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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

 

What every fails to consider is that the Japanese built their advantage not due to the wages of American workers but due to favorable currency exchange rates and protected markets for many years.  They didn't begin to build cars in this country because the wanted to but because it insulated them against any imposed tariffs. To say that all American cars are garbage is just not true, I own both a Mercury and an Acura, and yes the Mercury may require a fix a slight bit more often, but it cost a hell of a lot less to fix it than it cost to fix the Acura, and they both have 100K + miles on them.

1.  Could someone please explain why Ford and GM can build factories in Europe but not in Asia?  Yet the Asians can build their factories here.  Could it be because the Asians refuse to play on a level field?  Compare what a Jeep sold in Japan costs here vs there with one of the Asian "knock-offs" sold there & here.  I think the US government owes it to the big 3 to make up for the one way tarriffs our government allows.

2.  Can anybody please explain how the Auto Asian manufactures can continue to copy American and European designs with impunity?  It is easy to cut your R&D, manufacturing and design costs when you steal them.

Let them die! Let them die. They have been on life support forever. THe Big 3 should have been the Big 0 years ago.

If you want to see examples of direct copying of European cars, look no further than ford 500, the back looks like a cheap rip-off from a Mercedes. The American car companies have pathetically failed to adjust to the changing times, and should therefore be subject to the market forces and allowed to fail as a consequence of their ignorant business practices.

 Here is another reason that they don't deserve our money. My brother in law has a 2004 Ford Focus. Nice enough car, 4 yrs old, 62K miles. The thermostat failed on it last week as such parts do, especially after the warranties gone.

 The problem is that the local dealer wanted to charge 3.5 hrs for labor at over $400 in cost!!

 I fixed it for him with a $7.99 part from Autozone and...  What do ya know.  It took me a grand total of 10 min. 35 sec. to complete the repair.

 I understand needing to make a buck, but come on, how can anyone justify such a blatant rip off!!!  

 And as far as fuel mileage, I bought a brand new Subaru XT coupe in "88, wish I still had it, 20 yr. old technology got 38 mpg on the highway and could compete on speed with about anything. Why can't we get such economy out of todays 4 bangers???

Like many readers, I recently reviewed the 2008 Consumer Report on cars and trucks. There were very few American made cars or trucks that I would purchase

after reviewing the problems section on each vehicle. It is my understanding that significant parts of American vehicles are manfufactured by suppliers and not the big 3. So the problem goes much deeper and relates to work ethic, wages, etc.

and not the UAW, Ford, Chrysler, or GM. When they fail, obviously the suppliers will go down the drain with them. One advantage of the Great Depression, was the new found appreciation that workers had for their jobs as the economy recovered and many never forgot that lesson. I hope we do not need to reach that level to learn from our mistakes......

how can an auto company lose money for 7 years and suddenly show a profit in 3 months so they can obtain a bailout? the main reason the big 3 are bust is they have too many workers on pension.......sorry, but it's the truth........

I do not know why more attention is not given to the banks, who, with there money hording policies, have done a good job of wiping out credit to consumers.The spin on what the American automakers produce or sell is crazy, the media has done a good job pitting Americans aganist Americans. I am a U.A.W. worker for Ford, the plant I worked at is now closed for retooling to build small European autos to sell here. I was transfered to Wayne Assa. in same local , by senority, no job bank. Ford is doing its part to give consumers what they want.P.S. Nission is also advertising a 332 h.p. car(what kind of price tag and fuel eco. here?) along with a $10,000 car(very lowend) that probely would not hold up very well in northern winters, and send your money to Japan for there parks, musuems, health care, pensions,and other gov. supported programs. Americans like power in there autos and trucks, both American and forigan companies offer this.

I drive a FORD F-350 crewcab dually (6wheels for you foreign lovers) powerstroke diesel 7.3 liter TRUCK.  I bought it used but it is a work truck.  I have a small ranch and pull a very large and long horse trailer.  There is not a foreign truck out there that can do the job.  It use to be trucks were for working people.  Construction, farms, ranches, etc.  The big three made their big mistake in turning the TRUCKS intoluxury vehicles which drove the cost up for the people who had to have them.  If the big three would return trucks to working vehicles (yeah, we still want radios) and concentrated on making a few good quality, high mpg cars for the main population and yeah, maybe a couple luxury cars for those who don't have to spend their hard earned money to survive, the big 3 might save themselves.  Regardless, some of us still need those big gas guzzlers.  Wish they could make one that got even 20mpg.

I agree with you johokeda, I need tourque,power & a place to carry HEAVY items such as four wheelers, boats, and AIRPLANES yes I said AIRPLANES.... you see I'm a hard working man and I need a hard working vehicle which would be a chevy

250 crew cab  with a 5.3 engine,3.73 rear end. For about 19,000 ut the door I figure that because I don't make 73 bucks an hour. But yeah chevy, your not doing so hot now, come down on the prices of those trucks not suv's, and I would surely bail you out.$$$

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