Automakers' Future: The Smaller 3 Or Big 1?

CNBC's Phil LeBeau predicts that the idea of Ford selling Volvo -- along with GM selling Saab -- would be the beginning of a new era for the "Big Three:"

Call this the start of the Big 3 becoming the smaller 3. Starting tomorrow and playing out over the course of the next week Detroit's auto makers will be telling Congress how they plan to get back in the black. For the American auto makers it will likely mean shedding brands.

Ford is now looking at selling Volvo. It's a brand with an incredible reputation worldwide that should bring Ford between 1 and 1.5 Billion dollars. In better times, Volvo would bring bigger bucks. That said, Ford will take what they can get.

Doug McIntyre, of 24/7 Wall Street, considers an alternate future -- a Big Three merger, in which they become The Big One:

Look at the GM (GM) 10-Q. The company had $3.3 billion in sales, general, and administrative expenses. That is all of those white collar workers, the R&D and product development staffs, the marketing men and dealer relations people, and the accountants in the basement of the headquarters in downtown Detroit. Ford's (F) number is nearly as large and Chrysler's must be $2 billion. Robert Nardelli makes a lot of money.

Added up, those costs of being in business, costs that are duplicated among all three companies, are $33 billion a year. Even in Detroit, that is a lot of money.

Car CEOs will argue to Congress that they can cut costs more and make better cars. None of them can take out $20 or $25 billion. None of them has the balance sheet to make all of the new cars that they will have to and spend all of the R&D money necessary to be competitive five years from now.

CNBC: Ford Selling Volvo?
AP: GM Selling Saab?

Comments

[Rule Of Law]

Not my words-borrowing from a response to one of my posts elsewhere, but it is great:

Instead of the smaller 3 or the bigger 1---Why not the "Dirty Dozen?"

Break them all up into their parts and let free markets reign.

[Two Three Four]

The auto industry has survived on minor revisions for the better part of a decade, but America doesn't need a recolored cozy-coupe, we need a green cozy-coupe.

http://voteforamerica.net/editorials/Comments.aspx?ArticleId=166&ArticleName=Ready%2c+Set%2c+Bailout%3f

[Viper]

It appears that UAW workers average 28 per hour. And thats for a much older work force than their competition.

Toyota workers recently at their largest U.S. plant made more and are a much younger work force.

If you convert to Average Wage for the same age group the comparrison would even be more in conflict with the idea that Autoworkers are still over paid by Big 3.

We pay Radiation Techs at our Cancer treament centers who are Highschool grades with 2 years of tech school training from $25-35 per hour. Its not as tough as working on an assembly line.

UAW starting wage is now 12 bucks per hour. Much lower than low end hospital staff. Lower than what a bartender makes

http://www.washingtonmonthly.com/archives/individual/2008_11/015760.php

http://www.aftermarketnews.com/Item/28594/uaw_losing_pay_edge_foreign_automakers_bonuses_boost_wages_in_us_plants_as_detroit_car_companies_struggle.aspx

Regards.

[Excitedforfuture]

Exactly -- I find it curious that the very people complaining about $28 an hour are taking home huge bonuses and salaries. Why is it wrong to provide jobs that pay well for the middle class? Because it takes money out of the CEO's pockets!!! God forbid the middle class be able to provide a nice home for their families!

Not to mention college graduates who are lucky if they can find a job for $12 an hour!

[KillTheMessenger]

At $28 per hour you are not middle class. You are one layoff away from becoming White Trailer Park Trash. Or worse.

And if your college graduate can't land an exempt job, he or she went to the wrong college and took the wrong classes.

[superhookie]

Yeah, nice BMW photo for a story about the Big 3.

[rlkinny]

The 3 auto companies merging into 1 --- noooooooooooooooooooo! Then it will take only one idi.ot to mess up the whole industry. Right now, it takes 3 id.iots. (Although, granted the boards of directors seem to be doing a good job of finding them). I think the longer term solution lies in the opposite direction -- breaking up these "too big to fail" companies into smaller entities that can be more competitive and be a breeding ground for innovation.

[research]

Really,

What part of

Too Big To Fail

Don't Conservatives understand?????

[Excitedforfuture]

Merging all those smaller companies and banks is what got us into this mess!!!

If they merge into one auto company, there will be even less competion. Good luck affording any kind of car if that happens!

[mapleaforever]

If one dime does to beefing up Chinese operations (hello GM), then these CEOs should be thrown in jail and all monies would come due immediately.

[Viper]

While we tar and feather the BIG 3... The last major industry we have, only lost half of in 30 years...
Where is the steel, ship building, consummer electronics, computer, textile, appliance and etc industries... ? Why did we lose all of them.. it appears when you have in just 30 years lost 66% of your industrial base with the bih 3 being half of what we have left.. we have to look at a bigger picture.

Even research and computer software are going to low wage countries. We produce only enough new High Tech jobs to employ 25% of those that graduate with Tech degrees.

Some how we never point out that only the BIG 3 dont have a protected home market where their cars sell for twice as much like Japans cars do back in Japan where they make their profit and get interest free loans and have their research and development paid for. Europe's car makers are protected from Asian imports since 1980s. They all have government paid for healthcare. All other countries have a government industrial policy and protect their strategic industrial secfors.

The problem is bigger than the BIG 3... but lets keep doing the same and continue our slide... 1980 32% GDP MFG. 2008... 9%.. of which Big 3 is half of that. Hey we can all be burger flippers!


Regards

[Nancyok]

Amen. Please write more elsewhere, VIper. People are clearly not getting why this industry must be saved. Washington and the banking and oil industries are about 80% responsible for the woes of the auto industry. Detroit's not perfect, but they aren't evil. The American Dream will die with the auto industry if we don't act. It's easy to look at hindsight and say that the auto biz should have done this or that, but none of us really anticipated the massive decline in credit, housing market, consumer confidence, increases in unemployement...that have led to the Big 3's troubles. Could they have been a little more aggressive on the green front, sure, but up until this summer, consumers weren't demanding in any sort of mass way alternative autos, or weren't willing to pay for the huge difference in tech/production costs to do the right thing. Production lines cannot be changed overnight, but a Depression could be upon us in less than a year if we put 1Million people on the streets in the next quarter...that will quickly turn to 9Million+ by year's end.

[Excitedforfuture]

Not to mention to redistribution of wealth to 5% of the population. When we don't have disposable income to buy the goods these companies produce, they don't move, which results in job loss, which results in less $$$ to spend on goods!!!

What the republicans don't realize is that nothing trickles down!!!

http://www.cbpp.org/3-27-08tax2.pdf

On top of the redistribution of wealth, gas prices ate up what little disposable income people had to buy cars, furniture, clothes, etc. That's why it's so important to keep not only the jobs at these companies, but at the companies that provide parts and services to the automakers -- including tire companies, window, upholstery, and car dealers. That along with the new jobs that Obama is proposing can actually do some good. Unlike throwing good money at the greedy banks that hasn't helped the economy one bit!

[KillTheMessenger]

Where is the computer industry? HP is #1 and Dell is #2. US ship building is leading in the world of military vessels. Appliances, last time I checked Best Buy inventory, are fine. In consumer electronics Apple is cleaning the floor with the competition, tv's of course, went to Japan and Korea.

Textiles are best left to developing nations, there is not much hope that we can compete there, except with high end and specialty clothing.

"Even research and computer software"

Are they? I didn't notice.

"We produce only enough new High Tech jobs to employ 25% of those that graduate with Tech degrees."

That's nonsense. Just look at the demand for H1B visa. Those are all people with degrees of which the US hasn't made enough off for the past 40 years or so.

In any case, none of this is enough to keep a dying industry alive with government funds. Otherwise we would still pay for people who make fishing nets by hand and weave sail cloth for four mast barks.

[Arthur954]

Amen ! good comment by Viper ! The reference for the US is GERMANY, not China or Russia. In Germany, the private sector works closely with the government and the labor unions to find a way of doing things that benefit everyone in the long term. Everything starts by a love of your fellow human being and citizen, and the willingness to share the results of the common work. This is translated into an intelligent INDUSTRIAL POLICY that helps the private sector create good manufacturing jobs.

The German system produces the best cars in the world, Lange and Sohne watches, dental and medical machinery, even woodcutting machines like Stihl are considered the best and sold all over the wold. These are all things that the US should be producing.

Instead what we have now in the US is a Russian - style capitalism where the government is demonised and the ordinary people are left unprotected.

The new Obama administration needs to create a new position : SECRETARY OF INDUSTRIAL POLICY -- the most important new position of all !

[CologneCitizen]

Very well said.

I live in Cologne, Germany and agree to everything you write. Our unions and employers associations work closely together on all issues. The goal for both is to benefit the worker and to rise the profits of the employers. Believe me it works. It is a give and take. Bottom line is to produce goods which have a quality that can compete worldwide. It has made us one of the worlds largest export nations. German people have a good personal savings rate which is necessary when the going gets rougher in a recession. But even if pay raises are smaller in hard times, we always keep our health insurance,
4-6 weeks paid mandatory vacation, etc. and our companies make still a profit. Our system in Germany is not rocket science. It is the result of constantly working on the benefits and bettering life for ALL the people. You nailed it: INDUSTRIAL POLICY !

[thegreatgiginthesky]

Its UAW's fault that these companies are is such a state. All those greedy workers. Why can't they sacrifice their salaries so that the CEO can live a better life?

[mjb5406]

I sure hope that was sarcasm... because if it's not, you've really got your priorities screwed up!

[ratcity]

OK Karl Rove. Get off the computer and take your medicine.

[wesinohio]

Companies become big because of 1) Superior quality 2) Lower cost per unit of production as the scale of production increases at the plant level - up to a point.
Number 1, superior quality, evolves from a multi-faceted marketplace and also requires innovators who set goals and priorities based on what customers want. This is not what's happening in the US.
Number 2 applies to the cost of production at the plant level, but it is clear that there are no such savings when a few corporations manage many factories. Managing one factory is different from central control over 100 factories. Central planning causes problems both in economies and governments. In a centrally controlled mega-corporation, fewer ideas are involved in formulating decisions, mistakes become larger scale, and its massive changes are destabilizing to companies, communities, the nation and the world. Progress is slowed down as gigantic market experiments are tried by huge companies, instead of the many different experiments from many interpretations of the market, with quick feedback and accelerated learning, that we would see with many smaller companies instead.
We'd be a lot better off if the government simply facilitated the sale of much of the auto companies" plant and equipment to entrepreneurs. In this way, the government wouldn't be subsidizing the failed corporate model of the mega-corporation but investing in a corporate model that works - one that is human scale, community oriented, involves more managers, more ideas, is more stable and creates more satisfaction.

[dizmo4]

The best way the Feds could help the big three is by loosening franchise laws in states that will allow a GM or Ford to discontinue vehicle lines. When GM Killed Oldsmobile a few years back, it cost them nearly $1bn and four years to buy out all the dealers, etc.

If the feds are able to suspend franchise laws, and provide financial backing to allow the discontinuation of several lines it will be far more effective than writing them a check for $15 bn. GM needs to get down to around 3 vehicle lines: Chevy, Cadillac and GMAC. Scrap everything else. Then focus on making those lines competitive and far more fuel efficient.

Chrysler is a private company and should get absolutely $0. More than likely they should be folded into Ford or discontinued altogether.

Ford probably should be extended a line of credit -- (loans not grants) should they need it. Of the big three they're the only ones that actually seem to be on the verge of profitability. They also appear willing to reorganize and cut CEO pay.

[Chavez08]

You go, Washington!!! Why not give the rest of our manufacturing base to Asia since you've killed manufacturing in the U.S.?....Maybe you can talk Beijing into paying the taxes that keep you ignorant criminals in existence since Americans can no longer afford you.

[WilhelmOttoWolf]

Why is it that Japan has 6 or 7 solid auto manufacturers, and Europe a dozen or so auto manufactuers, but we THE GREATEST COUNTRY IN THE HISTORY OF THE WORLD, have just three crappy, and maybe just one?

[netzwerg]

GREATEST COUNTRY IN THE HISTORY OF THE WORLD in what, building bombs, building burgers?

surely not building cars.

[thegreatgiginthesky]

You only scoff because you have never had a good burger. Don't knock it till you've tried it.

[JScott]

Well weren't Saab and Volvo not part of the US auto companies at one time?
BTW that means Sweden only has the big 2.
And Japan doesn't have as many as ya think-Scion and Lexus are Toyotas in addition I think they own Daihatsu. And it Europe I think there really as many as ya think either Fiat owns Alfa and Ferrari.
Isn't Porsche part of VW which also builds the Mini and Bentley, SEAT and Trabant? And aren't Peugeot/Renault/Citroen kinda all one company? I'd say keep em separate but smaller, Ford and GM could give up their Swede subs, might actually be a good thing. Oh and they could probably give Hummer away but who will build the mil version?

[netzwerg]

NO! ;)

Im German and tell you about our auto companies:

Porsche largely owns VW, State government of Niedersachsen (Lower Saxony) owns 20% of VW.
VW owns Audi, Skoda, Seat, Bentley, Bugatti and Scania, who build Trucks... forgot one?!??

Audi owns Lamborghini.

Then there is BMW, which is largely privately owned by Quandt Family.
BMW owns Mini and Rolls-Royce.

And of course Mercedes Benz, which is basically... Mercedes Benz and SMART.

And there are some smaller manufacturers like Wiesmann, who build only small series of 100-200 a year.

Pretty complicated connections but i hope you got a clue. ;)

[jojojo]

high labor costs--end of story...

[Viper]

Lower wages than in Japan or Germany!

They have government paid for healthcare and government industrial policies that protect and grow stratgeic major industries. Asian imports have been limited in Europe for almost 30 years. Try to import to Japan or Korea ... good luck. China basically requires cars sold there to be built there.


Would you pay twice as much for that Toyota as they do in Japan? Would not look quite the same as quality per dollar then.

No one is playing by the same rules our industries have been asked to play by!

Regards

[Viper]

By the way Nissan and Mazada were in trouble just a couple of years ago. Toyota has run up a huge debt load selling cars here at no profit for 30 years to gain market share.

Regards

[KillTheMessenger]

Except that Toyota has been posting a profit last quarter. Chucks. Reality is a bitch. And she keeps biting the Viper!

:-)

[spinns17]

i think other countries that get the perks from making products in there country .should also kick in on the bailout

[netzwerg]

Why should they be punished for doing a good job for their people? Some Americans are really strange.

[freethinking moderate]

I would really like to see a publicy inquiry into American business schools of the last 2-3 decades because its every industry that is run by greedy morons who have no concept of long-term thinking. What does an MBA really mean in 2008? More Bad Actions?

[Rule Of Law]

Anyone who looks at the consolidation on Wall Street in the banking industry and thinks that is a good thing, would love there to be only one auto company in America. But look at what happens every time we allow monopolies to exist. When competition no longer provides an incentive for Any business to provide the very best product or service; when those business grow so large that they threaten the very political system that allowed them to flourish; and when the money is so great and concentrated that the people are no longer free, but rather slaves to the Corporate System, then we see a degradation all down the line in those products and services, just as in the old Soviet Union, and the death of Democracy and our rights.

[JoelNH]

Uh, One US Automaker does not a Monopoly make. They would have plenty of competition from Asian and European automakers.

I suggest you learn what a Monopoly is...

http://en.wikipedia.org/wiki/Monopoly

[nibblybits]

Rule of Law makes a point. It's not that foreign companies wouldn't supply plenty of competition; it's that one large company, backed by the US government, is essentially a nationalized *industry*. You get into very messy territory there. The one large company can then be mismanaged to their heart's content (though that doesn't seem that different from now) because taxpayers' dollars would always be there to bail them out.

For the system to work, they have to *believe* they can fail.