If you’re wondering about the reason behind Toyota’s $250m zero percent marketing blitz, look no further than their very own job bank. Unlike The Big 2.8’s top-secret pool of idled workers, ToMoCo’s labor reservoir is a matter of company policy, not union contracts. With Tundra sales as frozen as the truck’s namesake (down 61 percent in September!), something had to give. The Wall Street Journal reports that “the Toyota plant here in southwestern Indiana and another in San Antonio, Texas, stopped making pickup trucks at the beginning of August. About half of the 4,000 workers are expected to resume making vehicles in November, and now Toyota says the rest won’t likely be back on the assembly line until at least April.” Putting a happy face on a bad situation, “senior plant manager Norm Bafunno said he can already see the benefits of the training. Mr. Bafunno cites a Teflon ring designed by an assembly worker during the down time that helps prevent paint damage when employees install an electrical switch on the edge of a vehicle’s door.” This problem was causing workers to have to do a bit of paint buffing on one or two trucks per shift, back when they were actually building trucks. Meanwhile, have you noticed how little news we’ve heard about United Auto Workers’ efforts to organize the transplants?
Category: High Finance
Regular readers of this site will know that America’s domestic automakers and their captive finance units are not on speaking terms with the truth. The estrangement continues with news that GMAC (a GM – Chrysler co-production) is tightening-up its lending practices. GMAC spins the announcement as some kind of reflection on their sense of fiduciary responsibility: “GMAC Financial Services today implemented a more conservative purchase policy for consumer auto financing in the U.S. as a result of the lack of stability in the global capital and credit markets. The changes include limiting purchases to contracts with a credit score of 700 or above. Additionally, the company will restrict contracts with higher advance rates and longer terms.” As Automotive News [sub] points out, this is hardly an onerous “limitation.” “For the first seven months of 2008, prime customers with scores exceeding 700 represented 74.3 percent of the U.S. auto loan market.” But the real story is the story behind the story.
Financial advisers seem to agree that a panic-fueled stock market decline has opened a number of opportunities to snag solid investments on the cheap. Stock in solid, well-proven companies is being sold at huge discounts as panic grips the market. So why in the name of price-earnings ratios is the Detroit News shilling Ford and GM stock? Well, to be fair, the newspaper itself isn’t hyping stocks, because “Biz Insider can’t officially offer investment guidance into purchases of General Motors Corp. or Ford Motor Co. stock.” And why would they, when they have professional misleaders for that job? Former Chrysler spokesman and now Compuware Corp. veep Jason Vines “shared his own thoughts on the stock at the annual Automotive Hall of Fame dinner, telling the crowd of auto aficionados to buy, buy, buy Ford and GM paper.” No, seriously. And guess what else Vines would suggest you buy?
And we’re back! Our ongoing coverage of GM’s attempts to squeeze yet more money from your elected officials continues apace. We’ve got two stories on a potential “stopgap bailout” designed to keep GM afloat while funds from the already-approved bailout clear regulations. The first story from Automotive News [sub] indicates that while GM is flailing around for a merger partner, it is seeking access to the fed’s discount lending window, which is already pumping some $420b a day into distressed financial firms. Such access would allow GM to borrow at a 1.75 percent rate, a far better deal than the already-sweet 4.5 percent it will get when the $25b bailout becomes available. With its stock at 60-year lows, GM will likely need this access to put any kind of merger together. The feds won’t comment on this plan, and Automotive News [sub] reports that GM has not yet sought the funds. However…
While global stock markets are in full retreat, Volkswagen shares have soared to a 20-year high. Marketwatch has plenty of theories to explain the recent 60 percent surge: short covering, inclusion in market indices and the relatively small number of VW’s shares which trade on the open market. Even the collapse of Lehman Brothers gets an honorable mention. Whatever the reasons, “with a market capitalization of 95 billion euros, or $129b, VW is now worth more than Toyota.” Surely the big rise in VW shares has nothing to do with the company’s ongoing inability to get anything right in the U.S .market. VW’s US sales were down 9.4 percent in September and would have been even worse were it not for the introduction of the Jetta SportWagon and the Tiguan. The best explanation for the recent VW share price run-up: the tug of war between Porsche, the state of Lower Saxony and various factions within VW’s management and a related squeeze on short sellers who had bet that VW would crater along with the rest of the automotive stocks. Barron’s summed-up the situation up nicely today with this note: “Holding VW shares can be likened to musical chairs. Each time the music stops, some of the shorts cover and drop out. At some point, relatively soon, the shorts will be out effectively of the stock, and VW shares will start trading on fundamentals again. When that happens, the game will be over, and holders of VW shares will be left standing with shares that will plummet to where fundamentals dictate.” So, if you are a betting person, short some VW stock and wait for it to unfold. Me, I’ll be watching from the sidelines.
New York Times scribe Bill Vlasic set the U.S. automotive industry abuzz last night, reporting that GM and Chrysler were discussing a merger. Careful reading of the article revealed that the story had more holes than a block of Emmantal. It included unocorrobrated, unnamed sources; backpedalling a plenty and language couching that seemed carefully designed to maintain what Ronald Reagan’s administration famously called “plausible deniability.” Oh, and it didn’t make any sense. Today’s follow-up— declaring that GM and Ford were looking to hook-up– is even less credible, AND less equivocoal. [NB: Again with the “two people.”] “In July, G.M. approached Ford with a proposal to combine the operations of the two biggest American automakers. The talks involved several meetings between G.M.’s chairman, Rick Wagoner; its president, Frederick Henderson; Ford’s executive chairman, William C. Ford Jr.; and its chief executive, Alan R. Mulally, people with knowledge of the process said… Ford broke off the talks in September, these people said. Mr. Ford and Mr. Mulally were said to have concluded that their company had a better chance to reorganize on its own than in tandem with another automaker.” TTAC’s take: While such a high-level meeting may have taken place (and it may not), again, the automakers had plenty of things to talk about other than merging: federal loans, federal bailouts, federal regulation, etc. [thanks to Robert Schwartz for the link]
The scramble to raise cash over at Ford continues apace. Recent press rumors out of Japan [via The Associated Press] say The Blue Oval Boys are talking with the Zoom Zoom Zoom folks about selling all or part of the American automaker’s share of Mazda. Ford first invested in Mazda back in 1975. FoMoCo increased it’s stake to 33.4 percent in 1996. Mazda was on the ropes in 1975, thanks to having most of it’s chips on the Wankel-cycle rotary engine. The oil shocks of the 1970s killed the rotary engine and put Mazda on Death Watch. Ford rescued Mazda with cash and know-how. Since then, the Mazda-Ford partnership has been one of the most productive in the industry. Today the companies share platforms and drivetrain development on a global basis. For example, Ford’s four-cylinder engines are based on the Mazda MZR family and Mazda has standardized on Ford’s V-6 engines. The two companies also share factories in Thailand, China and the US. Considering these deep ties it isn’t surprising to hear that “Ford would maintain some of its stake in Mazda and management ties.” But, with Ford burning over $2b every quarter; there aren’t many good choices left. Ford has made it clear that they aren’t interested in handing Mazda over to a competing auto maker, but will they have any choice?
After our story on GM’s letter to its non-core suppliers changing payment terms to 60 days, I received a flurry of emails that asked, in effect, are you out of your fucking mind? For example, “I do not know of anyone in the Supplier, Engineering, Consultancy or Technical world who has EVER been paid by GM in anything less than 90 days.” And “a friend that owns a Tier Two company has to be a real pain in the ass to GM Purchasing to get paid anywhere near 90 days. They told him once on the phone ‘We pay everybody 180 days payable…that’s our policy, what makes you so special that you think you should be paid in less than 90 days?'” (Interestingly, when he stopped shipping Just-in-Time parts to GM, they overnighted him a check.) In general, we’ve learned that The General’s suppliers generally get paid in 60 to 90 days. And “Even 60 days is not so bad from an OEM.” TTAC apologizes for any misconception created by our earier report.
So GMAC doesn’t lease anymore, and its ResCap mortgage arm is properly screwed… but they still write car loans, right? Er, sort of. Automotive News [sub] reports that GMAC is limiting loan terms to 60 months beginning this week. “We’ve been writing fewer 72-month loans,” Mark LaNeve, GM’s vice president of North American sales, service and marketing, tells AN. “In September and October, we did a much higher percentage of cash — meaning non-lease or non-APR, than we did in decades.” Which is an extremely cheerful way of saying GMAC is fucked. In September 2008, loans of 72 months or more accounted for 43.0 percent of all loans approved by GMAC, according to Power Information Network. That figure was down from 72.9 percent in July and about the same as the 42.0 percent in February. The really bad news? Loans of 60 to 72 months accounted for 45.5 percent of all loans approved by GMAC in September, up considerably compared to months past. In other words, 88 percent of all loans made by GMAC in the past month were for 60 month terms or higher, and the music is beginning to stop. GMAC spokesfolks insist that the “tightening of underwriting standards” has been going on for a year, and that the new restrictions on 72-month loans will only affect a “small percentage” of GMAC customers. For now. If GMAC’s forced to restrict 60-month loans (a scandalously long auto loan term just a few decades ago) there goes some 80 percent of its new business. Gulp. As for GM dealers, they’re already shopping for loans elsewhere.
Automotive News [sub] reports Toyota’s profits are set to slide 40 percent when the firm announces its annual numbers. At issue: exposure to weak American sales and a slowdown in China. And though reaping just over half its expected profits sounds like bad news, ToMoCo will still pull down $12.8b this year. Needless to say, that’s a mighty impressive accomplishment for a firm that’s so dependent on flagging US sales. Koichi Ogawa, chief portfolio manager at Daiwa Asset Management, says Toyota is still on solid ground. “Given that the price of fuel and some raw materials is falling, earnings in the auto sector are likely to start to recover in six months to a year. This could be a good buying opportunity for long-term investors.” A quick look at Toyota stock shows it’s fallen steadily from its longtime high of $137/share in February of 2007. It’s still dropping, currently trading at about $65. Still… with a rock-solid 6.5 price-to-earnings ratio, and a portfolio that includes massive investments in hybrid and electric technology, Toyota is no GM or Ford. No siree.
Car manufacturers are transitioning from one disaster to another, as the economic meltdown makes high gas prices seems like a blessing. Automotive News [sub] reports that two of the top prognosticators in the biz have looked at the proverbial tea leaves for the year’s U.S. sales figures and come-up with a soup tureen of not good. J.D. Power says 13.6 million. Global Insight says 13.8 million. GM says who called the whole thing off? Nigel Griffiths, Global Insight group managing director of global forecasting, has the answer. “We are moving from a liquidity crisis to an insolvency crisis right now. There is increasing evidence that this has affected the real economy, and as we see the automotive industry as the heart of the real economy, we are really taking a hit now.” As opposed to the fake economy (i.e. sub-prime loans)? Makes sense to me. But here’s the weird part. “It’s worse than if we saw oil at $200 a barrel on a sustained basis. At least with that, there was a transfer of wealth to countries like Russia that are inclined to buy automobiles.” So much for GM and Ford depending on foreign markets to stay afloat. George Magliano, Global Insight director of automotive industry research for North America, says you ain’t seen nothing yet. Magliano said it could take until 2013 for sales to recover to 2006 levels.
According to the Economic Times, Porsche Holdings SE has purchased “a small parcel of Volkswagen shares off-market, ‘significantly under the current market price.” How small? The deal has increased Porsche’s stake in VW has by a “low single-figure” percentage, according to Porsche spokesman Albrecht Bamler. The deal was but the first salvo in Porsche’s final assault, as the Suddeutsche Zeitung (via Bloomberg) reports that Porsche Holdings will have bought a majority stake in Volkswagen by November 26. But wait, there’s more! Once Porsche buys the final 15 percent or so shares it needs to own VW, expect swift changes in the way Europe’s largest automaker does business. Automotive News Europe [sub] reports that Porsche CFO Holger Haerter has already spilled the beans to Handelsblatt. “I am working right now on a joint paper on the future management model together with my finance colleague at VW. We will be discussing this with the VW and Porsche board of directors,” says Haerter. But Haerter’s leak privileges only extend to news that won’t completely piss off his new minions. Accordingly, he only mentions that VW managers will sit on the management board of Porsche Holdings, a body currently manned only by Porsche CEO Wendelin Wiedeking and Haerter himself. Still no word on how Wiedeking and Haerter plan on eviscerating the Piech/Union/Niedersachsen Provincial Government faction at VW.
Mitsubishi’s Normal, Il factory is the nation’s most under-utilized auto plant. Facing declining American sales, its operators have cut costs to survive. But unlike other transplants, Mitsubishi employs UAW workers, so it can’t just kill its workforce and feed them to Japanese-made robots, right? Well, Mitsubishi has actually surpassed the realm of mere xenophobic science fiction and has managed to wrangle concessions from the United Auto Workers. Bloomberg reports that 1,260 members of UAW Local 2488 approved pay cuts of nearly five dollars per hour and higher benefit costs in a new four-year contract with Mitsubishi. So much for the long-running Detroit narrative of the UAW being blind to the struggles of automakers and squeezing the life from domestic manufacturing. Sales and production have been cut in half at Mitsubishi’s American operations since 2002, and apparently the union get it. It’s not exactly a happy story for anyone, but the bottom line is that jobs are being kept in this country. Incidentally, this story explains with the utmost clarity why Detroit and the UAW joined forces to make a run on the federal piggybank. Otherwise they would have had to face the music and make an unpleasant but ultimately sustainable compromise like this one.
CAR Magazine has been covering the ongoing collaboration negotiations between BMW and Mercedes for some time. As usual, nothing unites like a common enemy, and the longtime rivals have been brought together by the looming leviathan that is the new Porsche-VW alliance. But partnership does not come easily after decades of fierce competition. CAR speculates on the possible causes of ongoing difficulties thusly: “Maybe it’s a mutual case of ‘not invented here’. Maybe it’s what decades of ingrained rivalry does to you. Or a mix of shortsightedness, ignorance and stubborness. Perhaps a combination of the above.” Whatever the cause, BMW and Mercedes have yet to finalize any plans to share M-B’s new M295 all-aluminium V12. Is BMW, like McLaren, suffering from a restrictive Daimler contract with Aston-Martin? We’ll may never know. What is clear is that Mercedes needs a new corporate four-banger for its burgeoning small-car portfolio. The current C-class four is “too big, too heavy and too expensive” say CAR, and a new, shared four-cylinder could be jointly developed for Benz’s A-, B-, C-, E- and GLK-classes, and BMW’s 1-, X1, 3, X3, and MINI models. If no German alliance forms, PSA and Fiat are waiting in the wings, hoping to snag a technical partner for their own next-gen four-bangers. Meanwhile, “other collaboration opportunities between Munich and Stuttgart include more pace-setting hybrid modules, more efficient dual-clutch and automatic transmissions, advanced driver assistance systems and a highly flexible small car concept.” No mention yet of the Sudetenland.
The Wall Street Journal is calling attention to the massive cash piles sitting around the offices of big oil re: falling stock prices. The solution to this problem? “Mr. Flannery argues that Big Oil will need to put cash into acquisitions to restore the battered share prices.” ExxonMobil alone is sitting on $39b despite buying back its own stock at a rate of $8b per quarter (it’s repurchased $218b of its shares over the past several years). General Motors’ total market capitalization of under $5b, and falling, makes it a target. OK, they have a few liability “issues.” But what’s good for GM is good for ExxonMobil. By deferring two months of its own stock buy backs ExxonMobil could gobble-up the world’s once and future king of cars. Think of the synergy! From exploration through production, marketing and finally right out the tailpipe; a truly global and integrated oil monster. Chevron, never one to be outdone by its sister company (both were once part of Standard Oil), is said to be eyeing Ford. With plunging demand dragging oil prices from $140 per barrel down to around $90, something must be done! Or not.
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