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Car sales: The Achilles Heel of auto bailout

Posted Jan 02 2009, 07:03 AM by Douglas McIntyre
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The mathematics of the U.S. car company bailout are simple. At least the car companies say that they are.

Expenses get cut. Labor costs go down to what they are for Japanese auto firms operating in the U.S. Creditor costs get chopped as debt is traded for equity. The failure of the GMAC debt swap program shows that not everyone will go along with that. Suppliers take a haircut.

On the revenue side, things are even less complex.

The car companies assume that they will keep their market shares in an industry that will produce at least 12.5 million domestic vehicles sales a year. December car sales numbers show how flawed that logic really is.

According to Edmunds, vehicles sales will fall below 13 million for 2008. That is down 17% from 2007. The rate of the drop-off is expected to be closer to 38% in December, which means the fall-off is accelerating. If last month's numbers are the standard for next year, total vehicles sales could drop below 10 million. While no one wants to believe that is true, no one wanted to believe that the current recession is the worst since World War Two.

The American car industry may be reshaping itself for a world based on wild optimism. If so, the government will be back into the bailout business for much more than the $37 billion the industry is seeking. If two million vehicle sales disappear next year, $50 billion in revenue could go out of the domestic market. US companies have about half of that.

Chrysler's sales are expected to drop 46% for December. If that holds true for the first quarter of next year, the company is dead. GM and Ford sales are expected to be off by between 30% and 40%.

The new administration needs to put another $25 million or more in its auto industry rainy day fund. That is what Detroit will need after its spends the $37 million it has already asked for.

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.

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Comments

 

Problem with the Big 3 is THE PEOPLE WHO BUY THIER CARS AND TRUCKS. See the problem isn't quality that the big 3 build, its that the owners keep their cars longer than import buyers. Its not uncommon to see 10-20 year old domestic cars on the roads. (most people don't realize that these cars are everywhere, the problem is some still look like they belong) You don't see the koreans and japs on the road that long (except for a few accords that are 8-12 years old) American Car owners know something the rest of you don't, we already own better products, we don't need to replace them with under 200K because they really don't need the maintance. Its not like owning a Jap/Korean/German car that requires 100k service at $600+. THe only problem the industry has is the number of people who think that companies who offered employees retirement in exchange for 30 years loyalty are a thing of the past. Pensions used to be expected from companies, however the last of the big companies GM/FORD are now at the point where everyone else was 20 years ago, they can't afford to give these because to many people think they are a better person for buying non-american made goods. Foolish people!

How about this idea? I only make 10.00 per hour. This figure is only my wage not benifits. UAW workers ,this is only gossip,make 20.00 per hour, not including benifits. So how am I going to afford to buy a auto?  Something gotta give. Also 7 figure salaries for CEO's and alike? Again somethings gotta give.

Agree with both posts, in a way.  The Big 3 really need to make some changes with the UAW - if anything cut benefits, why are we paying for people who don't have a job or are retired?  And why are we paying for CEOs huge paydays?  

Also, start making cars that last over a long bit of wear and tear, and are still good ten or twenty years down the road.  Cars 15 or 20 years ago were being made well, the cars now dent and wear out so easily that you have to replace them.  I want a car that lasts that is affordable, no matter who makes it.

Comments from a jap car owner.  15 year old trucks on the road don't mean they are still owned by the original owner.  More than likely, the orig owner sold the car years ago.  Good to see it is still on the road.  Used to by US makes, too many problems.  Switched to better made Jap cars.  Never looked back  Two mazda 626s, 250k mi each. 1 miata, 200k +, 1 Isuzu trooper, 108,000, sold it in mint condition with the orginal brakes on it!, Nissan 200, 300kmi,  2002 pontiac firebird,

pretty car, replaced 4 window motors in 2 years, 3 CD players, cracked exhaust manifold. Oh yeah, only over the last 2 years or so, would Gm stand behind it cars for 100,000.  When I bought my firebird it was only 3yrs. 36,000mi.  If you buy american, make sure you by a warranty.   Unions, unions, unions, when they were first started, the made alot of sense. Many of the days off and things we take for granted were started by the unions to protect the workers from slave labor practices.  In this day and age, they are nothing more than extortionists forthe employees to hold their employer hostage.  The unions and their non competitive attitudes have killed the golden goose.  The goose has now laid the last egg.

The only solice I have is when the big 3 go down, the older corvettes and camaros should go up in value so more.  

Mr. K,

You could earn big money being a useless marketing person for the not so BIG 3.  The crappiest vehicle I have owned...and sold 2 years later was a 1991 Ford F150 rusted to the core getting 10 MPG and not reliable.  The 1970 Ford gran torino I had in High School got 12 MPG.  Ford had been setting some tough standards for the competitors?  My Toyota corolla has 218K and still getting 35 MPG with little maintenance cost.  My Nissan Titan gets 17 MPG in town.  I almost doubled my MPG on the truck trade and you still see the old nissan and datsun trucks on the road.

The reason their are a bunch of old BIG 3 dumps on the road is because they have been around longer (20 years as you said) with larger sales volumes.  That means more BIG 3 vehicles on the road.  Lower income families have little choice in their purchase preference...cheap as possible...which means used vehicles...the older vehicles on the road.  Toss in the NASCAR/Redneck Ford vs Chevy vs Rice Burner mentality and you have people making decisions based on peers, not the quality or value of the vehicle.  Most people buy vehicles for reasons other than MPG or quality.  How many people bought the new VW beetle because it was CUTE and had a flower holder in it?  Too many.  Why would you buy a Chevy Corvette?  To get some noogy?  To feel better about you self?  To brag to coworkers?

OK...say you're right.  The BIG 3 MBAs should have seen market saturation of their awesome product and broke into new world markets.  No...why?  Was it cost?  Was it quality?  During the bowl games...GM and Ford are selling Big trucks in their commercials.  Nissan is advertising the VERSA at $10K ant 34 MPG.  Sounds like a smart move by Ford and GM?  Geez...they are killing themselves regardless of your arguement or mine.  Survival of the fittest and smartest...nobody bails out my poor decisions.

You may do what your peers prescribe.  As for me, I have deliberately chosen non BIG 3 vehicles, but it appears my govt bought me one anyways.  Bye Bye Big 3, Business Major CEOs, MBAs, and the ever burdensome contractual BS of the UAW.

Big B, not the Big 3.

Big B: I have to agree with EXACTLY what you said the "big 3" has missed the boat entirely. Gas prices skyrocketed and what did they offer? Gas guzzling SUV's while in the short run may have been profitiable but..... I thought they would have learned a lesson from the oil and gas crisis of the 1970's but I guess not. They Hybrids that they have in the pipeline are a joke except for maybe the Chevy Volt but the jury is still out on that note. The Big 3 management has to  be held accountable for their actions, remember flying their corprate jets to ask for a goverment loan err handout. Enough is enough we all work hard and pay taxes. I do NOT want my tax dollars to bail out an industry that is either completly ignorant or just think that doing business as normal will solve their issues.

A angry taxpayer:(

Big B: Check out the new 2009 Ford Fusion and Mercury Milan Hybrids coming the 1st quarter of 2009.

41 government rated city mpg's (and it'll get more than 41 mpg, too) An added bonus, it looks like an honest to goodness car. A surprise and delight feature - it has a useable trunk!

proof of the pudding is in the eating! The consumer is much smarter than to fall into Mr K's marketing. The consumer wants good, reliable and cheap cars that give good MPGs. Currently is in the non American cars that offer that, and that's why the Japs car makers are better off. Past time for the Big 3 to wake up and change their habits instead of going to congress with the begging bowl every 6 months.

BTW I am a proud member of the UAW.

proof of the pudding is in the eating! The consumer is much smarter than to fall into Mr K's marketing. The consumer wants good, reliable and cheap cars that give good MPGs. Currently is in the non American cars that offer that, and that's why the Japs car makers are better off. Past time for the Big 3 to wake up and change their habits instead of going to congress with the begging bowl every 6 months.

BTW I am a proud member of the UAW.

Well so much has been said so I will try to say something a little different...the great American way of life is in jeopardy there must be change and that will hurt some people. I am tired of payiong for others selfishness. Bailout no - if the employees didn't want to buy them out then bite the bullet now and learn from their mistakes. We must quit throwing money at all our troubles. Better product better price with reasonable wages ...The Japanese figured it out.

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