Economic crisis? Detroit?
- Thread starter Gordon Gray
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eknuds01
Well-known member
I think the 'problem' with the Big Three revolves around an area that most pundits and authors are missing. That is that the american obsession (or love affair) with cars was built on cheap gas and until recently, easy access to credit. For the longest time, it wasn't all that hard to purchase a car (new or used). In fact the most profitable arm of the US auto industry is the finance department. I don't think the dealerships make very much money on the average car sale. Rather it's the interest on the car loan that is important to them.
We now have more cars than adults in this country. When you look at the Big Three total product line, I see 4 or 5 of the same thing: trucks, SUVs, small compact cars, family sedans, etc. They manufacture thousands of cars each month hoping that the average consumer 'needs' a car every 2-3 years. While the US auto industry does have a negative stigma, the fact of the matter is that most cars (be it foreign or domestic) are pretty reliable. You can put well over 100k miles on the engine and if you change the fluids regularly and don't drive like a bat out of hell, you can put many more miles on the car.
To me, this industry is built on selling a car payment one way or another. But when gas becomes expensive, they simply cannot adapt. If anything we need to shift from consuming a vehicle every 2-3 years based on technology that, in my mind, hasn't really improved drastically over the last 20-30 years [You'd think it would be possible to add 3-5% better fuel economy each year, but is it me or do most cars get 15-20 MPG in the city and 25-35 on the highway?] to either A) smaller vehicles that go slower, get better mileage, and are powered by natural gas, fuel cells, solar, etc or B) finally get serious about using more mass transit instead of building more highways and roads further away from the population centers.
This issue is more complicated than CEO pay vs union wages and benefits. While 'legacy' costs are important (these guys shell out enormous amounts of money to pensions, benefits, etc each year and it seems that the US auto industry is burdened by that cost and can't dump more money into R&D), the overhead is only part of the problem.
No one wants to see GM go under. This issue impacts hundreds of thousands of people, and it remains to be seen how this bailout money will be spent. Will it just keep them afloat for another 3 years? Will the money be used toward designing and building a better product? If not, would bankruptcy allow GM to restructure it's debt and pension/benefit obligations? Jim Cramer once said that GM is a healthcare provider with an automotive problem.
In the end, the issue will revolve around how often the average american purchases a car. Personally, I feel that we don't 'need' another vehicle every couple of years. If you can get 8-10 years out of a car, you won't be buying that many over your, driving, lifetime.
*** so what would I like to see...well a solution, or at least steps in the right direction in terms of more efficient power plants, more innovation, smaller vehicles, etc. I do feel that America's long-term economic future is grounded in energy and how we get from point A to point B (be it a vacation, daily commute, and so on). There's huge potential to get this country humming again in terms of developing a new energy infrastructure (more hydrogen pumps or natural gas stations vs regular gasoline stations), more jobs and companies related repairing/developing/building vehicles powered by alternate forms of energy (ideally they'd be renewable forms of energy), etc.
But I don't see any of the above happening any time soon as long as we have a short-sighted approach or mindset when gas is cheap and people are able to buy a car whenever they want that is based on same old, tired, technology.
We now have more cars than adults in this country. When you look at the Big Three total product line, I see 4 or 5 of the same thing: trucks, SUVs, small compact cars, family sedans, etc. They manufacture thousands of cars each month hoping that the average consumer 'needs' a car every 2-3 years. While the US auto industry does have a negative stigma, the fact of the matter is that most cars (be it foreign or domestic) are pretty reliable. You can put well over 100k miles on the engine and if you change the fluids regularly and don't drive like a bat out of hell, you can put many more miles on the car.
To me, this industry is built on selling a car payment one way or another. But when gas becomes expensive, they simply cannot adapt. If anything we need to shift from consuming a vehicle every 2-3 years based on technology that, in my mind, hasn't really improved drastically over the last 20-30 years [You'd think it would be possible to add 3-5% better fuel economy each year, but is it me or do most cars get 15-20 MPG in the city and 25-35 on the highway?] to either A) smaller vehicles that go slower, get better mileage, and are powered by natural gas, fuel cells, solar, etc or B) finally get serious about using more mass transit instead of building more highways and roads further away from the population centers.
This issue is more complicated than CEO pay vs union wages and benefits. While 'legacy' costs are important (these guys shell out enormous amounts of money to pensions, benefits, etc each year and it seems that the US auto industry is burdened by that cost and can't dump more money into R&D), the overhead is only part of the problem.
No one wants to see GM go under. This issue impacts hundreds of thousands of people, and it remains to be seen how this bailout money will be spent. Will it just keep them afloat for another 3 years? Will the money be used toward designing and building a better product? If not, would bankruptcy allow GM to restructure it's debt and pension/benefit obligations? Jim Cramer once said that GM is a healthcare provider with an automotive problem.
In the end, the issue will revolve around how often the average american purchases a car. Personally, I feel that we don't 'need' another vehicle every couple of years. If you can get 8-10 years out of a car, you won't be buying that many over your, driving, lifetime.
*** so what would I like to see...well a solution, or at least steps in the right direction in terms of more efficient power plants, more innovation, smaller vehicles, etc. I do feel that America's long-term economic future is grounded in energy and how we get from point A to point B (be it a vacation, daily commute, and so on). There's huge potential to get this country humming again in terms of developing a new energy infrastructure (more hydrogen pumps or natural gas stations vs regular gasoline stations), more jobs and companies related repairing/developing/building vehicles powered by alternate forms of energy (ideally they'd be renewable forms of energy), etc.
But I don't see any of the above happening any time soon as long as we have a short-sighted approach or mindset when gas is cheap and people are able to buy a car whenever they want that is based on same old, tired, technology.
And that is the problem and not just in Detroit. 70% of the US economy is based on consumer spending which is to my knowledge the highest percentage in the developed world. Our hobby is no better, many of us think nothing of keeping an amp a year or two and buying another. The era of easy credit, conspicuous consumption, and profligate use of natural resources are over for the US IMO. 5% of the world's population cannot continue to use 25% of the world's natural resources without having to pay the butcher, the bill is coming due.
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I guess my point is you dont know what Chrysler's cash position is and even if it is low why would you bail it out since it represents roughly 8% of the economic activity of their parent company.
If you know the cash position of each company in question and the burn rate let me know since I cant get precise data on this from the buy side auto analyst I use.
I will bet that 99.5% of the gear on this website is paid for. as to using the most natural resources make no mistake about it we are the 800lb gorilla in the room if there is a butcher to be paid it is us.the whole worlds economy is set too our wristwatch.
Well - I think it is all public knowledge (not to infer that we all would know - just that it is out there)... I saw an article that said GM wanted to buy Chrysler because they had 11 billion of cash on hand...Take that for what it is worth...
Ford has said they think they could make it thru this without any loan... But, the problem is - is that they all use a lot of the same suppliers - so, if GM were to go down as an example, all of them could get dragged down with them since many of the shared suppliers probably could not stay in business which would lead to a parts supply stoppage. In effect, freezing production for each of the companies. That is why they went into congress together.
Saw a statement the other day (an old one...but should be repeated)... 'GM is a health company with an automotive problem'
As is my system! Actually my point is that if a country relies on consumer spending remaining high to push economic growth then eventually they are going to either require easy access to credit (cause of current problem) or a retooling of society (ongoing due to the above). America built its might as a manufacturing giant (we actually made things people purchased) and now we sell services. For a service economy to grow, people need the means to purchase said services (which tend to increase in price, while goods tend to decrease) which requires a higher standard of living. That standard of living is based on access to and an equitable distribution of resources. The American standard of living is unsustainable due to the great disparity in resource use and American arrogance about it.
The cash, snapshot at a point in time, is public knowledge for 2 of the three companies --- To my knowledge the companies have not shared the run rate information with the general public. In fact, the transcripts of the Congressional testimony showed the manufacturers were not in a position to go on record with the burn rates.
The problem with financial journalists is they typically dont know what the're talking about and often unintentionally spread misinformation. One of the services that my business uses tracks opinions as voiced by journalists so that we can fade the prevailing wisdom.
The statement about GM being a health care company with an automotive problem is a cutesy financial way of refering to business model problems and has been applied to loads of industries --- its not creative or new....
It used to be said that GM is a finance company with a little car company tacked onto it...(So they sold GMAC to Cerebus)
Relative to the merger talks, by the time we were on GM's last earnings call the net liquidity position declined to -27.1 billion. Most of the questions on the call were related to liquidity and I would not characterize the responses as crisp. On the subject of management, GM also hedged roughly 50% of their commodity exposure at a time when commodities had their fastest drop in roughly 20 years.
Looking over my GM notes I see that as far back as 2005 my favorite GM analyst called for GM to hit a liquidity crisis by 2010 --- guess even the best guy was a bit optimistic...
BTW thanks for the generous response timm --- I'm really trying to gauge public opinion on this issue --- I have the original filed sources on all of the accounting information and occasionally I'll teach a class on classical financial statement analysis and where it falls short.
