Wednesday, November 19, 2008

Where’s the Bottom?

Another very bad day on Wall Street… the Dow down 427 points, closing below 8000. More bad news out of the banking industry, the Big Three execs in Washington begging for cash to stay alive and Paulson zigging and zagging over what to do with his $700 billion. Not the kind of news to send folks out to the auto mall to purchase a new set of wheels or give the broker a call to pick up a stock or two. Everyone is waiting for the next shoe to drop. Actually it reminds me of that recent TV ad where it’s raining shoes. (Funny. I can’t recall what they are selling.)

Frankly, I think Paulson would like to punt the whole $700 billion TARP thing down the road to the next administration and let Obama’s new Treasury Secretary figure it out. That way he could sneak out of town and not take the blame when it doesn’t work. The whole thing smells like they have no clue.

The Big Three automakers were operating on a flimsy business model before they got whacked by the duel tsunamis of the spike in gas prices to over $4.00 per gallon and then the credit meltdown. Decades of increasing concessions to the UAW and the accumulated deadwood of their own management and distribution network (they have way too many dealers) placed them at a big disadvantage to the foreign manufacturers. They have huge liabilities for their retirement and health care programs and they must pay nearly full wages to tens of thousands of laid off workers. The sum of all this means that their cost of producing a car is some $1600 to $2000 more per car than their Japanese competitors. Their loaded cost per worker hour is $72 vs. $42 for Toyota. Some business model.

In addition, Congress has placed some formidable obstacles in the way. As pointed out in an excellent piece in the Wall Street Journal today, Congress imposed the CAFÉ fleet-mileage standards that forced the Big Three to produce low mileage cars at a loss to sell their profitable and popular SUVs. Bowing to the green lobby, Congress will not allow the automakers to include in their CAFÉ calculations the autos they make abroad. This simple change alone, says the WSJ, would likely save Chrysler from bankruptcy. Nor will the greenies consider allowing the car companies to sell in the US their highly efficient, small diesel cars so common in Europe. Anyone who has rented a car in Europe has likely driven one of these little beauties. Quiet, peppy and non-polluting, they get great mileage. The environmentalists won’t permit the increase in the supply of diesel either. That’s why it costs more than gasoline. Never used to, and now it’s killing the trucking industry.

So, with all this against the auto industry does it seem like a great idea to throw $25 billion more at them? I think not. It’s only the beginning. Unless the Big Three can restructure their labor and distribution costs they are never going to be viable. And, unless Congress acquires some common sense about the penalties they impose with their mileage standards, even restructuring may not do the job.

Unfortunately, it looks like the incoming Obama Administration may make it worse. Bush refused to grant California a waver to impose a 23% reduction on greenhouse gas emissions from autos by 2012 and a 30% reduction by 2030.

That would have required the automakers to produce special cars for the California market. A killer. Obama promises to reverse the Bush policy. If he’s going to do that, sending the auto guys any amount of money is pissing it down a rat hole.

I believe, however, that Detroit will get the money, if only because the politicians are afraid to let them fail. Besides, the Democrats owe Michigan and Ohio. Bush will go along because he won’t want the demise of the US auto industry to happen on his watch. He’ll think, “Let the Democrats deal with it after January 20th.” Thus, the problem will be postponed and until the auto industry gets sorted out and banking stabilized, guessing where the bottom is can only be a WAG (Wild Assed Guess).

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