December 4, 2008
Big Three Auto Companies' Pleas for a Bailout: A Hook??
The CEOs of our big three domestic automobile companies are back in Congress today, asking for emergency loan funds to stave off bankruptcy. They drove, rather than flew in private jets, in energy efficient cars the 520 miles to Washington. They submitted "viability plans" and they came with fresh union concessions (no more "job bank" payments and delay in payments to a new health care fund). Congress will give them funds -- at issue is whether this Congress or the next one that takes over in early January will do it. Republicans still have the votes to block the funding in this rump Congress.
Several notable features of the "plans" spell trouble.
First, the companies structural changes (selling brands and shutting dealerships) will take time and not produce immediate cash savings.
Second, the new plans show the need for a $9 billion increase in funds over the amount that the Big Three asked for two weeks ago.
Third, their emphasis on "green" cars comes when gas prices have fallen to historic lows and when the sales of green cars are falling substantially worldwide. Moreover, green cars are often subsidized sales -- their price does not cover their costs.
Fourth, labor costs of $75 an hour are not reduced and are too high compared to the labor costs of domestic plants of foreign auto companies ($45 an hour) and other manufacturing in the United States ($31 an hour). Instead of reducing wages the companies, and this is classic, are firing workers and saving the high wages of senior workers who remain. The simple fact is that the company need to reduce hourly wages. Short of wage cuts, my reading of their situation suggests that the most profitable move they could make would be to shut down most all their domestic manufacturing and import cars into the United States from their overseas plants in Brazil, for example.
Fifth, what are they going to do with the cash? Pay down debt? I hope not. Debt holders should be taking haircuts and any bailout money should not be absorbed immediately by debtholders who are otherwise giving interest rate concessions. My reading of their situation suggests that the most profitable move they could make would be to shut down most all their domestic manufacturing and import cars into the United States from their overseas plants in Brazil, for example.
And sixth, and most important perhaps, no one is doing a thorough due diligence on the companies and their plans. When have their normal financials and 37 page plans but, as would happen in a normal acquisition or a normal workout, there is no due diligence being performed by anyone on the companies. Government officials, before any bailout, should check all the company's confidential books and records, just like bank examiners do for banks. Will they? I doubt it.
All this adds up to trouble. The amount requested looks to be a hook for more requests later. Once the initial money is gone, one could conservatively estimate that another $75 billion of successful requests will follow. A popular suggestion is to loan some now and some later with the later money coming only on the condition that benchmarks have been met. Either meet the conditions or take Chapter 11, but the problem is Congress's stomach for Chapter 11 -- it could later rescind the conditions.
Will the government take warrants or other equity with the loans? The bailouts of the banks and AIG came with grants of equity. We are now seeing the AIG and bank bailouts come back to bite us -- "Why bail out Wall Street and not Main Street (with 2.5 million workers)" is the public cry from Michigan.
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A modern parable...
A Japanese company (Toyota) and an American company (Ford Motors) decided to have a canoe race on the Missouri River Both teams practiced long and hard to reach their peak performance before the race.
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.
Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 7 people steering and 2 people rowing.
Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.
They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.
They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The pension program was trimmed to 'equal the competition' and some of the resultant savings were channeled into morale boosting programs and teamwork posters.
The next year the Japanese won by two miles.
Humiliated, the American management laid-off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.
The next year, try as he might, the lone designated rower was unable to even finish the race (having no paddles,) so he was laid off for unacceptable performance, all canoe equipment was sold and the next year's racing team was out-sourced to India .
Sadly, the End.
Here's something else to think about: Ford has spent the last thirty years moving all its factories out of the US , claiming they can't make money paying American wages.
TOYOTA has spent the last thirty years building more than a dozen plants inside the US . The last quarter's results:
TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.
Ford folks are still scratching their heads, and collecting bonuses... and now wants the Government to 'bail them out' .
Posted by: Michael Rosemeyer | Dec 12, 2008 6:16:05 PM
About a third of the fuel Brazilians use in their vehicles is ethanol, known in Brazil as "alcohol." That compares with 3 percent in the United States. All gasoline sold in Brazil contains at least 26 percent ethanol, but motorists driving flexible-fuel cars have the option of filling up with pure ethanol, or E100, which currently is selling for about half the price of the blend.
Use of pure ethanol will rise sharply as carmakers in Brazil such as General Motors and Volkswagen make more flexible-fuel cars. Half the new vehicles sold this year will be able to use either pure ethanol or the blend, according to the Sao Paulo Sugar Cane Industry Union.
In the United States, the sugar-cane industry has had little incentive to diversify into ethanol production because import quotas support U.S. sugar prices far above world levels. Expansion of sugar cane acreage beyond Hawaii, Florida and the Gulf Coast is limited by the need for a long, frost-free growing season. The House-passed energy bill would authorize a three-year demonstration program for producing ethanol from sugar cane.
Most U.S.-produced ethanol is now made from ground corn in a process that has been faulted as inefficient. Corn yields less sugar per acre than sugar cane, and the refining uses substantial amounts of energy. To keep ethanol competitive with gasoline, major refiners such as Archer Daniels Midland Co. have relied since the 1970s on a tax subsidy, now 51 cents a gallon.
General Motor in Brazil and Volkswagen have these biofuel cars out so what are they squawking about. They need to cut the CEO salaries in half and monitor the spending accounts. The 100.000 breakfast and lunches and 350 dinners have got to go!!! Let them go to MacDonalds and Subway for lunches or a Sam Seltzer or Chinese Buffet, Chile's for dinner like everyone else. The hotels
like the Holiday Inn are sufficient.
Posted by: Bernadette Nata | Dec 30, 2008 3:00:00 PM