Option Investor
Market Updates

Automobile Apocalypse

Printer friendly version

Detroit's big three automakers begged a reluctant Congress for a $25 billion lifeline to save themselves and the nation from an economic catastrophe if they were allowed to fail. I wonder how far I would get in selling that idea to my creditors?

They claimed there would be millions of layoffs and a dramatic drop in the economy if the automakers had to fight their way through bankruptcy and slash employees, plants and production to stay afloat. Many analysts say it would be good for the companies to go through bankruptcy because they could rid themselves of decades old union contracts, pension and healthcare costs and move plants out of high cost locations mandated by state governments in past deals. The companies claim a bankruptcy would hurt the brands and nobody would buy a car if they could not be sure there were parts and maintenance for the next decade.

Robert Nardelli, CEO of Chrysler, told lawmakers a bailout would be the least costly alternative when compared to economic damage from a bankruptcy. Executives claimed the economy could lose $150 to $250 billion from 3 million lost jobs, production and advertising if GM was forced to file bankruptcy.

There was little to no sympathy for the automakers and most lawmakers felt they industry was suffering from self inflicted wounds. They constantly built bigger cars when gas prices were moving higher. They avoided building quality economy cars because there was no profit in small cars. They continually agreed to pay higher wages rather than suffer painful and punishing strikes from unions. They traded deals for tax incentives in exchange for decisions to put plants in areas where labor was expensive and could not close them because of deals with the local governments. Thousands of top executives made millions for doing the same job day after day without any evolution into better company. The list of errors and excesses is nearly endless and built on generations old manufacturing processes.

Chrysler was bailed out by the government back in 1979 with a whopping $1.2 billion in loan guarantees. The company repaid the loan, plus interest, ahead of schedule. CEO Lee Iacocca reduced his salary to $1. Current industry executives harkened back to that time and volunteered to reduce their salary to $1 as well.

GM says it may run out of cash by year-end due to reimbursements to dealers for rebates. Supporters of the automakers recommended relaxing mileage standards and crash test standards to make cars cheaper to build. Many are considering some very short-term band-aid fixes on the assumption President Obama will suddenly appear in 2009 with a permanent fix for the auto industry. Unless he comes up with a bag of pixie dust I seriously doubt that is going to happen. The situation has been cussed and discussed for the last two years and no real solutions have been found.

Many analysts feel the three companies need to be consolidated into two. This would eliminate thousands of dealers, allow higher sales prices from lack of competition and produce more profits for the automakers. Of course that would mean consumers would have to drive farther to shop and get repairs as well as pay more for the privilege. There is no win-win answer but Chrysler is likely to be the odd man out and end up being consolidated into the remaining entities. Their divisions would be auctioned off to the other global manufacturers in order not to put too much power and cost into any one entity.

Automakers could not convince lawmakers they had a long-term strategy for success and without that plan it is going to be tough to get the money on reasonable terms. Lawmakers claim they don't have the votes to pass a bailout now and may have to come back in a later session and try again. The lingering cloud of a potential bankruptcy is hanging over the markets until a final decision is made.

Jim Brown

Intraday Update Archives