Car analyst Erich Merkle was a cheery guy. A few days ago, as reported by mlive, he still believed Ford will thrive and GM will survive with government help. He had his doubts about Crisis LLC, but who hasn’t.
Now suddenly, Merkle joins the ranks of those who gather their maps to plot a path for the hills. The main problem of the car industry is that there aren’t enough buyers. There are fewer by the day. People are losing jobs. With more on the dole, there will be fewer in the showrooms. “I’m concerned about the job losses. The acceleration is pretty alarming, and that has to stabilize,” Merkle said to Reuters.
“If we don’t beat the second half of 2008 this year, then it could be all over,” said Merkle. “We’re all going to be peeling bark off trees and go back to being an agrarian society.”
Currently, we are far from beating the second half of 2008. The prospects look even dimmer in coming months after U.S. auto sales plunged 37 percent in January to the slowest pace since 1982. If Merkle is right, we don’t have to worry about lithium. Except in our pills. Tree bark will be a scarce commodity. He’s not alone to be worried.
“The whole industry is in serious trouble,” IHS Global Insight analyst Aaron Bragman said. “The pain is starting to be shared across the board.
Except for begging, the Detroit automakers have been doing precious little to adapt to the market changes. Even if they would, “you can restructure these companies all you want. But unless people start buying cars again you’ll have wonderfully restructured companies that are bankrupt,” Bragman said. “Restructuring” is a euphemism for fewer jobs. Fewer jobs, fewer buyers.
The federal stimulus package includes provisions to allow consumers to deduct sales taxes on vehicle purchases. Ford says that could save buyers roughly $1,500 on a $25,000 car. Big deal, says Jim Hossack, vice president of industry forecaster Auto Pacific. “If the $6,000 rebates that Chrysler is offering on top of zero-percent financing can’t sell cars, a $1,500 incentive won’t do much.” Again, not enough buyers.
“In 38 years in the auto industry, I’ve never seen it like this,” Hossack said. “Those who have the financial ability to buy cars aren’t going to until they feel wealthier. They’ve seen the value of their house and their 401(k) drop, and until they feel better about their own finances they aren’t going to take on any new commitments.”
Next week, there will be another round of begging. There will probably be a show trial for public consumption. Followed by a backroom deal and more money. And then?
“I’m not sure the government knows what to do or how to do it. It’s hard to have confidence in anyone’s intentions or ability to solve these problems. A month ago I thought it was possible. Now I’m not so sure,” Hossack said.
Like Reagan said the government isn’t the solution they are the problem.
Like I said a long time ago, the Little 3 are just the canary in the coal mine.
I agree. My sources in GM report that management at all levels is unified in the story-line that “(The current situation) is not our fault.” In the peak years these incompetents couldn´t make money and pay down debt, so how are they going to do that in crisis mode?
If the rebates and stimulus get high enough, many people who have the means may indeed buy a car, but it won´t be many. But for the 80% of the rest of the population, saving or paying bills will take precident over a new car, especially for ego purposes.
The auto loan interest deduction was removed from the final stimulus bill, leaving only the sales tax deduction.
Nothing to see here, anyways. With most companies offering low to no interest financing, there would not have been much interest to deduct. And sales tax on vehicles is already deductible in certain states and situations, while other states already charge no sales tax.
What Schmitt is saying is that there is twice the capacity of building cars in the World than needed. In Darwinian capitalism this means the weakest will be sacrificed so that the strong can survive and not eat bark. We are not going to have a situation where all car companies keep bleeding, there has to be the ultimate downsizing, less makers of cars. This is a bitter pill for the Detroit companies, because they still feel (at least publicly) that they can go foreward at half their size. The reality is that only those companies with great balance sheets of reserves and equally great consumer confidence in their products will survive. I don’t have to list for you who the leading survivors will be, do I?
If the current situation with the Big 3 was entirely the big three’s fault then they would be the only ones posting losses/need bankruptcy cash/etc… They’re not the only ones. A timeline of reduced sales drawn out long enough and even mighty Toyonda will be fucked whole heartedly too.
It doesn’t matter how well any of these companies are run/structured if they get 0 sales they make 0 profits.
Most folks in my area have a new-ish car. It will range from the Yaris to a full boat 7-er or S classe. Trucks run from Hyndais to Escalade.
Basically the market is saturated. All the metal on the road has a few years of life in it. The car industry has followed the “fashion” model, in that you buy a new dress because you are bored of the old, not because it is worn out.
In these times, the fashion model will not work. There are lots and lots of perfectly workable cars out there, which have 5- 10 years of life. They don’t NEED to be replaced (save wrecks, etc.) but now that the WANT to replace them is stifled, the industry is stuffed.
Up until yesterday, if you had a job you could “sign and drive”. Most folks did.
A rare loss by Toyota or others does not absolve the “entirety of fault” for the Detroit automakers that includes:
1. Creating their current state of being too financially weak and credit-unworthy after over a decade of boom-years (it is, after all, a cyclic industry, and 911 was a significant warning to be prepared, too).
2. Not fixing their obvious problems in the boom years.
3. Not fixing their reputation among the non-fleet, non-employee buyers.
4. Too many models.
5. Too much capacity.
6. Not facing down the UAW when strong enough to do it.
7. Being arrogant and overpaid, hated in the eyes of the majority of the middle-class.
8. Blowing money on failed ventures, like SAAB, Subaru, Fiat, etc.
9. Being the definition of necessary evil to their suppliers.
10. Internal cultures so broken that good ideas are killed and the employees put-down.
11. I´m going to stop here, because it´s all too obvious and depressing.
Ahhh, Arbutus menziesii! Or, Madrone. A wonderful tree, native up and down the west coast of the US, along some of the best driving roads in the world!
Side note: the bark isn’t, err, edible, but the berries are. Good choice.
So the US carmakers and the US economy is in dire straits and the government is increasing in size.
How does that work?
If the current situation with the Big 3 was entirely the big three’s fault then they would be the only ones posting losses/need bankruptcy cash/etc… They’re not the only ones.
That completely ignores the fact that the big three have been losing billions for years. GM alone lost almost $39B in 2007, $2B in 2006, and $11B in 2005. The problems of the big three extend well beyond the current financial situation.
Let’s use much vs. many, few vs. little and less vs. fewer correctly, please.
Sorry, English as a second language.
“Sorry, English as a second language.”
I know, Bertel, and I wasn’t aiming a bullet at you, just making a general comment. In fact, I think your command of English is amazing. This less/fewer thing is just a pet peeve I have about the language and its usage. Another one that I see and hear everywhere and really gets me is “If I didn’t stop the car I’d have had an accident.” What’s wrong with the correct “If I hadn’t stopped the car I’d have had an accident?” English is also my second language although I learned it at a relatively young age, so I know from personal experience how difficult it is. And I spent 40 years teaching languages. No personal slight intended, believe me.
From English to Economics:
How about the WSJ article announcing that GM is going to give the taxpayer a simple choice: fund us or fund us through Chapter 11.
I’m not so sure I’d give the taxpayer such a clear cut choice.
My personal English pet peeve is when someone says “there’s a lot of people” instead of THERE ARE a lot of people.
I hear even TV broadcasters do this, and they supposedly go to the top schools!
If it wasn’t for the housing bubble, GM(through GMAC) would have already fallen into the grave head first.
Pretty sure Ford Credit and Chrysler Financial avoided home loans altogether. Subprime car loans are a different story.
I’ll quote a good one I spotted yesterday somewhere on the ‘net.
Capitalism without bankruptcy is like Christainity without hell”
bluecon,
“Reagan said the government isn’t the solution they are the problem”
Mr Reagan’s having said that may be one of the most destructive presidental statements ever made, and to my mind set the mental attitudes that led to the mess we are in today. Government is absolutely a necessity. Name a nation that organized, rose, and functioned without a government.
He should have said “bad government is the problem, good government is the solution.”
Furthermore, in answer to your “So the US carmakers and the US economy is in dire straits and the government is increasing in size.
How does that work?”
Here is how.
Unbridled free markets have lead to catastrophe, history has many examples to offer. Currently, our unbridled free enterprise is imploding, and what institution is left to pick up the pieces? Government, of course. Who else would or could?
Please do remember, the way the Costitution is set up, it is We The People who are the government, if We The People would get our heads out of the sand and be responsible citizens who actually hold their elected representative accountable, we would be in far better shape today.
Sir, Government is necessary, we need to ensure it is good government.
I would suppose there are some on the Right who would read the Preamble to the Constitution of the Unites States and throw it out as being (sneer) Liberal and socialist.
If government is the problem, maybe we could just abolish government and let General Motors run the country.
@ Detroit X
What if car sales do not pick up? It might not be a “rare” loss for Toyota. I never said that the big 3 never made mistakes or that they aren’t poorly run companies but if overall sales don’t pick up then even Toyonda will be screwed.
If they don’t have good sales and profit then they will have the negative press of plant closures and lay offs. They will then little by little lose their solid bond rating ensuring a slippery slope on borrowed cash. In order to prop up profits they will probably cheapen the product (evidence is already mounting) and if sales stay this depressed for say a year and half or even longer then things will get ugly FAST even for Toyota. Their ironclad reputation won’t mean shit if no one buys.
By most metrics the big three were due for good times in the next year or two. Then the market got fucked fast.
ttacgreg: “bluecon, ‘Reagan said the government isn’t the solution they are the problem’
Mr Reagan’s having said that may be one of the most destructive presidental statements ever made, and to my mind set the mental attitudes that led to the mess we are in today. Government is absolutely a necessity. Name a nation that organized, rose, and functioned without a government.
He should have said ‘bad government is the problem, good government is the solution.’
Actually, he did.
The sentence is from Reagan’s first inauguration address. The actual words are “In this present crisis, [i.e., the economic recession] government is not the solution to our problem; government is the problem.” He went on to explain how we thought excesses by government had stifled individual initiative and our prosperity-building energies.
And one paragraph states: “Now, so there will be no misunderstanding, it’s not my intention to do away with government. It is rather to make it work–work with us, not over us; to stand by our side, not ride on our back. Government can and must provide opportunity, not smother it; foster productivity, not stifle it.”
You know, there’s just nothing like going to the source rather than relying on hearsay. The speech can be read at:
http://www.reaganlibrary.com/reagan/speeches/first.asp
Four things are needed;
1. Inflation so the face ‘value’ of debt is lowered (Stimulus debt/money printing is a start).
2. Failure so that non-viable enterprises are killed off (with support for those who are then unemployed), that capital is then spent elsewhere hopefully in more productive ways.
3. Productivity improvements freeing returns for greater investment into real capital works. Renewable energy and efficiency are excellent places to start via Stimulus spending.
4. Bottoming out of the downturn, or a sense of the worst being behind us, so that confidence can return.
My own theories, which I own, and what it is to.
re: “Like Reagan said the government isn’t the solution they are the problem.”
bluecon / February 14th, 2009 at 9:25 am
but government was only part of this problem. in this particular case, the government was the bush administration, which endorsed the pursuit of profit at any cost. many among the financial sector also were, and remain, a big part of the problem. the federal reserve and the fractional-reserve monetary system are also a part of the problem. and a society of consumers who never understood the value of saving, or the concepts of self-control and delayed gratification; they were also a part of this problem.
legitimate concerns about an economic crisis immediately after the 9/11 tragedy resulted in a dramatic reduction in interest rates by the fed; which fueled record refinancing by homeowners; which was augmented by calls for increased homeownership rates by bush – all resulted in radical mortgage securitization schemes by wall street and led to the sale of these ‘unsanitary’ securities to unwary investors – all made seemingly possible and/or at least plausible by historic increases in domestic housing values which suggested to far too many, a sort of new paradigm wherein housing prices would continue to increase in perpetuity. which of course, they did not.
and once they did not, the entire scheme started unravelling. and it hasn’t stopped yet. and it won’t be stopping anytime soon. and we will all be the poorer because of it. much, much poorer.
unrestrained capitalism was the problem. an unregulated financial sector was the problem. uncontrolled greed was the problem. the reckless, relentless pursuit of money and the american dream and a ‘get-something-for-nothing’ mentality was the problem.
“If the $6,000 rebates that Chrysler is offering on top of zero-percent financing can’t sell cars…”
Sure, but this offer had a fatal flaw: It asked of people to own a Chrysler.
“The legitimate object of government is to do for the people what needs to be done, but which they can not, by individual effort, do at all, or do so well, by themselves.” Abraham Lincoln
Like never before over the last 8 disastrous years, the US (indeed the world) needs leadership in government.
I’d encourage people to read “Why Lincoln Matters”, by Mario Cuomo. These truly remarkable men of the past was (is?) one of the reasons people around the world used to admire the USA, myself included.
Somewhere on the path, the US has gotten lost. It might be time to get back to first principles.
Jason :
February 14th, 2009 at 9:20 pm
“If the $6,000 rebates that Chrysler is offering on top of zero-percent financing can’t sell cars…”
Sure, but this offer had a fatal flaw: It asked of people to own a Chrysler.
LOL,
When their own employees don’t like the buy-out package, because they would rather have the cash than the 25k voucher for a car, what does that say?
Pic looks like a Cavalier hood.
“When their own employees don’t like the buy-out package, because they would rather have the cash than the 25k voucher for a car, what does that say?”
It may only say the workers don’t feel secure enough to buy a new car, no matter how good of a deal.
In fact, that is what the current economic situation is really all about. Some can blame the car companies for inefficiencies, or blame the financial sector, or blame monetary policy; and there is validity in casting blame in those directions. But right now, as we watch our neighbors losing their jobs, as our 401Ks drop to new lows, as we see housing prices fall and foreclosures and ruin circle in closer by the day; it doesn’t make us want to go out any buy anything. Perhaps there are a few wealthy people who are buying stocks right now, or real estate since it is cheap. But anyone with a family who can’t afford to live without a paycheck is nervous. That is what the stimulus package was all about. If the population doesn’t have the money or the confidence to buy new cars, for example, the stimulus is there to have the government buy the cars. At least that way a few people will still have jobs.
50merc
Thank you for your in depth elaboration. Intersting to know.
My only gentle retort would be this. Is Mr Reagan remembered in our political culture for standing for good government, or for it being the problem as in the quote quote I cite? Furthermore, how have his “descendants” on the Right taken Mr Reagan’s ideas an run with and or twisted them?
The Right’s worshipping of Ronald Reagan is becoming its downfall. They would do better to worship Mr Eisenhower.
“Ford says that could save buyers roughly $1,500 on a $25,000 car.”
8.25% sales tax on $25,000 = $2063. A person in the top 35% federal income tax bracket gets .35 x $2062 = $660. They don’t get it until whenever they file their tax return and get a refund.
Psychologically, a reward which is hard to calculate and comes long after the behavior which earned the reward is an ineffective motivator.
“Those who have the financial ability to buy cars aren’t going to until they feel wealthier.”
So many commentators speak as if nobody is buying anything, which isn’t true. What is true is that recent sales are down about a third from where they were in the past several years. Cars and trucks are still selling at about a 10 million unit per year rate in the US. That is a whole lot of people who are indeed ponying up cash and/or credit to buy.
A different way to look at the situation is to say that demand was kept artificially high in recent years through lax credit standards, hefty fleet sales and a willingness of many people to get in way, way over their heads in debt for the momentary thrill of owning a new car. The party is over and we are now having a bit of a collective hangover. People who really need new wheels and have the financial ability to get them are indeed buying, otherwise sales would be down a lot more than a third.