Soon we’ll all be driving Korean hatch-backs
What do General Motors, Ford and Chrysler have in common? Yes, they’re all motor vehicle manufacturers based in Northern America. But there’s something else. Each of these behemoths of US industry is on the brink of bankruptcy. The best solution their res
General Motors chief executive, Rick Wagoner says the rescue package goes beyond keeping Detroit alive. He believes “it’s about saving the US economy from a catastrophic crash!” The Financial Times agrees, adding that “the severity of the crisis facing the car industry was highlighted by Toyota Motors’ move to halt its North American factories for two days in December.”
This is a real crisis
A regular follower of the financial press could be excused for thinking they’ve heard it all before. But this time it’s serious. General Motors has halted payments of rebates and other incentives to dealers and claims it will run out of cash before the end of this year. And Chrysler has dismissed suggestions that they file for Chapter 11 Bankruptcy protection because they don’t believe they’ll be able to trade out of the position. So why is the industry on the rocks? We know that motor vehicle sales have come to a screeching halt in 2008. But how can an industry giant come unstuck on a single year of poor sales performance?
You’re asking the wrong questions. The US automobile industry has been in trouble for a number of years. They’ve been too slow to meet consumer requirements of more fuel efficient vehicles as fuel costs rise. And over the last few years they’ve lost more ground to European and Japanese manufacturers. Last year Toyota trashed the US manufacturers in total units produced for the first time ever. In reality these companies are too ‘heavy’ for the modern day motor vehicle industry. They are the industrial equivalent of Tyrannosaurus Rex, hunting for customers in an environment where nimbler and smaller predators are making a killing. The lack of global competitiveness shows on the bottom line. General Motors has lost money in each of its last three trading years – and Ford was in the red in full-year 2006 and 2007.
And as sales dry up they’re getting weaker. General Motors is trading at just $2.88 per share, down from its 12-month high of $29.95. The company is valued at only $1.6bn! Ford is under just as much pressure. Its shares have fallen from $8.79 to $1.38 and its market capitalisation to $3.044bn. This destruction of capital is weighing heavily on the US markets, which are already weak on the back of the ongoing credit crisis.
Is it worth saving a dying industry?
Let’s set emotion aside for a moment and argue whether government should bail out private companies. (South Africans are quite familiar with the concept, as state-owned airline SAA is a regular recipient of government assistance.) Our gut reaction is that taxpayer money shouldn’t be used in this way. But there are other considerations which we’ll list below.
The first point is the US automobile industry is hugely important to the US economy. If one of the big three were to fold the impact would definitely be catastrophic. On this argument alone the US government would be crazy not to find money to support it. The second point is that the rescue package doesn’t have to take the form of a bailout; but rather a loan. The motor industry claims it will pay the money back. It’s a tricky decision to make. If you have a long-term relationship (more than 50-years) with a good client, and that client runs into trouble over a short period (say three years), do you help them out with a bit more credit or do you pull the plug? Need extra motivation? If you don’t help out then your next car is going to be Korean!
The flipside of the coin is that state assistance is damaging to private industry. It supports a cavalier attitude to business – business executives have no incentive to streamline their businesses to be globally competitive because government will always be there with some form of assistance. We hate to say it, but the US is going to have to play ball. There best alternative is to take a capital stake in the motor companies and try to force aggressive reforms to resuscitate the industry.
Editor’s thoughts:
Should they or shouldn’t they? We hate it when government interferes with private business. Each time they throw buckets of our hard-earned taxes at SAA or Eskom we react with anger. Will we react in a similar fashion when the money they’re dishing out is to keep our banking system afloat? And what if the cash was destined for your favourite motor vehicle manufacturer? Would you support a move by the South African government to give funding to our local car manufacturers if they got into trouble? Add your comment below, or send it to gareth@fanews.co.za
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