If this is going to be a rational discussion, please stop using the term ?bailout.? Since when is a loan a bailout? Is your mortgage a bailout? When you bought your car, did you ask for a car loan or did you ask for a bailout? Is your child?s student loan a bailout?
Since I?m about to lay it all out, first I?ll answer ?Yes? to the financial aid package, which really needs to be closer to $50 billion over the next 6 months. The money does not need to go directly into the pockets of automakers. It needs to be made available to dealers, for floor plan purchases they cannot otherwise make, and to customers, who otherwise cannot get car loans. $50 billion directly to the automakers would likely buy only 45 days cash flow. The money needs to go to stabilizing guarantees of loans to consumers and dealers, whether they?re buying and selling Ford, GM, Chrysler, Toyota, Honda, or whatever.
From Bloomberg News, October US automotive sales were down 32 percent to 838,156 from 1.23 million, for the lowest monthly total since January 1991, according to Autodata.
Several negatives converged in the U.S. automotive market all at once, with that ugly spike in gas prices being one of them. And the spike in gas prices had, as we now easily see, less to do with automobiles than with a credit-over-fueled worldwide industrial boom. Now the boom is over. Demand is down. Hurricane season is ending and refineries are back online. There?s a glut of gas again. The whipping boy can go home?. The BIG AMERICAN CAR has taken yet another beating and kept on rolling. It wasn?t his fault after all.
Anyway, other negative forces included a US dollar hitting record lows against other currencies, making raw materials prohibitively expensive and profit margins on small, low-margin cars essentially nil.
Also, the glut of free money last year pushed US auto sales to a record 17 million cars. This year, sales are expected to be near 10 million car sales for the year, which I think is about a 25-year low.
Customers who want to buy cars are having trouble getting financing. Other customers bought their car last year and don?t need one this year. Others are too afraid to buy right now. Car dealers, which are not owned by the manufacturers, are having trouble in many parts of the country getting floor plan financing to buy cars from manufacturers to resell. Capital One announced a few weeks ago it was pulling out of the floor plan financing business in New York and New Jersey. Hey, that?s 10 percent of the car market. What?s in your wallet?
American buyers bought big cars because they wanted big cars. If Honda was the only mass market manufacturer to stay out of the SUV business, it doesn’t make them right. Honda’s US market share has just now, finally, after 40 years, gotten out of the single digits thanks to what Greenspan called a We’re in a “once-in-a-century credit tsunami”.* I don’t think I would necessarily call that a winning strategy. I’m not slighting Honda, really, really not. I’m just saying don’t read too much into their US performance based on this environment.
GM, Ford, and Chrysler have much higher exposure to the U.S. market than any foreign manufacturer. US car sales account for a much higher percentage of GM, Ford, and Chrysler sales than they do for Honda, Toyota, VW, Daimler, BMW, and other foreign carmakers. Therefore, when U.S. sales decline, they feel it more.
Outside the U.S., where consumers really want small, fuel efficient cars, American car makers have long sold small, fuel efficient cars by the millions. They?ve even tried bringing those cars home. Forget about it. Not wanted.
On the other hand, most foreign market small cars do not meet U.S. or California emissions standards as-built and cannot be sold here without significant additional unit cost for emission control systems and certification. Additionally, U.S. market car new car warranties are typically 2 or more times longer than warranties in most other markets.
The upshot is that carmakers with less U.S. market exposure are faring the best right now. That will be true until the turnaround begins. Pundits think that will happen in the U.S. first. At that time, U.S. profits will mean that the carmakers with the greatest U.S. exposure will fare the best. And then perhaps everything will level out again.
*Sorry - originally I misquoted as “the financial storm of the millennium.”