Big Three Teeter on the Brink

[grober]

The USA's big three teeter on the brink today. http://www.guardian.co.uk/business/2008/dec/10/automotive-useconomy
and things are not looking good in CANADA
http://thechronicleherald.ca/Business/9009746.html

http://edition.cnn.com/2008/US/12/09/auto.bailout/index.html

 

[JasM]

It's not exactly any better here either.

 

[Darrell]

I am no economist but the whole world has had a good 10 years of flourishing finances.

Many of the worlds car producers have been selling their products hand over fist,yet just 4-5 months into a recession they have their hands out for billions of dollars in government aid.

If I have a few years of good earnings in a boom I will put away a few quid for the bad times.Can't these car producers do this or are their margins so tight.

Someone will put me right and explain,so please do.

Darrell

 

[Mudster]

Porsche are pretty much the only firm that make a profit per vehicle on pure sales without any other requirements.

Off the top of my head, they make somewhere in the region of £16,000 per unit sold (averaged out) whereas most if not all the others are lucky to see £1000. (This is why the Porsche VW fiasco recently was big news - Porsche are an incredibly solvent manufacturer). Every other company relies on add ons, finance being the main one.

Residuals are what's hitting the big boys along with a massive drop in new vehicle sales.

The very large majority of vehicles are financed, and the cost of that finanace is a very big part of the bottom line margin.

The big boys are being left holding the baby on a lot of vehicles every month that are maturing on finance agreements and left with a value a lot smaller than the guaranteed value underwritten when sold originally.

Add to this that the refinancing charges then escalated and it very quickly burns holes in any margins they had.

Also remember that most of these companies are PLC's and have shareholders to renumerate with dividends, they don't just sticka load of cash in the bank in the good times and say "We'll hang on to that thanks for a rainy year".

So, a massive drop in sales, large volumes of stock requiring refinanace that is valued at less than is owed in a market that is currently oversupplied.....things go bang pretty quick. Even solvent profit making companies can go bust purely for lack of cashflow. If they aren't able to borrow enough to pay their suppliers the music stops.....and all the chairs were removed some time ago.

 

[kikkthecat]

Funding turned down

Can anyone explain why the US government will spend $700 billion bailing out the banks but wont spend about 2.5% of that bailing out the car companies ?

 

[Mr E]

Porsche are an interesting turnaround tale in the automotive industry - you don;t have to go back too far to find the time when they lost money per car during manufacturer and still had the highest post-delivery OEM costs in the word (warranty, recalls, etc).

The difference was, they did something about it. Cost per unit is an interesting measure, but they had to rebuild the brand and credibility. This they've done with aplomb. The difficulty is that profit per unit is very difficult to actually split out for a private company...Porsche do much more than just make cars.

The big 3 have not sat up and listened. They've not taken on the unions and tried to sort out their healthcare and pension situation. They've taken few steps (in the US) to better their product and all have made real howlers in decisions made outside of the US (even though the core non-US business is essentially OK).

The only realistic outcome involves people getting seriously hurt - either the workers suffer as the business rapidly shrinks or everyone loses as the companies and associated pension/healthcare schemes go down.

 

[Mr E]

Funding turned down

Can anyone explain why the US government will spend $700 billion bailing out the banks but wont spend about 2.5% of that bailing out the car companies ?

Not so much risk on the $700B as there was on the $17B. The banks also signed up to everything the government wanted them to inn regard to getting the business back on an even keel. And remember, that's not $700B cash, that also includes liabilities underwritten.

The auto makers want cash - now. The UAW won't budge and help out in reducing core costs in either salary or pensions. Therefore the core is still rotten. Therefore the business has little or no reasonable way of seeing the financing repaid.

 

[Mudster]

What He says^^^^

The Unions are not accepting wages need to be cut, costs need to be cut....

I understand GM has a (sic) title of being one of the largest pension hand health care providers on the planet......

Banks are likely to turn around the problems over time and actually repay the sums required with interest.

GM and other boys are like addicted gambling shopaholics that run their own pension and welfare systems.....There's a core problem with the business model, no point throwing good money after bad. They have to completely restructure or it's all going to go Pete Tong.

 

[Rovinghawk]

Also remember that most of these companies are PLC's and have shareholders to renumerate with dividends, they don't just sticka load of cash in the bank in the good times and say "We'll hang on to that thanks for a rainy year".

In theory they do- the accounting term for it is retained profit.

I'll agree with the rest, though.

RH

 

[chord]

Funding turned down

Can anyone explain why the US government will spend $700 billion bailing out the banks but wont spend about 2.5% of that bailing out the car companies ?

Ford had been in trouble for a long time before the current credit crunch, Ford Europe made money, but Ford USA lost a packet. So I imagine a few people are thinking they are taking advantage of the current situation to get the taxpayer to bail them, even though there problems run deaper than the current sitiation.

 

[Mudster]

In theory they do- the accounting term for it is retained profit.

I'll agree with the rest, though.

RH

Understood, but the problem is I think you'll find they've been using "retained profit" to prop the company up...which then isn't actually retained profit as you or I would understand it. i.e cash in a savings deposit account incase things get bad.....

 

[Bobby Dazzler]

GM and other boys are like addicted gambling shopaholics that run their own pension and welfare systems.....There's a core problem with the business model, no point throwing good money after bad. They have to completely restructure or it's all going to go Pete Tong.

Good point well made. First lesson I learnt as a project manager was to kill a project if it needs to be put out of it's misery, whether it's just started or about to go live. If it makes no sense to carry on, then it doesn't matter how much - or how little - has already been spent, it still makes no sense to carry on.

With powerful unions and a history of simply meeting the spiraling cost of providing healthcare and penions, the easiest thing to do has been to simply carry on.

Eventually nature takes it's course and fittest survive, and those unable to adapt don't - survival requires drastic action, and makes those difficult decisions much easier - because you can 'blame' something else.

In some respects, the big-three senior management will be torn. What faces them will have a massive affect on those people who depend upon them, but they may finally be able to break the shackle that's held them back for so long.

 

[st13phil]

If it makes no sense to carry on, then it doesn't matter how much - or how little - has already been spent, it still makes no sense to carry on.

Absolutely true - and I've done it myself - however...

meeting the spiraling cost of providing healthcare and penions, the easiest thing to do has been to simply carry on.

This is the nub of the problem. If it were truly just a commercial decision then there would be few who would argue that a quick death wasn't actually the best option. However, that would instantly create an unacceptable social care situation so someone, somewhere, would still have to pick up the cost of healthcare and pensions. That "someone" would be Uncle Sam, so he may as well get a few cars made for his money too.

Rocks and Hard Places spring to mind on this one.

 

[hawk20]

Funding turned down

Can anyone explain why the US government will spend $700 billion bailing out the banks but wont spend about 2.5% of that bailing out the car companies ?

Don't worry it will spend a lot more than that trying to rescue the big three.

The issues are less simple than many paint. GM have four pensioners (claiming pensions and healthcare) for every current employee. Unsustainable. Chrysler has similar problems. Unions won't even negotiate about this issue and one can understand why.

USA is a federal system. Some states have given huge grants to foreign car firms to set up new, greenfield plants, with lower costs due to the grants, and with much lower wages. The big three find themselves competing with subsidised newcomers including Mercedes, BMW, Toyota, Honda, and Nissan. There is no logical industrial policy.

 

[Dryce]

If I have a few years of good earnings in a boom I will put away a few quid for the bad times.Can't these car producers do this or are their margins so tight.

Someone will put me right and explain,so please do.

Companies don't usually get to retain much cash - shareholders expect it to be returned to them or they expect it to be invested to make more money.

That assumes that these businesses have been making real profits.

Assume that a car manufacturer will be spending money on developing new models. That expenditure is probably being loaded on the balance sheet. Eg. You spend a £1 but it doesn't get treated as expenditure because it gets put on the balance sheet as £1 of value added to the company. So the company appears to make a profit because a whole load of money it spends looks like it isn't being spent at all.

Now what happens in the good times is that an inefficent company can put a higher value on its assets and also even on that R&D. So it appears to make money when in fact it's not got a lot of cash. Doesn't matter in the good times because you can raise credit based on the strength of your balance sheet.

So in the bad times this all falls apart. What has been particular distinct about the credit crunch is that it's really a confidence crunch. Nobody trusts balance sheets and stuff is being written down. That R&D that will generate future income may not genearte so much. Those factories and offices aren't worth as much.

Now the companies are carrying debt. That's looking bigger than their asset values. They have increased pension funding liabilities (pension funds writing down their assets but still having future liabilities). Their sales are down so less cash coming in.

So bang.

Companies like Microsoft which have huge amounts of cash are an exception. But they have had the luxury of not paying dividends.

I think the real problem for GM and Ford is that they have been closer to the brink even in the good times than people have realised. Just like the banks there has been a lot of supposed balance sheet value that doesn't pass the test when it comes to economic bad weather.

 

[Dryce]

Rocks and Hard Places spring to mind on this one.

The problem is that the taxpayer picks up the tab. And those taxpayers are likely to be on worse long term future benefits than those the politicians need to subsidise.

We had a recent miniscule version of this when MG Rover went down. The government put in some money to ease the situation for a few weeks. Why should the workers of one company get this benefit and not those in another (eg. a supplier's workforce).