Matthew Lynn
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The great investor Warren Buffett likes to remark that in business, it’s ‘only when the tide goes out that you discover who’s swimming naked’. As the credit crunch tide has ebbed, plenty of people have been found without their togs on. But perhaps none more than the auto industry — and at its centre, none more than GM.
GM has been a catastrophe on wheels for years. It has been ‘widely recognised as having destroyed billions of dollars in economic value, and it has been unsuccessful in its half-hearted efforts at transformation since at least the 1970s,’ argued the Columbia Business School professor Rita McGrath in an analysis of its problems. Indeed so. Ever since Honda and Toyota started shipping small, cheap and ultra-reliable cars around the world in the 1960s, GM has been in retreat.
Where once Americans chose only between GM, Ford and Chrysler, now they can choose from dozens of manufacturers. Americans like cars, and always have done: they own 2.2 cars for every family. But the market has become so oversaturated that it is impossible to make money. Indeed, since 2005 GM has run up $73 billion in losses, even while auto sales reached fresh peaks.
The reasons aren’t hard to find. GM, along with the other big Detroit auto manufacturers, pays its workers lavishly. A Detroit car worker makes an average of $73 per hour. Toyota pays its workers $48, and the average factory worker makes only $32. Those kinds of numbers, allied with huge pension and healthcare bills, made GM the high-cost producer in a brutally crowded, price-competitive industry.
Two trends have shielded GM for the past few years. Until two years ago, oil was cheap, and a big SUV was a must-have on every suburban driveway. Wagoner deliberately kept the company focused on big gas- guzzling pick-ups and SUVs. It took the military Humvee and turned it into the monstrous Hummer, too heavy for some streets and so thirsty it managed only 14 miles to the gallon.
Meanwhile, companies such as Toyota and Honda were developing petrol-electric vehicles. Dinky cars like the Prius were regarded as a bit of a joke by the US industry — but turned out to be the right strategic call. As oil soared, the SUV market collapsed, down by 37 per cent this year alone. GM had nothing left in its locker. An all-electric Chevrolet is being rushed into production, but it may be too late.
Next, for much of the past decade, credit gushed even more plentifully and cheaply than oil. Car sales were buoyant because people weren’t actually paying for them. They put them on credit. But this year, the markets suddenly woke up to the fact that lending people money to buy SUVs they couldn’t really afford made even less sense than lending them money to buy houses they couldn’t afford: at least they can’t drive the house away.
The credit market for car sales has collapsed. In October, only $500 million of auto bonds were sold, compared with $9 billion in October 2007. The bonds were sold at 6 per cent above Libor — the rate at which banks lend to each other — compared with less than 1 per cent back in January. Not surprisingly, your local Cadillac dealer isn’t offering 0 per cent finance any more. But if they can’t get credit, people aren’t buying.
With the props of cheap oil and cheap credit kicked away, GM has wobbled. In October, car sales in the US were down by 32 per cent on the same month last year. GM’s sales were down by 45 per cent. What the market thinks can be summed up in a couple of brutal figures. GM’s bonds now trade at 15 cents on the dollar, which means investors think it might be good for two more years of interest and no more. Its shares have lost nine tenths of their value this year.
One way out would be a merger with Chrysler. That might buy time. But Germany’s Daimler owned Chrysler for a decade, and couldn’t do anything with it. In reality, GM’s one remaining hope is a massive bail-out from Washington. Along with Ford, it is pleading for a $25 billion rescue package. Without government support, the company is likely to run out of cash before the end of next year.
True, there are plenty of jobs at stake. The big three car-makers employ 240,000 people in the US. Bankruptcy, one of the options Obama is reported to be considering, would send shock waves through the entire economy. Against that, the global auto industry needs to shrink to survive. There isn’t going to be space for more than five or six manufacturers. Toyota will be on the list, and so will Honda, and Renault-Nissan. Volkswagen should make it, and one of the Koreans, probably Hyundai. That leaves space for only one American manufacturer, and Ford has both a stronger global presence and is in better financial shape. A bail-out will buy another year or two, but it looks too late to save the business now. What’s good for GM is no longer good for America, and certainly not for the rest of the world.
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