US Auto Sales Collapse Again In October 2008: Looming Bailout Motives

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Novemeber 6, 2008

General Motors and Ford are scheduled to release their third quarter financial results tomorrow.  The two auto manufacturers have lost more than $27 billion through the first six months of the year, with GM responsible for about $18.7 billion of the total.  Even with GM’s stock trading at near 50-year low and an auto industry bailout expected by the US Federal government, Standard and Poor’s (S&P) rated GM a sell.  GM's market value is under $3 billion and just over $2 billion.  

The Detroit News reported yesterday General Motors is expected to announce "important changes" to its automotive operations Friday when the automaker releases third-quarter financial results, according to an internal leaked document.

Specific changes were not identified in the document. However, last month, GM CEO Richard Wagoner and COO Fritz Henderson wrote in another letter to executives that the automaker will have to cut more white-collar jobs later this year and early next year, including involuntary layoffs, suspend the company match in employee 401(k) retirement accounts and make other benefit cuts.

The problems for GM continue at its lending unit GMAC, which just reported the company lost $2.52 billion in the third quarter.  GMAC has been exposed to the housing slump and vehicle lease write-downs, and its mortgage unit, one of the US’s largest home loan providers, may not survive.

This has been GMAC’s fifth straight quarterly loss for a cumulative loss of 7 to $7.9 billion.  Residential Capital LLC it mortgage lending unit, lost $1.91 billion in the quarter, its eighth straight quarterly loss with a cumulative total of $9.1 billion.  GM will account for approximately one-half of those losses when its financial results are released tomorrow.

All of this comes on the worst month for vehicle sales in the US since the 1940s.  Chrysler and Ford saw their sales drop from a year earlier by over 30 percent.  GM’s sales declined by over 45 percent; with the industry as a whole down by just over 30 percent.  Toyota was down 23 percent as it beat the average by heavily incentivizing its vehicles.  As I expected earlier last month, the pricing pressure from Toyota would further dampen demand at the three Detroit automakers.  In October that occurred in a month where overall sales contracted.  October sales were off over 10 percent from the September 2008 collapse (Table 1 at end).  For the second month in a row sales were under 1 million vehicles.

The market conditions have become exponentially worse for the US automakers and bankruptcy is looming over the companies as the credit markets remain very tight and consumer confidence down.  With the real possibility of elimination of one or more of the Detroit based companies the prospect of an avalanche of significant job losses is real.   According to a study by the Center for Automotive Research, if the US Big Three carmakers were to cut U.S. operations by 50 percent, 2.5 million jobs could be lost in 2009.  These would include nearly 250,000 jobs lost at the automakers and nearly 800,000 at suppliers.  In addition, the organization estimates another 1.4 million job losses outside the industry, such as those caused when stores go out of business in communities hit by plant closings.

In economic terms the study concludes, cutting operations in half would reduce personal income by more than $125.1 billion in the first year, and $275.7 billion over three years. Such a decline in personal income would cost the government tax dollars -- $49.9 billion in 2009 and more than $108.1 billion over three years.  If the market remains where it has been for the next few months, cutting productionby 40-50 percent is likely.

Going into the recent economic problems GM, Ford and Chrysler have been in poor shape for some time.  However, globally car makers are beginning to strain.  Even Toyota has not been immune to the economic problems in the US as the company is expecting global operating profit to plummet 73.6 percent to $5.83 billion in the fiscal year ending March 31, 2008.   Just three months ago, Toyota had forecast operating profit to decline a comparatively modest 29.5 percent to $15.5 billion.

In North America Toyota announced a $335.9 million operating loss in the April-September fiscal first half. Sales there slid 9.4 percent to 1.357 million vehicles in the period. For the full year, Toyota lowered its ambitions 2.420 million units, an 18.2 percent fall off.  The company’s bottom line is also negatively affected by the rise in the value of the yen. The yen has gained nearly 12 percent against the dollar since August, further eroding the value of dollar-denominated sales when converted back into yen.  Toyota also reduced its global sales target as it expects sales to decline 7.6 percent to 8.24 million units this fiscal year. The company had earlier forecast sales of 8.74 million vehicles.

Standard and Poor’s just downgraded Nissan’s financial outlook amidst the ongoing collapse of the market for new vehicles in the US.  Nissan’s outlook was change to negative from stable and affirmed its BBB+ long-term corporate credit and senior unsecured debt ratings, as well as its A-2 short-term rating.

S&P's credit analyst, Chizuko Satsukawa is quoted as stating:

"The outlook revision reflects our concern over deterioration in Nissan's profitability and cash flow and the challenges the company faces in improving its financial performance amid the rapidly weakening conditions in most major global vehicle markets."

Furthermore, the ratings agency said Nissan's financial profile is strong for the rating and its liquidity is satisfactory.  Nissan and Toyota unlike the domestics has a large cash reserve.  Toyota has upwards of $40 billion in the bank.

With the US auto industry is crisis mode the talk of a government bailout appears to become more real.  The Speaker of the US House of Representatives, Nancy Pelosi was scheduled to meet today with the heads of the Detroit Big Three automakers and the United Auto Workers union to discuss further aid to the industry.

Congressional leaders are considering doubling the low-cost loans to the auto companies to $50 billion as part of a second economic-stimulus package.  A second package of $25 billion in loans would be on top of the $25 billion signed into law this fall and earmarked to help companies retool plants to produce new, fuel-efficient vehicles.

Nancy Pelosi stated:

"We're not saving those companies, we're saving an industry. We're saving an industrial technological and manufacturing base... It's about jobs in America."

The US Department of Energy released interim rules to oversee its $25 billion auto loan program yesterday, which could allow automakers and suppliers to win loans before the end of the year.  The rules allow automakers to borrow funds for up to 80 percent of an advanced technology vehicle project's cost for up to 25 years.  Automakers would get a loan for roughly 4 percent for the term of the loan.  In the current credit markets and poor credit rating the auto companies would have to pay a 10 percent interest rate on loans if they could raise the funds. Finally the interim rules was a way to expedite the funds without the DOE having to conduct a formal rulemaking process that can take up to a year or longer. There is potential legal risk that the government is taking on from public interest groups.

The US congress with a lame duck president is about to embark on a very difficult decision.  Given the poor health of the economy and the need to save jobs the US auto manufacturers will likely receive a large financial bailout.  Failure of the whole industry is not a politically good option as well as not a good economic option given the hundreds of billions of dollars given to the US banking sector and what little it will take to keep these companies going.   Suffice it to say the scale of the automotive industry is enormous when the suppliers, dealers, small tool and die job shops are factored into the sector.  And I will not forget to mention the millions of retirees the industry supports through pensions and health care benefits.

GM and Ford need the ability to preserve as many jobs as possible and an additional $25 billion can go a long way.  As for Chrysler, in better times I would suggest Lehman Brothers be its model.  For the health of what remains of the auto industry in the US, it should happen.  Ideally in today’s climate, Chrysler would partner with Renault-Nissan but that may not be an option unless its hand is forced or made attractive by the loans.  How the GM-Chrysler merger talks factors into this is uncertain at this time.  In the end, I do believe the managed end of Chrysler is very near.

Tomorrow when GM and Ford report their earnings (losses) including cash on hand, the health of the industry will be better understood.  However, given the announced losses at Toyota in the US, GM and Ford must be hemorrhaging money and very close to insolvency.   Congress will likely need to act quickly in the face of the perception the Detroit Three have with the public, auto pundits and “free market” ideologues after years of mis-management and questionable product.  I believe at this point in time there is no other option to save what is left of the US auto companies as the likely fallout if one or more fail would be overwhelming to the larger economy particularly the already depressed midwest.  Assuming the market does stabilize GM and Ford’s latest product has been well received in the market and in 2010 significant cost savings from the 2007 union (UAW) contract will kick in.  If these two manufacturers can make it to then, the future should start to brighten.



October October October 10 mos. 10 mos. Pct.

2008 2007 chng. 2008 2007 chng.
Aston Martin 140 172 –18.6% 1400 858 0.632
BMW Group 25512 26857 –5.0% 262172 275447 –4.8%
Chrysler LLC 94530 145316 –34.9% 1278049 1724139 –25.9%
Daimler AG 17257 22842 –24.5% 212886 203305 0.047
Ford Motor Co. 132248 194617 –32.0% 1741231 2166308 –19.6%
General Motors 168719 307408 –45.1% 2581385 3241501 –20.4%
American Honda 85864 114799 –25.2% 1266447 1308319 –3.2%
Hyundai Group 36303 55417 –34.5% 602055 645867 –6.8%
Isuzu 251 576 –56.4% 4440 6110 –27.3%
Mazda 16442 22201 –25.9% 231850 250601 –7.5%
Mitsubishi 7486 9280 –19.3% 87591 115106 –23.9%
Nissan 56945 84946 –33.0% 842644 898000 –6.2%
Porsche 1427 2862 –50.1% 22503 29140 –22.8%
Subaru 12917 14979 –13.8% 156706 153601 0.02
Suzuki 3482 6536 –46.7% 77999 88536 –11.9%
Tata Motors 2850 16639
Toyota 152100 197592 –23.0% 1945402 2199237 –11.5%
VW 23478 25059 –6.3% 266849 271575 –1.7%
Other 641 654 –2.0% 6521 6343 0.028
TOTAL 838592 1232113 –31.9% 11604769 13583993 –14.6%


Table 1: October 2008 Sales (Source Automotive News)




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