General Motors and Chrysler are demanding an additional $21 billion in bailout funds. Supposedly this is because car sales have been soft. I guess they don’t realize that this is the new reality, car sales aren’t soft; they are what they are.
The US auto manufactures have been mismanaged for years. General Motors (GM) has effectively been bankrupt since 2006 (when liabilities surpassed assets, never to look back). The big three have more excess capacity than either Ford or Chrysler’s actual production. They stuck with the mantra “American’s want big cars” as the Japanese brands caught up and eclipsed the US brands. In January it was announced that Toyota passed GM as the world’s largest automaker, a title GM had held for 77 years. 77 years.
The light-vehicle excess capacity of the big three is around 3.8 million vehicles per year (see graph below). Let’s assume that all of this excess capacity is sold off to a new car company called Excess Capacity Inc. Once Excess Capacity Inc. completed it’s acquisitions it would have production capacity of 3.8 million vehicles per year. That’s more than the production capacity of Ford or Chrysler, so Excess Capacity Inc. would be the 2nd largest automaker in the US. Yes, the excess capacity of the big three is more than the production of either Ford or Chrysler.
Below is a graph that was printed in the Wall Street Journal on February 8, 2009. It shows North American light-vehicle capacity and production for the big three and Toyota. Ford has reduced capacity as demand slipped, but keeping one million vehicles of excess capacity (a third of total capacity) seems… excessive. General Motors defines futility, keeping production around 5 million in the face of three consecutive drops in annual sales. Chrysler toes a similar line, keeping capacity steady in face of declining demand. Toyota is the only company showing even one year of increased year-over-year sales and very good excess capacity management. That’s right, good management…
Have I mentioned that all three companies have been mismanaged for a while? They built up like sales would grow until the end of time, but it seems the end of their time might come first.
The General Motors bailout is farcical at best. The attempt to reduce unsecured credit from $27.5 billion to $9.2 billion by exchanging bonds for common stock is a lose/lose proposition.
In the bailout of Fannie Mae and Freddie Mac bondholders were all guaranteed while stock holders were left out to dry (Fannie Mae stock, from a October 5, 2007 high of $67.30 fell current $0.57, an over 99% drop). In the case of Fannie/Freddie the debt was “secured”, but possibly through toxic assets. For General Motors, the debt is unsecured, but GM’s balance sheet shows that as of September 30, 2008 GM had equity of -$60 billion. So if the GM declared bankruptcy, the holder’s of the unsecured bonds would get nothing. But if they converted the bonds to common stock and the company went bankrupt they would get… probably nothing.
General Motors is bankrupt. And has been for years. There is only one course of action in my mind.
We should wait until one of the big three goes bankrupt. Auction off the assets to the remaining US automakers, using bailout funds to help with financing. The issue of excess capacity is diminished, and hopefully the remaining two could ramp up production to fill the gap left by the loser. Auction off plant assets to other manufacturers, again possibly using bailout funds to jump start new activities.
All of this hand wringing about massive job losses misses the point that the excess capacity is sapping these companies and represents a massive waste of capital. Excess capacity exists because people are being paid to do nothing. There could easily be a million layoffs getting excess capacity under control, this is just something we will have to live with.
The jobs will be lost one way or another. The real question is how many billions of bailout funds will be wasted getting to this point?
Is GM Playing Both Ends Against the Middle? Or Perhaps another way of saying it: “Do you really trust a car salesperson?”
http://ourcountryspresident.wordpress.com/2009/02/19/is-gm-playing-both-ends-against-the-middle/
It’s pretty obvious that GM and Chrysler are playing the “or I’ll go bankrupt” card against the government when asking for money. Chrysler put a date on their request, so they’ve asked for money by a specific date. That sounds more like a ransom demand to me…
I think the government should sit on the sideline for a bit and let the market and attrition determine who survives. They do this with small business, they are failing left and right.
My latest post goes into a lot more detail about what I would consider a Bailout Plan for the Automakers.
[...] Please refer to the graph in my previous post Excess Automakers. Here’s the data I extrapolated from the [...]