December 17, 2008
The other shoe begins to drop
Chrysler LLC, awaiting a federal rescue as its cash dwindles, will shut all 30 of its plants for at least a month starting Dec. 19 as unsold cars and trucks pile up at showrooms.
Ford Motor Co. said it will idle most of its North American assembly plants for the first week of January, while General Motors Corp. said a new factory making engines for the Chevrolet Volt electric car is being delayed to conserve cash.
The cutbacks showed how far automakers are going to save money and prune output in a year in which industrywide U.S. sales are poised to fall to their lowest levels since 1991. GM and Chrysler say they may run out of operating funds in just weeks without emergency U.S. aid.
Posted by James Hamilton at December 17, 2008 07:56 PMdigg this | reddit
These would be the production shutdowns I hinted were coming back on 3 December 2008, for which the automakers' suppliers were having to coordinate their own suspensions of production ahead of the OEMs.
While I haven't been following Chrysler's situation since they were acquired by Cerberus, I can say that GM's situation is not a surprise. From 2 October 2008, in the comments here:
Even though the default data set up in the tool shows that GM was highly distressed back in March 2006 (their Altman Z-Score was 0.01 back in those rosy days), updating it with the most recent quarterly data as of 30 June 2008 reveals that things have become much, much worse. Their Altman Z-Score is now -1.35, which is the lowest I've personally ever seen.
Perhaps that helps explain why the Congress provided $25 billion for the auto industry in their bailout package. At this time, I don't believe that even if the full amount went to GM that it would be enough for them to avoid bankruptcy proceedings.
And later that day, considering what if GM did get all that $25 billion:
"Whither General Motors? I want to know but, frankly, my crystal ball is a bit hazy these days. Is that US$25 billion loan guarantee provision sufficient to keep GM afloat?"
No. They would have to receive all the $25 billion (it will be split with Ford and Chrysler), and even if they did get it all, it would only reduce their Altman Z-Score to -0.96. Reorganization via bankruptcy is in their future.
The numbers being thrown at the automakers are only going to get bigger. I would be very surprised if figures being tossed about now were anything other than a down payment that will be dwarfed by the future stream of payments needed to keep the company out of the bankruptcy proceedings it needs.
Posted by: Ironman at December 17, 2008 09:31 PM
I thought the other shoe was the value of the dollar and the external balance?
Posted by: SvN at December 18, 2008 02:37 AM
GM : bankruptcy is the best solution, the earlier the better.
What is your opinion, JDH ?
Posted by: John Lee at December 18, 2008 03:52 AM
What is the multiplier effect of the automakers? I was surprised to read that they contribute 50billion annually to the chemical industries annual revenue. Considering that this is a small part of auto costs I would imagine that the multiplier effect is pretty substantial.
US automakers in prior years generated roughly 500 billion in aggregate revenue. 25 billion is a rather small amount to slow the massive loss of jobs if the automakers went out of business.
Posted by: cb at December 18, 2008 06:08 AM
Does anyone think we have reached the low point for the auto industry? In the recessions of '74, '82, and '91 it took between two and four years for auto sales to return to pre-recession levels. Sales did not drop substaintially in the 2001 recession. Why not wait to bail them out a year from now when it will be easier to make the tough decisions?
David Rosenberg at Merrill Lynch suggests we will have "frugal future" and a return to the days of Ozzie and Harriet where saving was a virtue. We will just not need as many SUVs. This will benefit the auto repair industry. Labor for auto repairs is something that can not cheaply be exported.
Posted by: MikeR at December 18, 2008 08:05 AM
GM and Chrysler say they may run out of operating funds in just weeks without emergency U.S. aid.
Didn't they say that a few weeks ago?
Posted by: Phillip M. at December 18, 2008 08:33 AM
"I was surprised to read that they contribute 50 billion annually to the chemical industries annual revenue."
So am I. The Detroit 3 will sell around 5 million units this year. Assuming a net to the manufacturer of $20,000, that is about $100 Billion. It is hard to believe that the chemical industry would receive half of that amount.
Further Federal Bankruptcy Law proceedings under Chapter 11 of the Bankruptcy Code (Title 11 of the US Code), do not mean that the debtor is out of business. Most of the major airlines have been in C11 proceedings in the last few years, and they are still around.
And, even if all of the Detroit 3 are liquidated, it will not be the end of the automobile business in the US. Many Asian and European OEMs have plants in the US, and given the high costs of their home countries ($1 = Y89) they will expand those capabilities. Sales and service must by their nature continue in the US.
Posted by: Fat Man at December 18, 2008 09:08 AM
I personally am disturbed by these ideas:
We should bail out the auto makers.
We should bail out all three.
The measure of their individual bailouts should be scaled to their need.
Such periodic interventions create a clear operating guieline. My optimization formula would be thus:
1) Maximize exposure to the unions. The company gains political support from natural opposition, and minimizes reduction in scale of the business. There will always be a big excuse on hand for low productivity and high costs.
2) Maximize revenue, not profit. The goal is to become too big to fail.
3) Minimize innovation. Innovation redirects labor-rich operations to risy technology intensive projects- risky because technology projects can be cut in a recession with fewer job losses and less damage to suppliers. Lowers the justification for public funds.
4) Do not excel. Be a little better than the competition, but not good enough to miss capital inflows during recession.
By this system:
My union employess will receive decent pay and benefits.
My own pay and benefits will be scaled to the size and importance of the business.
The company will survive.
Posted by: Name at December 18, 2008 09:22 AM
Fat Man, you are thinking and following the money........shame on you.
I also agree with John Lee that GM should and Chrysler should liquidate. I do not want 10 cents going to Nardelli and Cerebus. None of the jobs will be saved for the blue collar types even with a bailout.
Posted by: me at December 18, 2008 10:00 AM
When is it time for triage?
Chrysler is too sick to survive; my guess is that odds of the "temporary" shutdown lasting beyond January 19th are at least 50:50. And Intrade gives a 60% chance of them going Chapter 11 before the end of 2009Q1.
Chrysler will fail; any attempts to save it are starting on the wrong foot. However, if we're trying to minimize the damage from its collapse, we have a reasonable way of proceeding.
Posted by: Dan Weber at December 18, 2008 10:15 AM
I would guess the last Chrysler has been manufactured in the U.S.
Posted by: Steven Kopits, Princeton, New Jersey at December 18, 2008 11:16 AM
And if GM continues trading like today, it has 5 more days...note to WH to reassure reassurances.
Posted by: calmo at December 18, 2008 02:25 PM
I keep expecting the big vertically integrated oil companies, that are squeezing independent refiners hard this last year, to pay out huge dividends and then come hat in hand to Washington for a hand out because they are then low on cash. They can't possibly drill, baby, drill unless taxpayers pay the increasing investment that future oil production requires, with no cash on hand after they pay out massive dividends and stiff their workers. Or do I not understand how the game works?
Posted by: Zero X Owner at December 18, 2008 03:40 PM
My estimate of 500 billion revenue is from yahoo finance
GM had revenue of roughly 200 billion in 2006
Ford had revenue of ~170 billion
by guess is Chrysler was a bit less than Ford.
The 50 billion figure came from the a business concentrate note in C&E news.
I found a more detailed article in Chemical & Engineering news Nov 24 2008 vol 86. It cites 35 billion.
"T. Kevin Swift, chief economist at the American Chemistry Council, values the chemical content of each light vehicle made in the U.S. at $2,664. That content includes adhesives and sealants, coatings, fibers, plastic resins, rubber-processing chemicals, synthetic fluids, and synthetic rubber.
All told, U.S. automakers purchased $34.9 billion in chemicals in 2007 to build 13.1 million light vehicles. As the number of vehicles made in the U.S. declines, chemical sales will fall too, Swift tells C&EN. For the first 10 months of this year, General Motors' domestic sales fell 20%, Ford's dropped 18%, and Chrysler's were off 26%."
The chemical industry has already start shedding thousands of US jobs and shutting down chemical refineries in the US.
At what point does this become a national security issue??
Posted by: cb at December 19, 2008 09:01 AM
"They can't possibly drill, baby, drill"
Ironic isn't it, we have gone from oil shortage to glut in less than six months. The oil glut is so large that companies are renting oil tankers for storage space. At less than 40$/barrel I doubt that any of the majors would drill any new wells in Alaska. Oil refiners are trying to sell and shutdown plants, that only two years ago couldn't produce enough fuel. The few that survive will make piles of cash during recovery, and US transportation will become increasingly dependent upon foreign fuel and autos.
The game is called feast or famine.
Posted by: cb at December 19, 2008 10:10 AM
"The chemical industry has already start shedding thousands of US jobs and shutting down chemical refineries in the US.
At what point does this become a national security issue??"
When any other nation on earth demonstrates 10% of US military capability.
Do you personally believe that any three nations working together could mount a successful military campaign against the US without nuclear weapons? Their land, our land or any land.
It only takes a handful of terrorists to blow up a building, poison a resevoir or knock down power lines. I'm talking about an actual military effort.
The Chinese army, the Russian navy and the Israeli air force? I'd bet on the US.
Posted by: Anonymous at December 19, 2008 02:04 PM
EVERY time a huge American industry starts to go down, there are calls – often successful – for the government to step in and save the strategic, historic, imperative, too-big-to-fail, etc., industry. For the record, that is why the Department of Agriculture exists at all. It was not considered necessary until the 1880’s when industrialization and urbanization started the (still continuing) migration of people and jobs from farm to city.
NOW…let’s fast forward to 2058. I really do expect the following news report fifty years from now:
“Malia Obama, daughter of the late president and long-time Senator from the State of Illinois, rose in the Senate today to defend the planned bailout of Google and Microsoft. ‘Software and Search are the very foundations of the great American economy. In fact, it is not too much to say that this country was built on the backs of the very hardworking people over the decades who did so much to build our Software and Search industries. At this critical time in our nation’s history, we simply cannot afford the layoffs – and emotional pain – that would occur if we let these two great, historic companies enter bankruptcy proceedings. Moreover, I firmly believe that, given time to adjust and reorganize, Google and Microsoft will make the hard choices and strategic moves necessary to compete in the new world of nano-sized PC implants in the ear and move away from their long-term reliance on old technologies such as the internet and voice recognition. While I would, in normal situations, oppose bailouts of greedy corporations and their overpaid management, at this very important time, I must encourage all my respected colleagues to vote in favor of the $45 trillion appropriation as a bridge loan to Google and Microsoft.’”
Posted by: John Rosen at December 20, 2008 03:25 PM
"Do you personally believe that any three nations working together could mount a successful military campaign against the US without nuclear weapons? Their land, our land or any land."
Posted by: Anonymous at December 22, 2008 02:34 PM
The department of Agriculture was established to 1)Collect Ag data and prevent the possibility that Americans would ever starve 2) research and educate farmers about better farm practices. I agree that it has morphed into a pork spending program, but it still serves to keep an eye on two of the four horsemen of the apocalypse; pestilence and famine.
I generally dislike bailouts, however I know that some well run banks are still living in terror of being wiped out. Some of the most conservative were only engaged in bank-to-bank lending, and are now worried about lending to anyone, this lending is only just trickling along right now but had come to a complete stop.
The financial bailout was necessary to prevent massive failures in the financial system and huge asset divestitures by reasonably well run companies like GE to shore up short term loan obligations.
The next wave is the job losses in manufacturing and service industries. I consider the loans to the auto companies as a firebreak, the loan is a relatively small amount of money. Especially in relation to the billions in taxpayer funded 2008 bonuses and "retention pay" being doled out at fannie/freddie/AIG/Citi/etc.
I think in retrospect letting Lehman fail was a huge mistake, I don't think many realized the ramifications, (collapse of AIG, breaking the buck, halt in interbank lending, etc). Letting the auto companies go under could have significant impact resulting in several million jobs lost, further snowballing the downturn.
Posted by: Anonymous at December 22, 2008 02:43 PM
Just think of how much more healthy the US auto industry would be if these 3 weren't around dragging down the rest of the industry.
Posted by: Allen at December 25, 2008 01:28 PM