those of us who can least afford it. For 34 years I worked faithfully for my employer, supported my union and my country. We were told by previous generations that if we worked hard and saved our money, we could someday reap the rewards of a decent retirement. Now, the rules have changed. The top 1% of this country have tripled their incomes over the last 8 years and we lose our pension benefits. If the USA has the money to bailout Wall Street, it had damn better bailout Main Street! Whether it is a failed economic model or not!
What you refer to as “doom,” I call “discernible reality.”
Karl Rove told me to keep and eye on that particular prize.
I’m also keeping a close eye on those who have planned our demise, their means and methods, and where they are funneling our money.
“Wishful thinking” has left the building.
It’s time to discern reality with brand new eyes.
Assume the worst of “them.”
I’ve been seeing this reality just fine with my old eyes – unfortunately, seeing is not believing. I’m going to fight till the end though – if it takes a revolution, then so be it. I’d much rather speak truth to those in power and hope that an Obama presidency will pull us back from the brink. Maybe “wishful thinking”…
Jeebus, that’s scary.
If we tax payers are being asked to serve as venture capitalists, and we were truly thinking like investors trying to maximize our return on investment, it seems to me like the suppliers presently have a gun at their heads, and we hold the trigger. Would now be an excellent time to swoop in an acquire the supply chain for pennies on the dollar, and in so doing, assure that the industry remains functional no matter what secondary steps are taken?
Personally, I’m not in favor of throwing good money after bad in any portion of the auto sector, but if the supply chain is fully integrated throughout the manufacturers, it sure doesn’t make any sense to view “investing” in the manufacturers without also ensuring that this apparently fragile just-in-time system of parts delivery is accounted for.
If we don’t account for the suppliers on the front end, after telling them that they are absolutely critical to the survival of the US Economy – and then we bailout the Big Three, how long do you think it will take before the suppliers hold a gun to our collective heads to get their own bailouts?
Presently, ALL the leverage is in the hands of the taxpayer to get the best possible terms from both the manufacturers and the suppliers. Bailout the automakers, and you’ve just handed the suppliers a hammer with which to smash you.
Is ANYONE viewing this like a damn investor?
Follow the money. If we bail the auto companies, they keep the suppliers alive.
You’re so fucking snotty, Marcy. Matt asked a perfectly reasonable question — one that I certainly asked myself — and in the process engendered a discussion of the issues. Guess no one should ever ask a question that the great Marcy Wheeler already knows the answer to, or you’re just a “willfully ignorant” fool.
No need to be disrespectful here. Why don’t you write a diary instead of carping?
Glenn
Yglesias asked a question (and did no research). And his commenters answered that question. Within the first 10 comments, he had his answer.
Then, apparently ignoring his commenters, he asked the question again.
If I ignored my commenters after asking them a question, then asked again (and still refused to do basic research), then I’d be due for a slap in the face, too.
Sounds like an agenda – hidden or not – to me. Disingenuousness, besides being its own karmic reward, deserves no slack being cut.
Try not to be an asshole when you’re chewing someone else out for being ’snotty’, OK? She’s giving Matt credit for thinking (and possibly researching) before he posts. Then she’s given him a hard time about it. Perhaps she’s given him more credit than he deserves. I do have to say, if I were spending the effort to post a blog (and wanted to keep my reputation intact) I would research first, and post second.
People are not buying much of anything right now – so who is going to buy the cars which are already on the lots? Will the auto companies take the money (if they can get it) and continue to build cars that nobody can buy? No snark – serious questions.
Production would be slowed and stopped until the economy recovers. The bailout is to buy time for that. No bailout means millions of people out of work with NO benefits insuring a much delayed recovery (if ever!). Folks, this is a no-brainer once you get past the rampant misinformation being spewed by “anti-organized labor” folks. That’s what this article is about, trying to expose the misinfo.
Didn’t mean I was not for the bailout – I definitely am for it. Just wondered how they were ever going to catch up. There are so many cars going unsold and still coming off the production line.
They’re not now coming off the production line–the car manufacturers caught up to their diminished demand pretty quickly. The problem right now is that they’re paying for stuff they bought for cars made in August and only now have to pay suppliers for.
LOL Thanks, Marcy. I got the whole thing wrong. That’s why you write and I don’t. That made me laugh.
I really appreciate your knowledge and all the research you do.
Your question answers itself. Nobody needs a new car. Nobody.
With new car pricing so depressed, and with so many incentives in place, used 2008 vehicles with just 5,000 miles on them can be had for half price.
Total imbalance in the system.
Two things.
First, they premised their proposals on the CURRENT market, and included a scenario on what happens if the market gets worse. So while you’re right that no one is buying anything right now, they’re working with that assumption.
And in fact, people ARE buying their cars. The Chevy Malibu was the most improved car, year on year, last month–even while no one wanted to buy from GM because of worries about bankruptcy. That’s a good car that appears to be eating into Accord’s market (which lost market share last month). And that’s on top of people buying the same old GM cars they were buying. As GM pointed out, they’re still selling 1/5 of the cars in this country, more than Honda is selling.
The big question, though, is what happens if there’s another shock on the industry, which is really possible.
“The auto industry spent nearly $50 million lobbying Congress in the first nine months of this year.
And people tied to the auto industry gave another $15 million in campaign contributions…
Dingell’s current financial disclosure filed in May lists GM stock worth up to $350,000, options worth up to $1 million more, and a GM pension fund. In 2000, among the Dingells’ GM assets were stock options worth up to $5 million.”
http://www.cbsnews.com/stories…..tpop_story
Let’s not have any illusions about why the car makers will get the money.
When people work, they will buy cars, simple as that. No work, no market. Seems to me that the simplest way is to put people to work to create demand. The bailout buys time to give the Obama administration a chance to put money into the economy, Republicans are all against that.
An industry in balance advertises the benefits of “investing” in a new vehicle for among other reasons, a given nameplate’s ability to retain its value in the resale market over the coming years.
Remember those ads ten years ago, bragging about resale value?
Remember when Lexus and others touted their “pre-owned” line of products with the high budget cache of their new car line? They did it to ensure that their pricing power for new products remained intact – understanding that consumers view new vehicle purchases as the second largest “investment” they ever make.
That entire concept is toast.
The dumbest “investment” you can make today, sure to result in the fastest rate of depreciation and greatest loss at resale – is to purchase a new car.
You can’t legislate that.
The auto industry is very complex and not very well understood by laymen (as evidenced here and elsewhere). If not for the credit crunch caused by a MASSIVE failure of the financial sector, we wouldn’t be having this conversation. The auto industry is no more broken than any other industry in our supposedly free market. Even the foreign car companies are asking for help. But, bottom line, when large amounts of money are concentrated in the hands of fewer folks, (the redistribution that has occurred the last 8 years), a shrinking economy will ensue. How is that the manufactuting sector’s doing?
Except for the fiat money rant I agree with plunger. All of the economy is broken. It’s been based on leveraged expansion of earnings for a long time. I really don’t think it is the 2.5s ‘fault’, but the credit induced market distortions are far ranging. Heck the US has had a negative savings rate, people have nothing to fall back on. There houses have no equity left, if there was ever any in them. How long before 401ks become accessible without penalty? 25 bill for the 2.5 still makes at least as much sense as TARP.
If I remember right, we patriotic Americans responded to our leader’s request to go out and shop. Interest rates were dropped and home refinance was encouraged. This propped up our economy enough that the MSM would never pay attention enough to warn us of the dangers until it was too late (now). Property values inflated, and now deflated, wealth has vanished from our grasp right before our eyes. Was it planned or just mismanaged or a combination? What do we do about it?
Follow the money. Get indictments. Read their e-mails. Expose their collusion. Take the money back. Imprison them using RICO.
a relative who was a corporate accountant who did forecasting and budgeting-and did the books when they bought another company, etc. stuff like that, said that they don’t need a bailout, that a pre-bancruptcy structure would do what they need. that a bailout isn’t going to do what they need and will cost more for both the companies and the government. and because of this and other reasons it will cost more for both and that it won’t work. then shook his head.
he is an fdr dem and pro-union.
Has he looked at the exit polling from people who considered buying a GM last month, but didn’t? 30% said they didn’t bc they didn’t want to buy from a company that MIGHT go into bankruptcy.
So if he wants to make that argument, he needs to explain why it’s better to restructure with 1/3 to 1/2 the sales than do it with 80% of the sales.
Thanks for that tidbit … I saw the sales figures across the board (Toyota was down 30%) and thought the reason was same for all companies … lack of available credit.
GM was down over 40%, Chrysler was at 47%. And Ford was down 33%, below the average AND below Honda. VW and BMW were the only manufacturers below Ford.
So that says that Ford is doing relatively better and GM and Chrysler relatively worse. The big difference there–in addition to customer finance–is that no one is saying that Ford will go out of business.
On that polling:
What is ultimately responsible is the lack of coherent economic policy for the last 8 years. The financial market misdeeds has lead to the credit crunch which is going to lead to lots of problems throughout our economy. It’s a snowball effect but you should know that. No easy answers here until you admit the truth that we’ve been screwed by the republicans.
The credit crunch would have occurred at sometime, what the last 8 years did was let the bubble get much bigger. Allowing 60x leverage at the Ibanks was needed to keep the bubble growing. When housing stocks finally outpaced speculators and actual homeowner demand it fell apart. But the credit bubble was around well before that, and we’ll be feeling it’s affects for a while.
it had to do with solvency. i’m sure he’s thorough.
i only brought up what he said because he’s a smart man and knows what he’s talking about. and he’s honest.
I trust he knows what he’s talking about. In numbers generally. And in his own industry, definitely.
My question is, has he looked at the actual data that says–irrespective of the financial spreadsheets–that a bankruptcy wouldn’t work because it would basically end their viability among consumers?
yes.
i also have thought about all of the aspects i can consider or think of, and he has delved into it way more than i can.
that’s why i asked him about it, though i didn’t know if i would like what i heard.
when you do what he did at his level, it’s not just numbers; it’s jobs, it’s retirees, it’s infrastructure, it’s communities, it’s everything. it’s why he has ulcers. if he didn’t consider the people his job would have been a breeze.
he said the bailout will hurt the situation, not help it, that a pre-bancruptcy structure is the way to go in the short and the long run.
i asked him if it was also to finish off unions, he said no, that they had bigger concerns than the unions right now.
and it’s my dad. that’s why the idiot comment from lefty peeved me off.
just thought what he said should be on the table. like i said, he’s a smart man. he saved thousands of jobs while he was there. he’s a good man.the real kind.
Thanks dmac–and sorry things got short.
It’s one perspective. Don’t know if you’re watching the hearing–but the Moody’s guy is really impressive. He’s hammering the Big 2.5’s perspective, but he thinks bankruptcy is not feasible. ANd points out that the govt is on the hook in any case, since there’s no funding.
wish i could say why he knows what he knows, but i can’t. i shouldn’t have brought it up, but thought it was important to do so. there’s a lot of things that can be done under the structure he’s talking about. but the companies would lose certain things/big if they do, which is why they don’t want to do it. look into it, you’ll see what i’m saying.
yes, i’m watching it. i like stuff firsthand, but i always keep in mind that hearings are also ways to lay in the bricks in place toward what they wnated to do in the first place, but couldn’t have gotten away with without the hearing.
Sorry, I didn’t mean to diss your father, but I still will disagree with his “asssumptions”. Just because he says “that they had bigger concerns than the unions right now” doesn’t make it so. The political world of the UAW/Auto Companies is a very complicated beast – there is no reason to expect that your father has any real insight to that. I have been in the industry for 34 years on both sides of the aisle. I can tell you for a fact that the majority of information coming forth concerning the state of the Auto Industry is total BS. We have a severely shrinking economy that is guaranteed to cause a depression. The Auto Industry is NOT responsible and a bankruptcy is not necessary. That’s my somewhat educated and much experienced opinion for what it’s worth.
i didn’t say file bankruptcy. there are things you can do under a restructuring mode that you cannot do under a bailout. that’s what he did for a living, this exact, exact thing.
see ya.
My apologies again. I assumed your statement “a pre-bancruptcy structure would do what they need” indicated that a bankruptcy was to follow.
Bankruptcy, though, is the default option for a government that traditionally abhors “getting in the way” of private businesses and their free-handed lobbyists. It has standing institutions, rules and practitioners, who would be ready, willing and able to vivisect any company that comes along.
Allowing essentially an entire industry to go bankrupt is politically easy, too, in that it caters to the propaganda that the system, capitalism, or the way of the world is taking its “natural course”. Hogwash, because companies go to enormous lengths to game that system and lobbyists exist because of it. They spend hundreds of millions annually only because they reap billions for their clients in return. Letting “nature take its course” would be taking a position, one with fuller political fig leaves nearby.
I agree that a negotiated solution outside of bankruptcy is preferable. The US government would be the lender of last resort because no bank, brokerage, pension fund or billionaire would be foolish enough to lend without systemic changes, many of which are normally available only in bankruptcy. The government has unique powers and can implement needed changes outside of the rigid frame of bankruptcy.
As lender of last resort, the US government would be taking an equity risk. It should negotiate an equity stake in exchange. It should demand change, monitor how our money is spent, and be free to sell its interest.
The latter is a practical option only when plans succeed. If they don’t, the government-as-lender won’t be repaid any way, and the government and all of us remain stuck with the social, financial and political tab. If left to the Hank Paulsons of the world, though, the government would have no upside, only the down, and Hank and his friends walk away with billions.
Well said.
Given the pathetic current market cap (especially GM), maybe the preferable government equity position is in fact a public buy-out. (’Nationalization’ – a very scary word for most americans!).
At least then, the enormous accepted risk of a bailout would also include a significant upside for the public — and not just the down. Plus the pressure for transparency of decision-making and financial reporting would reduce the risk of someone (said Paulson friends) absconding with the bailout money and nary a trace…
We don’t need full nationalization. We want managers and financial markets — not just the secretive Cerberus (famously, the dog that guards the gates to [financial] hell) and its pack members — to share the cost and risk. We do need a stake commensurate with the amount of money, tax rebates, subsidies, legal immunities, etc., that the taxpayers fund. Along with that should come decision making authority, including seats on the board, and more disclosure of financial and operating issues than the SEC normally requires.
To ask that of many in Congress is asking the pope to advocate for birth-control and married priests. But if only the government (that means our) money is available, if allowing priests to marry is the only way to revive a moribund church, you use the options available rather than let things you hold dearer sink into the pit.
good.
was out of town for a while and now browser not cooperating on fdl sites.
still catching up on posts.
i miss the calendar, made it easier to do that. oh well.
You’re probably right, but if the cost of full ownership is at least an order of magnitude less than the total public money at risk, why not nationalize? In other words, if the government is guaranteeing private investments, (on top of making their own, as with Citi), what additional risks are they really taking in full ownership… other than political/ideological ones?
But I agree that even the partial public ownership you propose is a hell of a political challenge. And too funny the way you describe that challenge! If only the stakes weren’t so serious, the unwillingness to allow priests to marry would simply be a funny and irrelevant form of cluelessness on behalf of the authorities in power. But when it threatens to bring down the whole thing, then it’s not so funny or irrelevant.
when he said that comment about the unions, my heart fell, that MEANS that it is far more serious than anyone realizes, and that the way they are attempting to fix it, WONT. yes, more serious than what will happen with the unions. international, and permanent. i think when you all were reading my comments that you tainted them with a ‘bankrupcy’ fear, and that is not what i was saying at all.
and one last swipe of my sword–yes, he sees the affects, the domino affect. can’t get into why completely. his hobby is knowing who makes what and who owns the company…..really. can take about any product you can buy and he can tell you who owns it, where it’s made and whether he owns stock in it. i do that all of the time with him. like i said, it’s a hobby. did you know aldi owns trader joes? yep. so, go to aldi and buy german rye bread for 2 bucks. he does. did you know one of the only american made casket companies is in indiana? yep.
i’ll stop now, i’m getting ridiculous, listen or not, your perogative.
people for years have made excuses about why they don’t buy american, it’s just one more. it was being unpatriotic, now, it’s ok to bail and not buy one.
and how many of those people polled are actually buying a car that actually would have purchased one from them? and sales are going down because fewer and fewer people are able to purchase a new car or are putting it off because of worries about their own solvency. and those numbers are going up. exponentially.
yes, that was discussed.
he knows what he’s talking about. or i wouldn’t have offered it up for consideration. he was in charge of his division for a large corporation, he also said the entire upper level of executives should be fired. he doesn’t offer an opinion without thinking first. and i offered it because i thought you all actually wanted to examine the problem.
I don’t want to step on your admiration of your friend, but how would firing all the upper level of executives be an answer? Sorry, but we DO want to examine the problem, but to take your friend’s advice at face value is a bit much to expect. Everyone’s entitled to their opinion but don’t assume that your friend here has all the answers. As anyone knows, the most impossible thing to accomplish is to get a roomful of economists to agree on anything.
Um, then how do you explain that Chevy Malibu was the best improved sales (year on year) last month? And Silverado the second-best selling car in the US?
And he does know that Mulally is the guy who got brought in to replace the guy who got fired, and has made all the changes anyone smart thinks he should have made (and Nardelli to some degree)? In other words, that already happened–he knows that, right?
I hear what you’re saying–from a finance perspective, bankruptcy might work. But your statements suggest that he is not accounting for some of the actual facts on the ground.
And all those changes are well underway at GM too, and all that will be lost if they are trashed now. The Malibu is not exactly Pininfarina beautiful, but it is a very good car for its segment, arguably better than the foreigners, certainly on a par. The Cruze looks to be superb. The Volt is literally an industry game changer from all appearances. There are actually many things positive, and many more on the way.
Then he’s an idiot.
no, he’s quite the opposite, which is why i wondered about it and why i posted it…
Even though I’m a lowly “autoworker”, I have a strong economic background and have regular “chats” with several college instructors locally, one being an economics instructor. Naturally, we all bring varied viewpoints to this discussion, but rarely have disagreed at the downside of “bankruptcy”. To your friend’s benefit, he may be quite sharp regarding at bookkeeping but the auto industry is quite complex and if he doesn’t assign a “cost” to the loss of health care suffered by thousands of GM retirees, then his equation is flawed. There is much to know that even the EXPERTS are lacking.
Hey there. Greetings and welcome. Don’t recall seeing you here before, so welcome and thanks for the comments. Please stick around for other subjects too, you have a good voice.
You are quite correct that a standard bean counting business analyst, even an experienced M&A guy likely will not understand the complexities and inbred interrelationships in the auto industry. Maybe some of it, for instance the onerous dealership agreements and state dealership laws etc., but bankrupting the industry, or even GM, is not the way to go about it. There is way too much at stake up and down the line. The transition in a lot of these regards is already very well underway if you really study the facts. This should be played out in an orderly fashion without systematic shock and decimation of every segment of business, economy and society being impaled at once. This is not about spite; this is about our very existence as we commonly understand it.
Exactly.
Thank you for the greeting. I’ve lurked for several years now on FDL as scudrunner. Had to renew my id… I usually GLEAN info here but had to jump in as of late due to the subject matter of which I have considerable insight. I am attempting to counter the ignorance and outright misrepresentation concerning the auto industry. It’s a major uphill struggle and I’m tiring but mostly becoming disillusioned with my fellow Americans.
Again, thanks for the welcome. A big fan of Jane, Christy and Marcy.
and i guess you know there’s something else i would have liked to have said, but i’ll go by the house rules and let you just imagine what it would have been.
I apologize and know that I was out of line. But my opinion of your friend still stands. For me and many others, this is a no-brainer and just a convoluted effort by the republicans to kill organized labor.
I generally like Yglesias but he has certainly been wrong (cough*IRAQ*cough) before.
This is a complicated matter. The right is looking at this as an opportunity to screw the unions and the workers. We cannot let that happen.
On the other hand, shareholders and bondholders should get taken to the cleaners.
And we have to address the fact that we have had massive overconsumption of automobiles in the US over the last decade. This is a function of the credit bubble.
I think universal healthcare would go a long way toward solving some of american industry’s competitive problems.
There is a very fine line to walk here in bailing out the automakers. Keeping and creating good jobs is an end in itself. Churning out cars is not. For that reason I was very happy to see Waxman push Dingell out of that committee chair last month.
You also have to appreciate that Yglesias probably believes, as I do, that we are building way too many cars, period, and that the auto-based patterns of exurban development that we have seen over the last 50 years are unsustainable and will destroy us in the long run.
“…Yglesias probably believes, as I do, that we are building way too many cars, period, and that the auto-based patterns of exurban development that we have seen over the last 50 years are unsustainable and will destroy us in the long run.”
I agree. But perhaps we should then consider restricting Foreign Auto manufacturers somewhat. Why throw out American companies whose profits go to America? Limit the transplants, convert production capacity to mass transit production, solar and wind production. Anything to put Americans to work.
EW-i thought at the time that the american axle parts shortage was a myth–they have a plant in mexico making the same exact parts. that strike was a ‘weeding out’. 3600 workers involved and the shortage ’caused’ by it was a myth. it was a lie. they just upped the work at the plant in mexico that they HAD JUST put millions into. no coincidence.
i can’t find the original article i read, but here is one.from a uaw site.
http://www.1853chairman.com/20…..in-mexico/
and here is the google page for american axle mexico plant.
http://www.google.com/search?q…..=firefox-a
You’re so snotty, Marcy. Thank you. An excellent, informed, articulate antidote to the ignorance and willful omissions of the MSM and the occasional prominent blogger.
Supplier disruption is business school jargon for dozens of companies going bankrupt, tens of thousands of people becoming rudely unemployed (and some, with age and a track record of illnesses, become unemployable). It is code for hundreds of patents going to the highest bidder, which in bankruptcy, is often at fire sale prices. It is the disruption in development of new products from that technology, many of which are badly needed. And it is the further, rapid demise of more banks and finance houses, which have lent to those concerns.
In short, it would lead to the amputation of limbs from America’s ability to manufacture, which would lead to greater reliance on foreign manufacturers. That returns us to an issue you raised prominently: foreign manufacturers already benefit handsomely from red state subsidies. They, too, even in Alabama, would be seriously affected by taking a buzz saw instead of a scalpel to the automotive systems supply chain, leading to higher prices and fewer customers with the ability to pay. The aroma of financial napalm that would stick to automotive suppliers would make a generation of managers, investors and bankers reluctant to put scarce resources into reviving their industry, virtually ceding the field to foreign manufacturers.
Lastly, and this is for Matt, too. That’s automotive “systems”, not “parts”, because few suppliers or customers deliver or want just a widget. They want widgets and wadgets and woodgets, pre-assembled and drop-in ready, many with electronic self-diagnostics, which cut both manufacturing and repair times. The kind of industry cholera we’re talking about here could take that tight Six Sigma parabolic curve, beloved by quality process engineers, and flat line it, lowering product quality and, hence, sellability.
A dog’s breakfast of problems for President Obama. Nice to know the MSM (well, at least its DFH blogger cousin) is contributing to their solution with such thoughtful commentary.
Lovely comment. THanks.
I’ve decided that my role here, for now anyway, is to ask dumb questions, and get good answers, and just sorta hope the names I get called for doing so don’t hurt my feelings too much.
We’re told that there is a sea of cars in parking lots next to loading docks in California. We’re told that truckers who transport cars around the country are idle because dealership parking lots are full. IOW, there is a lot of inventory on hand.
Leaving aside the fact that shutting down production by bankrupting suppliers might not be the best way to draw down that inventory, does there not have to be a period of dramatically reduced production?
At least GM says it has seriously ramped down production (and Ford has cut its truck production, still, from the summer). You’ve got a lot of domestic auto plants that are idled for about 5 weeks over the holidays.
That said, the big problem here is time lag for EVERYONE in the market.
Look at the last 5 months.
In July, you had a really sudden abandonment of the truck and SUV market, and a related spike in the hybrid market. You had parts of the industry working overtime to deliver cars, and other parts doing layoffs to respond. But there were still full dealerships of trucks in the dealers.
In August that got worse, on both counts. By August the manufacturers were basically adjusted to the July numbers, but that didn’t mean the cars in the dealers were gone.
Then, in September, the credit crunch started to hit, and gas prices started to go down. This was a transition month, where the truck market was rebounding (helped by sharp discounts) but where the auto industry was crashing altogther. That crash has gotten worse in the last two months, but with really weird effects on the market (the newly introduced and celebrated Chevy Malibu had a great month last month, compared even to Honda Accord, for example). It appears (and this is my eyeball, not anyone else’s analysis) that new models (including the F150) are doing really well, but that the manufacturers are still recovering to adjust from sharply dievrgent patters in August (for example, Prius is OFF from last November, presumably bc they can’t keep up with demand, they’re harder to finance, prices are down, and they sold so much in August).
All of which is to say, you’re seeing more variability in the month-to-month market than you ever see. And this, in an industry that’s got to tweak these plans 90 days out.
Marcy, it seems to me something’s missing in this discussion. It’s not production that’s the only critical issue, but also production capacity. Short term swings in demand can be managed by throttling production, but long-term shifts need to address plant capacity and the associated fixed costs. If the wrong numbers are used for demand, the capacity adjustments will be inadequate and bailout funds insufficient to bridge the inevitable revenue trough that’s coming. (not to mention the profitability gulf!)
I’m going from memory on the numbers here, so correct me if I’m wrong.
N.A. production capacity exceeds 20 M vehicles/yr. The number the industry has been using as current demand was around 17M and based the current model years runs on that number. (The final runs have been shut down as you indicate, but the unsold inventory is significant.)
This year looks to end around 14M. Two problems that both impact the bailout consideration. One short-term, one long.
Unsold inventory (in both new and used cars), plus lease liabilities on large SUV’s being re-possessed puts huge pressure on short-term cash flow. It’s not just revenue that’s down, but gross margin per vehicle has been slashed to almost nothing, with the likelihood of going negative before all unsold inventory is cleared. This is massively compounded by the credit crunch so historical data on clearouts is pretty useless in forecasting how long (and at what cost) the overstock will take to clear. (massively fewer qualified buyers as per yesterday’s post)
The long-term question is what number do you use as the floor for the overall market? I’ve read 11M as a reasonable number (the companies are hoping demand stabilizes at 14, but seems unlikely). It could easily drop below 10M. The problem is that suggest that plant capacity could be as much as double mid-term demand.
The revenue trough of 50-100% drop in mid-term demand, plus the write-downs on inventory and costs of shuttering plants can eat astounding amounts of cash. It doesn’t take too much over-optimism in the various assumptions and variables (total demand in units, average price, gross margin per vehicle etc, added to unexpected and hidden costs associated with a drastic re-adjustment in capacity) to quickly overwhelm whatever amounts have been allocated, before the work of re-setting the industry is complete. (In fact, it could be an order of magnitude too low). Which would just be throwing good money after bad.
Not arguing against a bailout… just that the bailout needs to be acceptable on a worst-case scenario basis of long-term demand. Not sure that any of the stakeholders (which now includes every taxpayer) has the stomach to accept the pain involved. The inclination (and pressure) to succumb to better-case scenarios which make the numbers involved seem more acceptable is huge. If this is going to be done, everybody (management, labour and taxpayers) need to radically reset their expectations about what a sustainable auto industry really looks like.
I think you’re right. The difference between the Moody’s analyst testifying before Congress and the projections used in the begs (which use 10.5 as worst case, and 12 million as mid, though they assume market share remains the same) is in the length of time the market would be at those levels.
Agreed. It’s the product of those two factors (floor demand X time at the floor) that is the tough nut to swallow and where happy-thinking is most likely to mess things up. What if the floor is 9M and we’re there for 3 years? (not 12 million for 18 months). For that matter, what if it’s 5-10 years—our own lost decade? This is not outside of the realm of the possible.
What assumptions of gross margins have been made? When the product mix completely inverts itself—reflecting a profound change in consumer preference—and the demand falls off a cliff… in an industry where the 15,000 gross margin per vehicle (from SUV’s & light trucks) has sustained a bloated cost base… well you know where I’m going.
Multiply all of that together and I think they could easily remain in a position of taking huge quarterly losses for years to come as the various adjustments ripple through the system.
My view is that a bailout is necessary and is a net positive even if it ultimately fails to preserve a NA auto industry — if only for the reason that it will stagger the overall damage to the economy. The danger of total system collapse is real, and the immediate death of the big 2.5 could be the economic equivalent of the entire greenland ice-sheet sliding into the sea next month. Puts us in an unrecoverable position. At least if the failure pushes forward 3 years or more, we will have had time to shore up the foundations and launch other initiatives that may eventually pick up the slack.
They did not reveal their vehicle assumptions (with the exception of Ford, that showed a switch to smaller vehicles).
Tester just got them to answer what happens if it lasts longer than the 2 years they anticipated. They admitted what you’re saying.
As a retired autoworker, I would suggest limiting importation of foreign built automobiles for the near term. Not sure what those number are any more, but they are a significant portion.
Appreciate what you must be feeling watching this calamity, given your background.
Only problem is what represents a foreign-built vehicle now? Cars built by foreign companies? Cars built in foreign lands? Don’t have the numbers off hand, but seems to me that all the high demand toyotas and hondas for the NA market are either built entirely, or least assembled here.
So assuming you exclude those from a ban (since they are not imported cars), there may not be that much impact of excluding a few Korean and japanese-made models from the market. (German cars might be significant – not sure of how strong VW is these days). At least not enough to fundamentally change the dynamics.
Anything that slows down the damage and gives us more time to respond should be considered. Any bailout absolutely has to balance the interest of workers (and consumers) with those of management and shareholders. Such balance (i.e. fundamental fairness) being conspicuously absent from anything done or contemplated so far by Paulson and gang.
VW had the least decrease in sales year on year in November, BMW second. So consumers are still buying where the exchange rates dictate they buy. (Ford was third, btw, though substantially behind VW and BMW).
Thanks for the info. Do you think that the uncertainty surrounding big 2.5 survival is pushing the few current buyers to foreign brands (such as VW) that they might otherwise not have considered?
I’m in Canada where Toyota actually showed a small increase in November sales (only brand to do so), and the credit crunch hasn’t hit half as hard. So consumption patterns here lag those in the States — which is a good thing these days! Demand varies with the border, but supply crosses it… and what happens to your market eventually reverberates in ours.
Since it was BMW and VW, I gotta believe it’s exchange rate making those cars more competitive. But yeah, VW would be a replacement for Chrysler and Gm. Plus, they’re the only ones selling Diesel, of course, which is the cheapest way to get good gas mileage. It’s worth noting that Prius was WAY off where it was last year, which I can only imagine has to stem from financing/supply concerns (that is, the demand is there, but it’s not being served). And a Diesel Jetta would make a nice replacement for a Prius, depending on what you wanted to do with the car.
how soon we forget—–
and in the 80s volksswagon closed plants all over the world, in south africa caused major bad things, and moved them to canada, where in the 90s they then closed again..all of the people they moved there were out of work…parts plants, too. then they showed a resurgence with the new bug, but they weren’t built at the same locales. then other models followed that people bought. thousands and thousands out of work world wide. i know an exec that is now in ontario, from south africa. transferred and watched it all fall. had to start his career again at 57. not a relative, just someone i knew.
just ask eddie from barenakedladies, he worked at one of the parts warehouses in canada, he can tell you.
it’s happened before, it’s not just our automotive manufacturing, it affects far more than what you all are considering. you keep saying there is more in play, yet, you are not considering that there is more in play that what you are seeing. there is. most definitely.
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our family always had volksswagons, up to the last van that was made, my car i learned to drive was a carman ghia, after the last model van, then they went buick and american made after that.
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and all day i so wanted to write a resume of why my dad said what he said, as a slam dance, i so wanted to, there are reasons why he said what he said and why you should consider it, but am going to think about it some more before i do. cuz i can’t say all of it on here.
i wish you would have considered it without me having to do that. and hope you do.
i think sometimes fdl misses things when they are offered, blinders, cuz you said you ‘know’ people, but people who ‘know’ are telling you things that are true in that context, but are not ‘true’ when it comes to how it is done and you don’t want to listen. the execs who you are talking to aren’t the guys who do the math. there are only so many ways to do the math. i told you, admittedly hesitantly, cuz i hate repeating what someone else said, what a guy said who has done the math firsthand in a variety of international manufacturing corporate situational circumstances to save jobs and save companies and you blew it off cuz someone told you differently. not good. kinda stupid.
if you want to see the whole picture, talk to the people who do the REAL numbers on the books.
the execs bmaz mentioned, those people are not people doing the numbers, are not the ones submitting the reports, are not the ones that went in and assessed who was staying who was going, what plants are staying open and why, what operations would stay open and why, what suppliers will stay and why, etc………there are very few people who can give you that picture.
i offered an insight of one of those people and you blew me off.
i offered the opinion of someone who has done that and you said, but, someone in power told us this.
dangerous.
you shouldn’t have to come on here and express an opinion with doctoral credentials to make a point just because someone read the first line incorrectly. or was afraid of what the truth might be. when you face a situation you can change it, that’s what he taught me, and he faced some awful truths, and saved a lot of jobs doing that. maybe someone can learn from him, i did.
he said a bailout will make it worse, that there are accounting ways to do it differently, that the companies don’t want to do it that way because they will lose control over how they are now doing things. that a reorganization is more solid, that it has to do with solvency. that means on paper worth. that’s what he said. if i were you and i wanted to know what was really going on with this, i would find the guy who is the budgeting and forecasting/auditor. division head, that’s the guy right below the vice-president……until you do, you’re gettin’ breezed.
Listen, you are the one that is insistent on making a war here. I understand fully what you and your father are saying. Everybody here has been more than fair and has engaged you on the merits; yet you still act hurt and put off. There is simply no reason for that. Just as you argue there are things we are not seeing that should be taken into consideration, a point that may well be the case; there are certainly things that your father does not know and that should be taken into his equation before it is considered to be the be all to end all. I grew up around the car business and there is still plenty I do not know; but i can guarantee you that there is much that is critical that simply is not on the surface that goes into all this.
This is an open and intelligent forum here. Post up your best facts, arguments and opinions and they will be engaged on the merits. But don’t get pissy when independent minds consider them and are not swayed; sometimes different people just see things differently. That is okay.
there is a point that you are missing, i sent it in an email. i was hinting that you are missing something, you took that as an affront.
i was trying to point out that you are missing something pertinent without calling it out and without saying how i know it.
sometimes things hit close to home and sometimes people know things and can’t say why. and in order to defend it, i have to say something i can’t.
all because you are hard set on something you think you know.
back the fuck off.
next time i’ll wait to hear it on the local news. and won’t be mentioning it here, i’m sure that’s ok with you.
and if you knew me, you would be embarrassed that you were so confrontative about it, i was not, i never am, i was tentative and didn’t know how to put it without giving away confidences. hard place.
good luck with your search with the people you have been talking to. they won’t lead you anywhere. in my email i gave you the exact person you need to find to get the truth. wasn’t an easy email on my part. i hope you realize that when you read it. then you’ll see it had absolutely nothing to do with what you wrote to me, and why it was so important that i wrote what i did. good luck in that search.
I think labeling built and operational automobiles arriving on a ship would be a starting point. Most Japanese vehicles “assembled” here in America, have very little American content, most of their parts being manufactured overseas. We should enact laws to reward manufacturers on domestic content, perhaps with a tax break at the consumer level. All vehicle stickers, I believe, currently show domestic content. The higher the number, the bigger the incentive.
Bottom line: We will need x number of vehicles built to satisfy demand, by x number of manufacturers, employing x number of workers, period. Do we want to give that business to foreign interests who take the profits out of this country? Or, does it make more sense to keep the money here?
My understanding is that the longer the foreign companies assemble specific models here, the more they source parts from the local (NA) supply chain. That doesn’t negate the validity of your proposal.
My thought would be that as long as the law doesn’t discriminate based on the nationality of the company, but simply on the percentage of domestic content per vehicle… could balance fair competition with need to re-incubate the NA industry.
My point in an earlier comment though, was that the demand number is likely to be much lower than people close to the industry want to accept. As long as there is a very hard-nosed look at the numbers—short and mid-term—and any legislation is based on that perspective, then there is a possibility that it could work.
My point is that if we are using this moment in time to justify reducing capacity due to a downturn in the demand, rather than bankrupt American Car companies and HURT the American worker as well as the American economy, we should reduce importation.
I understand your point and I agree with the intent. The devil is in the details. I prefer an approach that’s incentive-based (as discussed) rather than restrictive and coercive (outright import ban).
NA car companies should not be rewarded with a gated domestic market to themselves after so many years of wrong-headed, greed-driven mismanagement and fleets of crappy cars with pathetic milage.
Find a way to structure it that still allows for competitive pressures for product evolution and a sustainable business model (based on likely future demand)… then it makes sense to throw public money at it.
Manufacturing, like Wall Street, needs to be reformed, not left floundering in the cold Pacific current. If swathes of manufacturing companies go belly up at one time, the frenzy from so many bodies floundering together will drag down nearby survivors, including hundreds or thousands of communities dependent on the talent, the energy, the commitment and resources (including tax payments) they provide.
Few people here are arguing against change or for mindless protectionism or xenophobia. The argument is about making needed changes, about not obscuring the need for them in a sleight-of-hand drama where malefactors grab the taxpayer pot and run for the hills. It’s also about who pays for the change and how, facts which carry commitments, which politicians and bureaucrats usually avoid.
George Bush’s usual solution to every problem is to open the treasury (or someone else’s pocketbook) to private businesses and their lobbyists, no questions asked or strings attached. That has never fixed a thing, as his track record so tragically demonstrates. His policies are not the sole cause of these problems, but they have contributed mightily to them, accelerated them, causing many to hit early and at once.
The solutions we need will be partial and require more time than Congressional or presidential terms of office. It suggests that we need an institutional arm of government capable of taking a longer term view. Sadly, we seldom do well at that. Our drug czars, war czars, intelligence czars, like their Russian precursor, seem successful only at perpetuating their rank.
Having purchased a new Chrysler Sebring convertible a year ago, with plans to take it in for its 4th recall fix next week, have I not already subsidized their bad behavior and mismanagement enough?
If you want to emulate the Soviet Union – we are well on our way.
The perception is that you are striving to save “organized labor” by allowing the government to acquire the manufacturers, while the government acquires your banks, and while you pay your mortgage to the government owned mortgage lender.
In the Soviet Union, there was plenty of “organized labor.” It was the State that did the organizing.
THAT is what’s being sold to you as a “free market bridge loan.”
Well, you should not have bought a Chrysler; the status of that model is well known if you really check. You could have had a Malibu, Fusion or several other vehicles that are light years superior. An ill-informed purchase of one car by you is not particularly persuasive here.
I just retired from Chrysler, my brother works for Ford, my father retired from Saturn. We all own our respective company’s vehicles. I currently own 3 Dodges, a ‘95 with 200,000 miles, a ‘97 with 125,000 and ‘06 Charger with 30,000. Knock on wood, but I have had absolutely no problems with any of them. However, I know that new models generally have “bugs” pop up, that’s why I always wait until the second year of production before I purchase. At any rate, I agree that anecdotal evidence is of little use in a discussion such as this. There are many measuring sticks for insight into a vehicle’s quality level that are more pertinent.
You have no idea what I paid, so it is fairly presumptuous of you to assume that I did not get a good value, despite your other assertions or the recalls.
Google this: “2008 malibu convertible”
That should help to explain why I did not purchase a malibu. The word “convertible” is relevant.
and people keep jivin’ on points i didn’t say—he didn’t say file bankruptcy, he said it needs restructured like a pre-bankruptcy…big diff.
a bailout won’t restructure. there are write-offs that you get that they won’t get. there’s a lot involved, before you knock me down again, try looking into it.
he wouldn’t have said it if he didn’t mean it, and he is not a ‘listen to me’ kinda guy. he keeps up on all of that stuff. it’s one of his hobbies.
he didn’t say file bankruptcy, he said restructure it.
if you look into the different structures you’ll be answering your own questions.
i’m done.
dmac – my expertise, such that there is any comes and goes. I grew up around the business and have a wealth of basic knowledge that is historical about the business itself. Subsequent to that, i am mostly just an informed car guy. But I try to keep up, and the last mont or so has made me dive back into a lot of the business end again. But from every thing I know, what EW and our new friend TrueLeft are very correct in their analysis. And Marcy and I have been talking over the last week to ten days to extremely senior guys at GM, and what we have learned is entirely consistent with what has been being said here. If you know one thing about us, it is that we will not just regurgitate BS just because someone told us something. These are honest, supported facts and opinions being related for what it is worth.
At some point, however, the psychology of the country and its consumers also comes into play, and this too also militates in favor of no bankruptcy. All the factors do really if you do an honest assessment. I know your father did not say “bankruptcy”, but what he is suggesting is, semantics aside, indeed what is known as a pre-pak bankruptcy. Because of the complexities that even a man of your father’s skill and intelligence does not know or understand (nor is there any reason he should, this is weedy auto specific stuff after a point) the situation is just different and therefore wrong for his analysis.
i hear what you’re saying, but i don’t think you’re hearing what i’m saying.
he knows what he knows. it’s not just because he’s my dad, it’s because i know what he’s basing his opinion on. i was just throwing it onto the table cuz i thought it should be mentioned. there are reaasons they don’t wnat to do it that way that have nothing to do with public perception. try reading what i wrote literally.
we’ll see.
Guarantee Ford.
Bail-Out GM with a Strategic Plan to go Whole-Hog on Volt.
Turn Chrysler over to the Employees and throw them some Sink-or-Swim Money to make the Transition into the National Scooter Company – specializing in Reliable Green Scooters for the Masses.
We shouldn’t just keep Big Iron going – which is absolutely neccessary – We should shove them in the direction of Smart Recovery, too. They should be made, proportionately, to become highly-focused on Engineering the Change they ignored in favor of Getting Flabby on the SUV Teat.
Remediation seems called-for with the Big Two and a Half.
I spent the morning consoling and counseling my longest friend about why and how he needs to go about closing his restaurant in Texas. He’s done everything that he thought was right, and the more he spends to make the business succeed, the more it costs him.
THIS is what the auto industry, and every industry, is up against. He’s not going to a bank to explain that he needs more money to pursue a business strategy that reaps 30% less than break-even. He’s going to stop spending his own money and shut the doors.
Business is very basic. Supply, demand, urgency to buy, willingness to pay and disposable income are the factors that make it all work, or fail.
In a deflationary environment with oversupply, there is no urgency to buy.
THAT is the reality faced by every manufacturer and retailer in a Depression.
Agreed. So, do we have a chance to stimulate the economy? If we do, should we allow a large employment sector go bankrupt? Or, buy it time until the demand comes back? Does the potentiality of demand increase or decrease under a bailout? Does bankruptcy provide as a side benefit, more demand or less? These are the questions this all boils down to in my opinion.
Do we have a chance to stimulate the economy? No, I don’t believe we do. I believe that efforts to try will simply result in more skimming by the thieves that caused the problems in the first place. There has been a psychic shift in the mindset of the worlds consumers that will be generational. We are in the early stages of a great depression, regardless of how much debt on top of debt is thrown at it. More debt is not a solution to debt. Stimulus is not a solution to over-stimulus.
The bottom is 30% lower than here…and five years long.
Senator Bob Corker is creaming Cerberus right now. It’s about damn time that somebody put Cerberus in the crosshairs. They’ve got the cash to keep Chrysler in business without tax payer help. They were stupid enough to buy GMAC and Chrysler, and deserve to lose their ass.
Perhaps, their solvency should be to their credit. If they in fact DO have the cash to survive, why should they “deserve to lose their ass”? I’m not a big fan of Cerberus, don’t get me wrong, but your post makes no sense to me.
Cerberus thinks it’s a bad investment to give more money to Chrysler.
NOBODY thinks it’s a good idea to loan money to Chrysler.
Yet taxpayers are asked to ignore business realities and throw good money after bad, when the likes of Cerberus, which has an 80% equity ownership in Chrysler and a 50% ownership stake in GMAC, don’t want to spend anymore of their own money. Screw them. They were idiots to buy these companies when they did. Isn’t a part of free market enterprise for idiots to lose their asses when they make incredibly boneheaded and ill-timed investments in failed business models?
Investment banking and insurance are supposed to involve “risk.” Remember that concept? When is the last time an insurance company really showed a loss?
My buddy who is closing his restaurant and waving goodbye to his money knows the concept first-hand. Cerberus can either throw more money at its boneheaded investments, sell the companies, or shut them down.
I have to disagree with your assumptions. Quote some links to back up what you say and I’ll take it from there.
here’s a link to the gm, chrysler and ford plans presented to congress.
http://www.1853chairman.com/
Thanks–did about 7 posts on them yesterday.
Sorry, count me in the “slap Matt into sense” camp here. He’s been wilfully ignorant on this, and has a blind spot on issues of blue-collar work that no wing mirror can assist.
plunger: if you read the previous threads here on this topic, there’s generally a consensus view: Ford is best placed moving forward; GM has work to do, but is finally being hit with the cluestick; Chrysler needs to die, at least as far as regular car manufacture is concerned.
2009 was going to be a critical transition year regardless of the financial implosion: the One Ford consolidation strategy ramping up with the Fiesta and Focus, GM rolling out the Cruze in Europe in prep for a 2010 entry to the US market. As Jalopnik notes, gearheads look at Ford’s Euro models and think ‘why the heck can’t we buy those cars? They win awards over there.’ Which they do. And Ford is converting some of its truck/SUV plants to build them.
GM was slow to bring in its foreign successes to the US market, but it’s on the way. If they don’t make it through 2009, that transition doesn’t happen, and instead you’ll get new corporate owners bringing in those vehicles as GM-badged imports.
Saw your comment over there. It made me laugh. Thanks.
Heh. I’m not that old, but I’m old enough to realise that Matt’s punditry chops are really lacking on issues tied to skilled manual labour. He doesn’t get “the trades”.
I, on the other hand, am a gearhead expat — I snaffle Top Gear via mumblemumble. It’s a cliché to deride American-badged cars as ugly, heavy pieces of crap with obsolete engineering and a phobia for corners. And to be frank, a lot of them are. But even the Top Gear people have some love for the icons of American car manufacture, and there is no geographical or genetic reason preventing workers in the upper midwest from building the kind of cars that union workforces across Europe send out with Opel or Ford badges.
You have, in the US, a gearhead contingent who for years have jealously watched road tests of the Euro-badged GM and Ford lines, and would be well disposed to buy a Euro-spec Focus made in Wayne or Louisville, or even take a punt on the Cruze platform. (Let’s not get too worked up about the Volt, shall we? If it works, great. In the meantime, the Euros are driving 50mpg diesels right now.) But to get there, Ford and GM have to survive 2009.
I’ve been squawking about those Euro-Foci for a while. I tried, very hard, to hold out for the new Fiesta (though I fell in love with it when it was in spec, and still had some more features), but couldn’t do it, which is why I ended up with a Fit. And yes, I’d have been happy to get one of those diesel models.
I did hear we’re getting real Mondeos soon, too, which I think will do well.
This inflationary bubble was dependent on the Greater Fool theory, across the board.
Cerberus was the last Greater Fool in autos and finance.
Now they want you and me to be the ultimate Greater Fools, so they can relieve themselves of that title.
Fuckem.
“Chrysler needs to die, at least as far as regular car manufacture is concerned”. I think that’s a bit hasty. In some respects, Chrysler is healthier than the other two and has a great product line up. Cerberus has some respectable operations world wide and should be commended as a private company. That being said, unless we help them compete by leveling the playing field, I think that Chrysler will be sold to a foreign interest at the earliest convenience. Not sure if that’s in America’s best interest and that’s what has lead us to this point: a hands off approach to the industrial sector and encouraging outsourcing.
TrulyLeft: Chrysler has no real global reach. Its passenger cars generally look lovelier than anything US-branded on the US market, but there’s nothing compelling there. Jeep and Dodge have a future; even the T&C could cope with being rebadged.
With respect, plunger, I hope your buddy knew the difference between apples and oranges in his restaurant, because you seem to have a problem with the two.
Enlighten me.
I’m fuzzy on the details, but CERBERUS DOES have global reach, if that’s pertinent. More importantly, to me anyway, is that we come up with a solution that does not rob thousands of retirees their hard earned pensions and health care. I think we should bail them all out, with ropes, not strings, attached. And enact good economic policy that returns (or at least levels) the advantage to Americans.
The problem is that the North American market is growing smaller–and even for Honda, the margins aren’t that big. So to stay in business, a company has to be selling cars in China, India, Eastern Europe, and Latin AMerica. GM and Ford are actually BETTER positioned in these areas than the Japanese. But Chrysler has nothing there. That’s why it needs to get bought up. Because until it’s tied in some way to a growing market, it will continue to get smaller.
Nobody will be selling American manufactured autos to these markets until we deal with the import restrictions placed on our companies. However Cerberus DOES have a presence in these markets, not necessarily selling autos (although Dodge HAS been exporting a diesel powered minivan to Europe!) I’ll have to dig for the details but had them when we first learned of Cerberus buying out Daimler.
Also, I thought Chrysler WAS bought up – by Cerberus.
plunger: if you need the difference explained to you between the business model of an independent restaurant and a car manufacturer, I’m not sure I can help you. Restaurants fail all the time — not as much as the mythical 90% — but with low barriers to entry and low barriers to exit, turnover is high.
Now, if your buddy were running a global restaurant chain that relied upon economies of scale and the ability to homogenize product and practice, that, were it to fail would bankrupt entire swathes of cattle-ranching country, that would be different.
Do you honestly believe I need the difference explained to me or are you just being a…hmmmmmm, what’s the word?
You were not specific as to precisely what you were referring with your “apples and oranges” insult (with all due respect).
If you reread your comment, it makes no mention of my comparing two distinctly different business models, which I did not.
I am consumer and market focused, be they apples or oranges.
Without “willingness to spend,” business models are irrelevant. That was and remains my point.
plunger: if you reread your own comments, there’s a whole lot of oversimplifying going on. I honestly don’t know what you’re trying to argue here.
The basic issue is this: when the economy recovers, is it in the long-term economic interest of the US for cars with “American” badges to be made by Americans in the US? The alternative is to have the transition work done by Ford and GM snapped up at firesale prices by cash-rich foreign enterprises, retired workers stiffed on the deals they made in lieu of wages (perhaps landing the nation, via the PBGC, with the bill) and the manufacture outsourced in ways that eventually squeeze the southern, foreign-owned plants.
It’s possible to argue that Ford and GM are beyond salvation, but the current economic climate is no laboratory to make that assessment.
Cerberus indeed has global reach and is very secretive. It finances Delphi, the former GM parts division spun off in 1999 that was once a $28 billion/year “independent”, which has been in bankruptcy since 2005. If Delphi emerges from bankruptcy, Cerberus is likely to own or finance it. So, too, with other automotive suppliers; so too with big chunks of GM.
Cerberus epitomizes the “private equity” mentality. It wants slash and burn rates of return from “going concerns”, an approach that disguises what is, in effect, an extended liquidation. The business equivalent of Montgomery Clift, who one wag acidly commented committed the longest suicide in stage history. Needed investments in technology, manufacturing and people are discarded to provide it. It is Jules Verne’s burning the ship’s deck and wheelhouse to stoke its boilers: the ship runs at flank speed, but only until it eats itself to the water line.
Do we really want huge swathes of our economy run by secretive private concerns beholden to no market or government? Slaves are made in such ways would be William Wallace’s retort.
Enjoying your literary allusions!
A pointed and colorful description of what’s wrong with the market, and the vile predators that rule it.
You mean like the US Treasury and the FED?
The FED and the US Treasury under GWB are certainly as secretive as the NSA, but then Cheney treats the federal government like a private estate into which citizen serfs are not admitted. In doing so, he violates laws and rules, which another government ought to enforce, and which Congress can extend and strengthen.
So, too, Wall Street and the financial markets are partially private, but dealing in publicly traded securities subjects those private firms to public scrutiny. Again, Congress has the ability to strengthen the relevant disclosure and operating rules, and there are ample precedents for doing so.
Cerberus, on the other hand, represents an example of the ultimate private business. Operating more like a Swiss bank than market maker, it’s rules are whatever its top players want them to be. The public attempting to influence its operations directly is like a toddler eating Jello with a toothpick, a modestly frustrating experience that can become enraging as the hunger pangs mount.
My point is that the US government, in exchange for becoming a company or industry’s lender or shareholder of last resort, can and should demand a decision-making role commensurate with the volume of public resources it puts at risk. Paulson should have done this in bailing out Wall Street. Instead, he spiked any effort to do so, revealing that his stint in government and away from Wall Street is a mere holiday. Obama owes the American public more publicly-minded stewards for their limited and shrinking resources. The DFH’s job is to help him realize that.
“NA car companies should not be rewarded with a gated domestic market to themselves after so many years of wrong-headed, greed-driven mismanagement and fleets of crappy cars with pathetic milage.”
Just the typical American business model. Before the crappy American car was the crappy Japanese car. Things change to reflect the state of the technology, competition and consumer demand. And mileage is only pertinent when the consumer reacts to high gas prices, itself wildly fluctuating. Reward will only come to the best competitor that satisfies an increasingly discriminating consumer. Thus I take issue with this portion of your post.
and you don’t have to thank me when you find him. just give a little listen to someone the next time when they’re trying to tell you something. they just may know what they are talking about. wouldn’t that be scary.
if not, oh well. take an epsom salts fragranced bath, it works.