Penny-Less Prosperity Redux

These three assholes just get more and more pa...

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*Disclaimer* - The thoughts expressed here do not represent those of my employer
Some of asked me about my opinion regarding some unprecedented times in the auto industry. Both Chrysler and GM have filed for bankruptcy protection in the past 2 months. Clearly, the North American market and manufacturing base is undergoing drastic changes.
There is a substantial amount of acrimony surrounding the tough love stance the US government leadership has delivered to the industry. Perhaps at the eye of the storm are the deep haircuts the bond holders have taken and the scorched earth policy which will significantly reduce the number of auto dealerships.

As mentioned previously in this space, I often watch C-Span in an effort to gain a different perspective. Typically their coverage is not your average talking head. What I have found most interesting is the special hour for the Republican Party. Many of these representatives attacked President Obama for the so-called spending spree. There was also talk of 'gangsta' politics. In that, the gov't just bumrushed dealerships and shut them down for no reason.

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Though, I fully understand that dealerships and ancillary businesses (ie body shops, aftermarket, etc) play a large role in the labor market and the auto industry ecosystem.
It is important to understand how we arrived at this place.. 10-15 years ago, the production volumes of NAFTA countries was roughly 16mil.. units. In 2007 those numbers had dropped well below 10mil units. Many economists are projecting those numbers to fall even further in 2010. Obviously, the current market conditions will not sustain these high volumes. Poor consumer confidence, no bank loans, upside down housing market. Need I continue?? So what you have are plant closings and too much product sitting on the lots of dealerships, all dressed up and no where to go.

The irony is that US automakers have historically under utilized their manufacturing plants. 10-15 years ago it wasn't so bad because the margins on SUVs was so deliciously intoxicating. Automakers would put cash on the roof (insider term for customer rebates), and it still would not put a dent in their profits. Times are so hard now, this sort of tactic stings greatly. Hell, even mighty Toyota and Honda have resorted to the cash on the roof strategy to push sales. I digress..

The point here is that market is shrinking. In fact, it has been shrinking for a number of years. It cannot sustain high volumes of autos, thus dealerships must also shrink proportionally with the demand. I understand that this is not a popular stance, but it is absolutely necessary. US automakers have been aggressively reducing their white and blue collar workforces and some are also permanently killing off vehicle name plates(See Oldsmobile, etc). What makes folks believe that dealerships are untouchable?
Yes, I know that these dealerships are basically franchises, but at the end of the day they pretty much have to march to the beat of the industry. It's ugly.

The Saturn brand has been abandoned. Fiat will ultimately steer the direction of new GM. Some people derisively call GM, Gov't Motors. Sure the gov't stepped in pushed change. Methinks that sort of jolt was necessary. In fact, the "jolt" came well before the Obama administration. It came in the form of the Asian automakers (ie Toyota, Honda, Hyundai, etc), the rising cost of precious metals I compare it to the jolt that Free and Open Source Software gave to woolly mammoth behemoth M$. The plan that GM leadership offered was unrealistic and would take too long to execute.
The major points of contention in the GM plan were

  • Assumed Sales Volumes

  • Company Market Share

  • Timetable for TARP Payback

For whatever, reason GM projected growth in sales volumes and market share. Very different from reality. Particularly in a regressing market place. These factors led to the Wagoner resignation

So, the automobile task force was organized to push change. Love it or hate it, something had to be done. One might argue that the bondholders got screwed. Some would also blame Obama for that too. I suppose the gov't major stake in GM will eventually shift to the public after all of the taxpayer debt is paid back. Unfortunately, the bondholders held onto these assets much too long. Perhaps there was not enough communication between the OEM and its bondholders. A couple of scenarios come to mind when I think about the bondholders strategy.
Some probably were misinformed, as they thought GM was too big to fail. Thus, they held out for a huge gov't bailout which would keep GM out of bankruptcy court. Obviously it never came. Secondly, they thought wrongly that their votes in the recent election would provide them infinite protection.

Additionally, methinks that it took too long to get all the parties to pseudo compromise(ie bondholders, labor union, and OEMs). Tough choices had to made. Nobody likes the shrinking job market, but as the North American Auto Market begins to resemble its European counterpart, that is a smaller market share for each manufacturer. The days of one company owning 21%-30% of the market are over and likely never to return.

What does puzzle me is the absence of Chinese. Sure Hummer went to a Chinese suitor.. I had anticipated that the Chinese would be clamoring for the distribution channels that GM vacated, particularly the Saturn network. I would not be surprised to learn that there was a huge effort on behalf US automakers to keep them at bay. Regardless, of what goes on behind close doors, the Chinese will eventually penetrate the US distribution channels. Once this occurs, the world will truly be flat.

Last words... It would behoove those parties that are left standing after the dust settles, Don't think for a moment that it is cool to gloat and pound your chest while proclaiming victory. It would truly be penny-less prosperity to repeat the failures of the past. Take advantage of this strategic time afforded to you by the collapse of your domestic rivals. Clearly the perennial leaders who have demonstrated exceptional quarterly profits are not standing idle pondering their next moves. Are the sales spikes a result of internal re-organization or the collapse of rivals?

  • Death of a Brand
  • Fiduciary Responsibility
  • Twitter experiment ends
  • The New Middle - Gov'ts Guiding Hands
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    This page contains a single entry by AG published on June 14, 2009 1:48 AM.

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