Detroit Has to be Saved

The cost of bailing out Detroit, which will end up being one automaker not three shortly, is cheap compared to the enormous cost of bankruptcy.

It is also critical to retain a domestic car manufacturing sector because of its importance to the economy as an engine of growth, to the currency in terms of balance of payments activities and to national security, in terms of keeping the country's commerce rolling.

Here's my latest Financial Post blog:

By the end of 2009 there will likely be a handful of auto companies left in the world, only one in Detroit and a handful of airlines. In fact, there will probably be only a handful of everything.

The de facto Depression underway worldwide will trigger consolidations. Strong will eat weak; cash-rich will eat debt-laden and consumer spending will shrink along with economies.
Detroit is a big worry for Washington and Ottawa alike. And taxpayers must bail out their auto industries. The number of people employed in this industry totals 4.15 million, equivalent to the population of Los Angeles (America's second largest city) or 12.5% of Canada's population. This is a 2007 figure and includes 996,500 involved in manufacturing and the rest involved in auto-related dealerships and suppliers.

The Big Three, which represent the lion's share of Canada's auto sector, are losing US$2 billion a month. Chrysler is headed for the ditch and General Motors has asked Washington for US$10 billion to help pay for its acquisition. Ford's biggest shareholder just bailed last week, leaving it an orphan. My guess is that there will be a three-way merger. Canada's auto parts makers are asking for C$1 billion or debt guarantees to keep their lights on.

More taxpayer dollars

These requests are on top of the US$25 billion Congress has already allocated over the next 18 months to help the auto industry retool. Despite the challenges facing the worldwide industry, it is ironic that the world's largest corporation is now carmaker Volkswagen in Germany. It is about to be taken over by Porsche, an announcement that made VW's market capitalization double and made VW bigger than the world's biggest, Exxon Mobil Corp. But the road ahead for VW/Porsche isn't going to be any smoother than that faced by their global competitors. Carmakers worldwide are struggling -- and airlines too -- with plunging sales as credit dries up and consumers with cash cancel discretionary spending of all types. U.S. auto sales fell 27% in September and European sales by 8.2%. VW will likely end up buying PSA Peugeot Citroen, Europe's second-biggest carmaker, and smaller French competitor Renault SA plus possibly Fiat SpA. All three have been downgraded credit-wise.

How the Mighty are Falling Too

Even Toyota had a bad month, with a decline of 4% in September. My bet is that Toyota will end up owning all the Japanese and South Korean automakers. (China's Chery will survive, as will India's Tata.) Carlos Ghosn, CEO of Renault-Nissan group, warned today that the worst was yet to come and would last into 2010.

"We have not seen yet the worst," Ghosn was quoted as saying at a business forum in Tokyo.

"Even if the financial crisis stops, the consequences of the market slowdown in terms of unemployment (will) come. So far we have seen only the beginning of the consequences."
Ghosn said he was bracing for "a relatively long term of credit turbulence."

"This is going to probably lead to a situation in 2009 which (will be) at best lukewarm. It may continue into 2010 if the financial meltdown does not find good solutions to address it," he said. "I think we are in the unchartered water," he said.

Japan's Nissan, in which France's Renault holds a controlling stake, is cutting production of luxury cars destined for the United States and is chopping 1,680 jobs in Spain. Renault is closing nearly all of its plants in France for at least one week. Daimler and BMW have both shut down factories temporarily.For Japanese manufacturers the soaring yen is another problem.

M&As are the Best Offense
Consolidations are going to happen and are as much of a defense against the crisis as an offensive means of taking advantage for the future. Airlines will be next, as will resource companies which are already being picked off on a daily basis.

The politics of such massive bailouts in the real economy, on top of those in the financial economy, are nettlesome and must be carefully negotiated. In the case of the unionized auto sector, where wages are higher than the average taxpayers', there must be huge labor cost concessions. There must be an end to ruinous featherbedding such as paying workers even when a factory is shut down for a period of time due to poor sales. A wage rollback of up to 25% is not out of the question plus an upside for taxpayers in the form of stock options. Same should apply here in Canada with rescues of any type. The auto sector is too important to let slide away in North America where as many as five million people derive their income, directly and indirectly. These are emergency measures in catastrophic times and blaming unions or management for past foolishness is not helpful. And bankruptcies are not options.

Comments

[montemalone]

We already have a thriving domestic production of automobiles. Toyota, BMW, Mercedes Benz, Hyundai.
Well engineered cars that people want to buy, made in America.
Detroit drove itsself into the mess it's in.
Gargantuan SUVs and pickups at inflated prices, paid for with home equity loans, was not a good business plan.
Let them all go under.

[vippy]

Why don't people understand that congress dictated the CAFE STANDARDS with their energy policy.
I remember the one being passed a year ago and all of them were so proud yet the mpg standard
was only 35 mpgs by the Year 2020, which is asinine but nothing in the press and people could not
care less about it. Now we see the fallout from this but who is the blame, the people again.
Why we let congress/senate get away with bad decisions that affect us all is due to being so very
aloof to their agenda. Our auto industry could not have produced cars which would have warded off
this oil crisis. Our politicians wanted it that way and yet we blame the oil companies. Check who raised your gas prices!

[DuganS1]

It is not that they "could not have produced cars that would have warded off the oil crisis", they just chose not to as all their profits come from SUVs and trucks, and not more fuel efficient cars.

[Rule Of Law]

Wrong! Further consolidation of money and power at the top and in the hands of a few corporations only leads to Monopoly Powers and companies that will in another few years still have not changed their ways and require even bigger handouts from the people's pockets!

This must stop! There are no guarantees in life in anything we do--let alone business. They have had over 25 years to become competitive and Chose not to. That sort of hubris should not be rewarded.

[RobinSeattle]

I'm sorry Diane, but this is very misguided.

What has killed U.S. auto makers has been a management style that was both bloated and resistant to change. Those who don't move with history, those who don't progress, are bound to get run over by change. They made crappy cars and their dealers left people feeling like they got ripped off with underhanded tactics. What you are seeing now has been a long time coming and now the day of reckoning is here.

If GM and Ford go down the tubes, so be it.

As for what to do about the municipalities affected (Detroit, Flint, etc), Michigan needs to come up with a comprehensive plan that puts those areas on the leading edge rather than looks back to the 1950's. They have to focus on diversifying their economy rather than being a one industry locality. So that is the actual challenge ahead, not keeping a moribund industry on life support at taxpayer expense.

[DuganS1]

Auto companies have fared badly for many years now. GM even lost money in 2005 when auto sales were high. Their problem is the unions. Back in the late 90s GM was able to spin off its union controlled auto parts segments into independant companies so they could buy much cheaper parts abroad in an attempt to become more profitable. Several of those suppliers soon went bankrupt, but for GM it still wasn't enough. The author of the article above is right that the union workers have to accept further wage and benefit cuts. I fear that if these cuts can't get done, GM and other auto companies like Ford will continue to be dying businesses. On the other hand, if the cuts do get done, they can get their balance sheets in order and begin expanding again, creating lots of jobs for Americans.

[January]

It was GM management who began to invest in non-auto industry related businesses around the world that signaled they had given up. They have gotten concessions from the unions in the last several new contracts.

Unions as the problem is 1950s thinking. Sure, American auto makers have let themselves lose the competition to foreign makers. But those foreign makers provide greater job security and higher wages to their workers than American auto makers.

So get your head out of the bucket of BS. Times have changed. Yes, that's what the auto makers' management has run away from. Sell GM to the workers and we shall see American cars win the world race again.

[iambusto]

the time for reasonable solutions has come and GONE.

i agree with detroit trying to make better cars. do something about healthcare...but the horse has left the barn.

I am no accountant but i do know how to read a balance sheet and if you invest in stocks (indivudual), you better too. Look at GM balance sheet (go to yahoo, enter ticker and look under balance sheet in left column).

GM has 57 billion$ of NEGATIVE EQUITY. almost same amount of retained earnings (-ve). If it werent for such importance to the economy, the company would not have existed/survived so far.

its time to take the bitter pill. let it enter into chapter 11.

[Rule Of Law]

iam, imagine if the FED gave that Trillion in bailout money to the People they took it from in the first place and we used it to stimulate the economy? There are still enough rubes out there who would by Detroit iron with that money, as well as pay down mortgages, go to college, start businesses, etc. It is time to downsize American Business and make accountability and responsibility the foundation of business again.

[DuganS1]

The Fed did get the money from those people. Those are precisely the people that pay most the federal income tax in this country.

[Rule Of Law]

"buy", not "by"...

[DavidJames]

What is the reason for reducing the number of automobile manufacturers in this country? Being bigger didn't help GM.

A clear path forward, has to be illuminated for the auto industry to be successful. Fuel efficient vehicles are what we need to maintain our transportation freedom.

We need to indicate to the auto companies the we want 100 mpg+ transportation. You do this with a carbon-dioxide emissions tax that is slowly increased over 20 years. $10 per ton of carbon dioxide-emissions the first year(only adds 10 cents to a gallon of gas) and increasing $10 per ton each year there after.

With oil prices going down so rapidly, this gives us the perfect opportunity to implement a carbon-dioxide emissions tax in a progressive way. We could start immediately with a $100 per ton of carbon-dioxide and rebate $90 of it with flat rebate to every taxpayer. This would be nearly revenue neutral for most people and would send a clear message to the auto manufacturers that we want to maintain our traditional transportation freedom.

[January]

So, Detroit auto makers are another "too big to fail"? That's the only point I got from reading this article. I agree that they are big. I agree that their failure hurts us. But they have been failing for a long, long time now.

After WWII, Detroit owned the world auto industry--lock, stock, and barrel. American management gave it all away and seemed to learn so little from the experience that we find ourselves today copying others in the business.

The failure is with "too big to fail." When an industry as central to us as the auto industry finds it can make more money investing elsewhere in the world, I think it's already failed. So the point is not to "save them." We saved Chrysler and got bailed out by BMW. Then they blew the billions of their investment just to get out with their skins. Something is deeply wrong. Something deeper than "saving" the auto industry. And don't blame the workers; they are treated worse than BMW workers.

American management sucks big time. Get it straight. Saving the auto industry is to save American management; that is a lose-lose proposition as far as the eye can see. "Too big to fail" means it needs to be nationalized--no doubts about it.

[RobinSeattle]

The failure is with "too big to fail."

Yes. And part of the problem is when one industry dominates the landscape, that industry becomes a state within a state, which is not only antithetical to democracy, it tends to encourage corporate inertia since people have a predilection for continuing that which they are comfortable with. So you get a big company town, in effect, a kind of corporate feudalism, that is vulnerable to extinction during times of rapid change.

Forward thinking states and cities look to ensure that they don't become glorified feudal holdings of a prominent firm. Nothing is forever. Feudalism in an agricultural form died and now it is dying with regard to the industrial age. And you know what? Good! Because that demands of us we roll our sleeves up and innovate or perish.

[rpr]

Only if Detroit starts making attractive cars again can it be saved.
As long as it makes mostly crap like Trucks, SUVs and minivans there can only be a steady decline that you can stem but not stop.
The only real cars I see around here are from Europe and Asia, the exception being the Crown Vics of the cops. Every now and then you see an older Pontiac or even older large sedan like Lincoln or Cadillac. Whenever I see a G6 for example my eyes say "what's that" because it's so rare. Toytotas and VWs are everywhere in comparison.
We'll have to see if Detroit lost the recipe or not.

[Paul]

The automobile is a dinosaur. Subsidies won't help.

At a time when credit will be scarce, why should everyone have to go $20K into debt just to get around?

Better answer: Spend the bailout money making a good mass transit system. It will put people to work, stimulate the economy and eliminate the necessity to own a car. No more car payments, insurance, repairs or gasoline to buy. We will cut down on our oil consumption and make the middle east irrelivent to our national interest.

Here in SoCal the freeways are dysfunctional. Why should my tax dollars go to GM so I have to go into debt to buy one of their cars and get nowhere fast on the freeway?

That is the definition of insanity.

[Northernmom]

The collapse of the domestic auto industry will severely hurt America. Yes, the management of the Big 3 have made some bonehead moves, but the companies consist largely of skilled, dedicated workers, from the factory floor to the engineering and support staffs. Most aren't involved in corporate strategic decisions, but they do care about quality and they know their jobs depend on it.

The economic reach of the domestic auto industry touches everyone. The talent in the companies can develop the transportation of the future. Isn't that what we want? Government's role should be to reward development of new technologies, through a variety of ways - incentives, tax credits, etc.

The alternative is to let the companies fail. The cost is 100,000s of lost jobs, lost revenue for local communities, individual bankruptcies, foreclosures, etc. Look at Michigan if you want to see a picture of the future - 4200 foreclosures per month. Everyone suffers. Local small businesses are failing every day because of the ripple effect.

Next time you are looking for a new car, be sure to test drive the American made cars too.

[Michale32086]

Call me naive and idealistic (no, seriously.. go ahead... it's OK) but it seems to me that Detroit wouldn't NEED bailing out if the produced hi-quality, low cost cars that pushed the envelope of fuel economy, but still had what the American family needed.

And don't tell me it's impossible.. Any country that can put a man on the moon can surely design a car that fits the afore criteria..

Of course, we would have to take greed, politics and ego out of the equation as well...

Ohgods, we're doomed...

Michale.....

[BassMonk]

Agreed. Our automotive industry is an embarrassment.

[customgreen]

The american public in general wanted "Detroit" to produced rear wheel drive high horsepower cars just a few short years ago. When the 1990's started Chrysler had no rear wheel drive cars, and no large (big block) V8 engines. The average fuel economy was up. The economy was rebounding and gas prices were low. Many people were tired of underperforming front wheel drive cars and clammored for more power. Detriot reacted by swinging back to far in the other direction. They obviously made a mistake to not keep one eye on the economy ball and for that they deserve harsh criticism. The American consumer as well desrves some criticism for demanding these larger heavier, highly optioned lower fuel economy cars. They were huge sellers and they made a lot of money for the big three. So much money in fact that the imports started to get into the act. Large heavy pickup trucks, bigger and faster cars, and more horsepower. The imports however were always invested in more fuel efficient cars and could rely on those in tougher times. Detroit largely abandoned the smaller cars and now they are paying a price.

[Henry]

There is something that would help the auto business in the U.S. and that is social provision of health care. Big big bucks that accure right to the bottom line of all business. Imagine a share slice valuation of 15 times each dollar saved (for business) that drops to income. This could apply to all people in the U.S.

[chagedorn]

We've been bailing out Detroit for years, let them save themselves with better products -- which other companies seem to have no trouble producing in America south of Detroit.