Here i am talking about a legendary car manufacturer founded in September 16,1908,in Flint, Michigan founded by William C. Durant who was a high school dropout. As of 2008,the company has about 266,000 people employed around the world.Call it ironical,this company is on the verge of Bankruptcy on its 100th birthday.
As of June 30, 2008, the net worth of the firm was negative $59.939 billion.The company is carrying a $43 billion debt burden, with nearly $3 billion per year in interest costs.Not long ago, It was the biggest, most successful company in the land and also the largest car manufacturer in the world.
I am talking about General Motors (GM) here.
The reason my focus is on GM is because its the Largest of the Detroit's Big Three.So lets focus on it first.
Everybody is talking about the Big 3 going bankrupt.The Big 3 are now fighting it out to get a $35 Billion bailout package from the U.S Congress which is getting postponed and which makes it clear to me that,the Congress is just buying more time to come up with a justification to help the industry.The negative effects of letting the 3 go bankrupt outweigh the positives.
Thanks to high Oil prices in the begining of this year,GM which was making the Gas Guzzling SUV's and selling them in Millions of units was finding it hard to sell as the Crude prices went goin Northwards.
In 2008 rapidly rising gas prices resulted in a 30% drop off of sales of SUVs which had been GM's most profitable product, often returning profits of 10 to 15 thousand dollars per vehicle. Sales of SUVs had been decreasing since 2004, but in May, 2008 plans for a new SUV platform, the CXX program, were canceled and on Oct. 13 it was announced that it would close the Janesville, Wisconsin plant, which built full-sized SUVs.
During the first 6 months of 2008 GM lost $18.8 billion and by late October its stock had dropped 76% and it was considering a merger with Chrysler. In only 12 months (October 2007-2008) GM sales in US have dropped 45 %.Now thats startling.
Since the late 1990s, over half of their profits have come from light trucks and SUVs, while they often could not break even on compact cars unless the buyer chose options. Ron Harbour, in releasing the Oliver Wyman's 2008 Harbour Report, stated that many small "econoboxes" of the past acted as loss leaders, but were designed to bring customers to the brand in the hopes they would stay loyal and move up to more profitable models. The report estimated that an automaker needed to sell ten small cars to make the same profit as one big vehicle, and that they had to produce small and mid-size cars profitably to succeed, something that the Detroit three have not yet done.
SUV sales peaked in 1999 but have not returned to that level ever since, due to high gas prices.What was GM and the other 2 automakers doing when it was pretty obvious that the fall in Sales would conitue.Manufacturers made 15% to 20% profit margin on an SUV, compared to 3% or less on a car.When gasoline prices rose above $4 per gallon in 2008, Americans stopped buying the big vehicles and Big Three sales and profitability plummeted.
There are a lot of things that GM did wrong,which they shouldnt have.The business model surrounding mass production of SUV's reason being one among many.The second obvious reason why the company in the state it is,is because of its super duper complicated contracts with their Trade Unions and the benefits dolled out to its employees.
Here are some interesting facts.
The total number of Big Three employees, parts-supplier employees and car-dealer employees totals approximately 1.6 million, according to the Alliance for American Manufacturing.All auto-related industries and after-market service businesses employ approximately 3.1 million people in the United States. The U.S. Bureau of Labor Statistics breaks down the workers into the following segments, as of September 2008: Parts manufacturing-504,000; Repair operations-864,000; Wholesale operations-340,000; Dealer operations-1.2 million; and Manufacturing-114,000.
Claims have been made that the crisis has occurred mainly as a result of the bad policies of the Big Three U.S. automakers, since Asian companies that manufacture automobiles in the U.S. are not experiencing similar problems.Consumer Reports a leading American magazine,reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies.
Heres an interesting find.While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created - many of them by Asian companies - in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period.
A "Jobs Bank" was negotiated with the UAW union in 1984, and in 2005 it paid 12,000 workers to show up daily and stay for their full shift, even though there was no work for them to do.GM pays about 8000 workers for sitting "Idle",just in case their services are needed.They draw about $70 (Rs 3500) an hour compared to about $50 (Rs 2500) an hour that the Non-Union,foreign manufacturers pay their workers.Foreign manufacturers here refer to the Honda's and Toyota's.G.M. workers are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota but note with similar productivity.
The majority of the operations of the Major 3 of Detroit are unionized (United Auto Workers and Canadian Auto Workers), resulting in higher labor costs than other automakers like Honda and Toyota.In order to improve profits, the Detroit automakers made deals with unions to reduce wages while making pension and health care commitments.
Delphi, which was spun off from GM in 1999, filed for Chapter 11 bankruptcy after the UAW refused to cut their wages and GM is expected to be liable for a $7 billion shortfall.If these unions donnot agree on wage cuts or some loosening of strings in their contracts,i have no doubts,General Motors would be history just like Delphi.
Off late i have been tracking some of the events and i beleive the Unions have agreed on wage cuts and some looseing of strings,which is good.But this entirely wont solve GM's,Ford's and Chrysler's problem.
Now i am coming to the point as to why GM and the other 2 should be saved in the Current economic scenario.
As the Nobel economics prize winner Paul Krugman said plans by U.S. lawmakers to bail out the Big Three automakers were a short-term solution, resulting from a "lack of willingness to accept the failure of a large industry in the midst of an economic crisis."
Krugman is right when he says that.I agree that ,its going to be a short term fix & i wouldnt be shocked to see the major 3 back asking for more funds in months to come. This automotive industry is indeed very large.In simple words,its Tooooo Big to collapse.
The major effect on the american economy with the 3 goin bankrupt would be Huge Job losses.
Its argued that for every job in the american auto industry,about 7 are employed at parts suppliers,dealers and so on.A bankruptcy of the 3 Auto majors would mean almost 3 million jobs lost and the unemployment levels touching 10%, which will only worsen the situation and "Swamp" the whole American economy. It's about saving the U.S. economy from a "Catastrophic Collapse"
One must be wondering why cant do GM do something about their "6000" odd dealers.Now heres the reason.GM cannot restructure or reduce the number of dealers because Various state level laws prevent it from doing so.If it does,GM would have to pay Singnificant Retrenchment Charges to the dealers,which would only add fuel to fire to this cash strapped company.
GM has eight brands, while Toyota has only three. More brands require additional marketing and product development expenditures, which drives incremental costs relative to the competition. One analyst estimated that reducing GM brands from 8 to 3 would save $5 billion annually.
However, reducing the number of brands requires closing or consolidation of dealerships, which due to state franchise laws is very expensive. For example, GM's retirement of the Oldsmobile brand cost nearly $2 billion.
Job losses will have more cascading effects on the Entire American economy. 3 Million jobs lost will mean,3 million more people facing problems paying their Mortagages,adding to the downward spiral in the Real estate market in america,it would mean,3 million more people cutting down on their monthly household expenditure and in return deepen the fall in Retail sales with the retailers and it goes on.Its just a Domino effect and i dont know where its gonna end only making this Recession worse.
Note - U.S. employers cut 533,000 jobs in November — the most in 34 years.
Job Losses, this is one of the main reasons and i beleive the "Only reason",why the Big 3 shouldnt be let to die in this economic scenario.
On October 13, 2008, Obama said that he wanted Congress to double its guaranteed loans to the U.S. automobile industry from $25 billion to $50 billion.
If GM and Chrysler disappear, there could also be an increase of about 1 million imported cars every year, which would remove about $25 billion from the U.S. economy. That would reduce GDP by 0.2 percentage points annually--excluding the impact of lost jobs and wages. In other words, U.S. demand for autos would be met by cars manufactured by foreign workers
On the long run,i dont beleive that these 3 majors would have any positive impact on the economy if they stick to their Old and Pathetic policies.
Now what would i do now,if i was a Big Punter on Wall Street.Simple,i would buy shares of GM currently quoting @ $4.Because i am ready to bet big time on this fact that the,The Big 3 will eventually be saved.I hope i am not proved wrong.
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