Detroit died tonight. That’s just a formality for Detroit, especially GM and Chrysler, have been slipping fast. Bailout or bankruptcy, or both, that is Detroit’s fate. Any choice constituted radical surgery. No degree of euphemism will hide the fact that whether it be called a bridge loan or bailout, Detroit, or 2/3 of Detroit, is bankrupt. The Senate Republicans have decided; formal bankruptcy it will be.
According to a recent General Accounting Office report, GM has liabilities, as of September 30, 2008 of $169.4 billion and assets of $110.4 billion. It’s bankrupt in all but name, and soon it will be unable to pay its bills without the taxpayer bailout. GM is bankrupt and Chrysler is terminal.
Congress would have imposed conditions upon the auto companies, who are so desperate for cash that they would agree to almost anything, including an oversight committee or Car Czar.
Congress signaled two weeks ago what it was looking for from Detroit, and the industry responded last week with interest. Detroit sought $25 billion two weeks ago, and came back seeking $33 billion, with no end in sight. Negotiations between the President and Congress agreed upon a government car czar to oversee Detroit, green cars, salary cuts with no golden parachutes for execs, hair cuts for creditors and shareholders, first in line rights for the government, elimination of private jets, reduction of the product line, and perhaps union concessions. The Democrats reluctantly dropped some green requirements, but not the CAFÉ standards, which have hobbled Detroit.
The UAW, similar to the Chrysler bailout almost three decades ago, wants a seat on GM’s Board of Directors in exchange for more concessions.
Detroit is willing to promise Green, Green, Green eventhough they know Detroit Green will not sell cars. Chrysler, which has essentially stopped future product planning after 2011, is promising 500,000 electric cars within three years, which is as realistic as buying a bridge in Brooklyn.
GM’s CEO stated a year ago that the hybrid is not economically viable when gas prices are low. Indeed, the Prius was not selling a little over a year ago. Dealers were discounting it instead of packing the price. Even at the Prius’ peak, Ford F 150’s, Chevy Silverados, and Dodge Rams were outselling the it, as were a wide variety of SUV’s and MiniVans. They still do, as does the Chevy Cobalt and Malibu and Ford Focus.
Once again, Prius sales are in the tank. Sales of the Prius dropped 48% to 8,660 in October, exceeding the sales drops of Ford (30%), GM (41%), and even Toyota (34%).
Maybe if gas goes back up to $4/gallon, Detroit Green will sell, but not now.
Forcing Detroit to move its product line to green cars, which Detroit will have trouble selling, at the same time an unregulated Toyota is moving into full size pickups, and thus large vehicles, illustrates more than anything else the folly of central planning.
One need not be a Nobel Laureate in Economics to realize that if half an industry is subject to regulation and the other half, the more profitable and efficient half, is not, the regulated half will fail, the only question being how soon?
GM now wants $18 billion it cannot borrow in the private market. It’s currently paying out about $2.5 billion annually in interest.
Much attention has bee spent on the wages and fringe benefits of the Union members, but these come to only about 10% of the cost of a car. The difficulties are deeper than labor costs.
Missing in the plans presented to Congress were two critical elements of any meaningful plan: a business plan for economic survival and a marketing plan to attract purchasers.
How does GM expect to reverse its four decade decline, including 90,000 jobs in this century alone? We don't know because GM is clueless. Forget the spin over the Volt, a proposed electric car with a 1.4 liter, 4 cylinder engine costing $30,000-40,000 that would require 3 hours of recharging the battery to get 40 miles of driving on the battery!
Parents want larger vehicles, think SUV’s, for safety and transporting their children to various venues.
And how does Chrysler expect to reverse its decline into irrelevancy? Most of our new vehicles have been Chrysler products: Plymouth Horizon, Dodge OMNI 024, Plymouth Voyager, Dodge Caravan, Plymouth Sundance, and now a Chrysler Pacifica, so I will miss Chrysler.
Of course, Congress would not understand a real business plan, so the absence is probably not significant.
The absence of a marketing plan though goes to the heart of Detroit’s problem: getting Americans to buy Detroit’s cars, especially small vehicles. Can Detroit change the reputation of low quality and high prices? One statistic illustrates the decline of Detroit.
Orange County, California is the nation’s fifth largest, with over three million residents, or roughly 1% of America’s population. The county has 130 new car dealerships, but only 40%, and dropping fast, sell Detroit’s products. Each of the 4 Mercedes dealers, four BMW, and 4 Lexus, not to mention the dozens of Toyota and Honda dealers normally sell more vehicles in a month than most domestic dealers sell in a year. Owning a Toyota or Honda dealership is the nearest thing to minting money in the County.
Did I mention that Toyota lost about $320 million in the United States last quarter, but is sitting on $40 billion in cash?
The defeated bailout proposals did nothing to help the nation’s dealers or parts manufacturers for the bill did absolutely nothing to increase demand for Detroit’s products.
Will Americans buy “orphan” cars from a bankrupt manufacturer? We will find out, but since we’re not buying GM or Chrysler products anyway, it may not matter. Let us note that we trusted our lives flying bankrupt airlines (Continental, Delta, Northwest, United, and U.S. Air).
If Congress really wants to save Detroit, it would be a lot cheaper and more efficient to offer a $10,000 tax credit to everyone who purchases a Detroit product through next year.
We can define eligible vehicles as those containing at least 51% North American content.
The cost to the Treasury will be less than pouring taxpayer money down the bottomless pit of Detroit.