Ford Motors announced today that they were going to
close about 21% of their North American auto plants, almost all of them in the Rust Belt. It was only 9 months ago that Ford had announced they were
laying off 30,000 employees. And if that isn't bad enough, they
also said that they would "revisit the issue in September". Analysts assume that this means more plant closures and layoffs.
Not to be outdone, GM had announced
30,000 layoffs of their own last December. Of course Fox News spun it with "it's going to be better for everyone involved."
Meanwhile, less than two weeks ago, a news story went almost completely unnoticed.
Shandong Jindalu Vehicle Co. Ltd. has become the first Chinese carmaker to export to the United States.
It's been at least a generation since things were good in Detroit, so we all tend to get a little conditioned to bad economic news from that region.
But this is different. Things have never been
this bad. And what makes them so bad is that they are going to get
much worse before they get better.
Only three weeks ago the auto industry hit a milestone: for the first time in history, more foreign cars were sold in America than american-made cars.
Domestic brands have been hurt by lower quality scores, and more recently, a heavy reliance on large trucks and SUVs at a time of a high gas prices.
"People have been swapping SUVs for fuel-efficient cars, and the domestics' car lineup hasn't been as compelling as the Asians'," Wardlaw said.
But that is only the tip of the iceberg. Before I go any further I want to take a trip in the Wayback Machine to December 2005. Business Week was openly
pondering General Motors filing bankruptcy. They were
far from being alone in this regard, as some analysts gave the odds of bankruptcy at 30%.
Then suddenly...nothing. The news media stopped covering the woes from Motor City. What happened? Did they suddenly find the magic to selling cars? Obviously not if they have kept losing market share to Japan.
What happened was that GM decided in March 2006, to sell their most profitable division for quick cash.
Things are so desperate for General Motors Corp. and Ford Motor Co. that the largest U.S. automakers are selling their primary source of profit to pay bondholders: car loans that any bank would love to have on its books.
GM
sold 78% of GMAC for just less than $9 Billion. They needed to raise the cash for a huge buyout offer to employees announced the day before. Plus $26 Billion of GM's bonds come due this year. $33.5 Billion of Ford's bonds come due in the next two years. This sale was just the most recent of several moves by GM designed to raise cash (GM's stakes in Suzuki and Fuji Heavy Industries were sold in the previous months).
The problem is that GMAC was the only part of General Motors that was actually making money. In the first three quarters of 2005, GM lost $3.8 Billion, or $539 for every car sold. (Ford lost $1.4 Billion over the same time period, or $576 for every car sold.) GMAC made $2.22 Billion in profits over the same time period. Ford's financial division made $2 Billion. Without those financial divisions Motor City would have already been in ruins.
To give you a better idea of just how dire the financial situation is for GM, they are increasingly having to take out more loans and back their bonds with collateral.
GMAC sold $15 billion of loans in 2005, 50 percent more than the past two years combined, Krell said. More than two-thirds of the company's debt is backed by collateral, compared with 35 percent in 2001, according to Krell.
[...]
The two combined have about $420 billion in debt, according to regulatory filings, almost as much as the $440 billion owed by Brazil, the most indebted nation among emerging markets.
Debt originally sold as investment grade by GM and Ford is now high-yield, high-risk at Standard & Poor's, Moody's Investors Service and Fitch Ratings.
When GM and Ford's debt was downgraded to junk status their financial divisions were suddenly much less profitable because marginal borrowing became more expensive, thus leading to the sale of GMAC. Meanwhile, GM's stocks tumbled 51% last year (Ford's tumbled 47% in 2005), thus reducing another avenue for raising cash for the carmakers.
And just when you thought the news for the automakers couldn't get any worse...it does.
China is closing the quality gap and building a base of low-cost suppliers that could eventually allow it to unleash inexpensive, well-made cars on the West.
And because local production capacity of 3 million vehicles a year is currently outstripping demand by about half a million vehicles, there are already a lot of wheels looking for a garage. "It's inevitable," says Mark LaNeve, chief of sales and marketing at GM. "They'll follow the example of the Koreans and Japanese."
China is still several years away from making a truly competitive auto for the American market, but the Chinese government is
getting ready for that day.
China also has the advantage of tarrifs. A car exported into China has a
28% tarrif. However, with China's Most Favored Nation status, a Chinese car exported to America has only a minimal tarrif.
What does this got to do with me?
Before you go into a deep debate on the quality of american-made cars and the leadership of GM and Ford, consider what it means to America in general.
GM spent $5.2 billion in 2004 to provide health care to about 1.1 million employees, retirees and dependents. The company suggests that the bill might rise 7.7 percent to $5.6 billion this year. That amounts to approximately $1,525 per vehicle before GM even begins to manufacture anything.
The families of 126,000 employees depend on GM paychecks. Tens of thousands more families depend on Ford paychecks. Then add in the retirees. Then factor the tens of thousands of auto parts employees and their families. Then factor in all the service industries dependent on those high-paid union employees spending cash on their services.
When you add all that together you wind up with a huge section of the American economy in deep trouble. To give you an idea of just how this will ripple through the entire economy, check out
this.
The loss of manufacturing jobs helped drive down home prices in 26 metro areas between April and June compared with the same period last year, the National Association of Realtors said Tuesday. [...]
General Motors (GM), General Electric (GE) and Hyster (NC), a maker of forklifts, were among the companies to close plants in Danville, leaving behind hundreds of unemployed residents. The median price for a home has fallen to $65,200 -- the cheapest in the country.
The exodus of auto, textile and other factory jobs has a direct effect on home prices. People leave town to look for work, boosting the supply of homes for sale. Others sell their homes because they can't keep up with the mortgage. At the same time, foreclosure rates in these cities are among the highest in the country, and banks are quick to cut prices to get the homes off their books.
"There were a lot of divorces, a lot of single mothers -- all they could do is refinance their house or put it on the market and let it go cheap," says Jerry Urich of Century 21 Home Team Realty in Danville.
Basically what we are looking at is an economic hurricane that is aimed directly at the midwest, and the Bush White House seems totally and completely oblivious to the coming disaster.