Good Auto Bailout Article - NYT:

[Midpack]

From the article, under this "plan" the government will provide:

1. DIP financing for how many billions of dollars? More than 25-50B I bet.
2. Warranty fund. How many billions will it take to fund that?

Also, shutting dealerships will put hundreds of thousands out of work and increase unemployment claims. Hundreds of thousands of GM employees will lose their good paying (maybe a little too good some say) assembly jobs and will rely on the government for unemployment benefits and healthcare and retraining. Plus, the government will lose payroll and income taxes on all these lost jobs. Oh yeah, I forgot about all the suppliers and other jobs that would be lost due to GM no longer having to actually pay them, so that's probably another 500K jobs. What's the price tag to the government for all that? Oh, and then Chrysler and maybe Ford may have to follow suit, so then you get to multiply all this by 3. ARE YOU KIDDING ME??

Instead, the government could float this LITTLE 25B (MAYBE 50B?) BRIDGE LOAN. It could actually work! You never know! It doesn't seem that expensive to try compared to the government sponsored bankruptcy alternative.

How does keeping auto and associated workers employed help them sell more cars? Giving them money to keep going is just forestalling the inevitable, at taxpayers expense, until they cut costs (ie, bankruptcy) and/or sell more cars. So far the UAW has said they're not giving up anything and Wagoner has said he won't resign. You think taxpayers making $15-$25-$35/hr or whatever should finance the bailout of autoworkers making $73.20/hr? ARE YOU KIDDING ME ??

 

[FinanceDude]

From the article, under this "plan" the government will provide:

1. DIP financing for how many billions of dollars? More than 25-50B I bet.
2. Warranty fund. How many billions will it take to fund that?

Also, shutting dealerships will put hundreds of thousands out of work and increase unemployment claims. Hundreds of thousands of GM employees will lose their good paying (maybe a little too good some say) assembly jobs and will rely on the government for unemployment benefits and healthcare and retraining. Plus, the government will lose payroll and income taxes on all these lost jobs. Oh yeah, I forgot about all the suppliers and other jobs that would be lost due to GM no longer having to actually pay them, so that's probably another 500K jobs. What's the price tag to the government for all that? Oh, and then Chrysler and maybe Ford may have to follow suit, so then you get to multiply all this by 3. ARE YOU KIDDING ME??

Instead, the government could float this LITTLE 25B (MAYBE 50B?) BRIDGE LOAN. It could actually work! You never know! It doesn't seem that expensive to try compared to the government sponsored bankruptcy alternative.

Based on your owning a dealership, I can understand wholeheartedly why you support the bailout. Certainly Congress has given Wall Street a lot more than that with little or no precondition.

I watched the hearings today. Waggoner acquitted himself fairly well, Mulally was ok, Nardelli was a smartass, and the UAW doofus is a total waste of space.

Say we give the Big Three a $50 billion bridge loan. When they burn through that, what is the next step? It seems to me they are "hoping" the new car market goes back to 13-14 million units or they are screwed. I remember when 12 million units was an awesome year, now 11 million units is abysmal??

It seems to me Congress didn't get the answers they wanted, so no bailout. Nitpicking on why the 3 each flew their own company's jet was stupid. What was NOT stupid was direct questions as to how the money would be spent. Waggoner admitted as much the money would be used for retiree pensions and helath care. I suppose he had to be honest, but that was NOT what Congress wanted to hear.......

 

[Independent]

From the article, under this "plan" the government will provide:

1. DIP financing for how many billions of dollars? More than 25-50B I bet.
2. Warranty fund. How many billions will it take to fund that?

Also, shutting dealerships will put hundreds of thousands out of work and increase unemployment claims. Hundreds of thousands of GM employees will lose their good paying (maybe a little too good some say) assembly jobs and will rely on the government for unemployment benefits and healthcare and retraining. Plus, the government will lose payroll and income taxes on all these lost jobs. Oh yeah, I forgot about all the suppliers and other jobs that would be lost due to GM no longer having to actually pay them, so that's probably another 500K jobs. What's the price tag to the government for all that? Oh, and then Chrysler and maybe Ford may have to follow suit, so then you get to multiply all this by 3. ARE YOU KIDDING ME??

Instead, the government could float this LITTLE 25B (MAYBE 50B?) BRIDGE LOAN. It could actually work! You never know! It doesn't seem that expensive to try compared to the government sponsored bankruptcy alternative.

I realize that you probably have plenty of things to do other then provide basic education, but I'm still going to ask.

I've read any number of times that US manufacturers have "too many dealers". I thought that dealers were independent retail outlets. The companies sell cars at wholesale to them, and the dealers are responsible for all their own expenses. If that's true, how is the company hurt by "too many" dealers?

I realize that the Detroit 3 have lots of small dealers who may struggle to compete with the bigger guys selling the same nameplates. But again, that doesn't seem like it's costing the companies any money. Is there a simple explanation?

 

[FinanceDude]

I've read any number of times that US manufacturers have "too many dealers". I thought that dealers were independent retail outlets. The companies sell cars at wholesale to them, and the dealers are responsible for all their own expenses. If that's true, how is the company hurt by "too many" dealers?

In the heyday of the Big Three, you could get a dealership for almost nothing. The Big Three were trying to push as many cars out the door as they could so every little town in America that had 500 people or more could get a Ford and/or GM dealer for sure. The growth of dealerships in the 50's and 60's was flat out amazing.

I realize that the Detroit 3 have lots of small dealers who may struggle to compete with the bigger guys selling the same nameplates. But again, that doesn't seem like it's costing the companies any money. Is there a simple explanation?

Well, the factory has played a lot of "tricks" over the years, like:

Rewarding bigger dealers by sending them the cars the smaller dealers order.

Shoving crap cars down everyone's throat as they saw fit.

Removing zone personel who could actually help with warranty problems, ane letting the service departments do their dirty work

Continuing to make crappy products while punishing the dealers that didn't get high CSI scores........

I could go on and on, but cardude is much more eloquent about it than I...........

 

[mathjak107]

soooo lets see. the autoworkers want the taxpayors who by the way most of whom have no health insurance or pensions to pay for the health insurance and pensions of someone else.


am i missing something here? sounds like a plan to me ha ha ha

 

[chinaco]

... You guys all think I am a whacked out Bible thumping righty, but I enjoy the occasional laspe in the media where they actually make sense............

No way!!! I never thunk it.

 

[Independent]

In the heyday of the Big Three, you could get a dealership for almost nothing. The Big Three were trying to push as many cars out the door as they could so every little town in America that had 500 people or more could get a Ford and/or GM dealer for sure. The growth of dealerships in the 50's and 60's was flat out amazing.

Well, the factory has played a lot of "tricks" over the years, like:

Rewarding bigger dealers by sending them the cars the smaller dealers order.

Shoving crap cars down everyone's throat as they saw fit.

Removing zone personel who could actually help with warranty problems, ane letting the service departments do their dirty work

Continuing to make crappy products while punishing the dealers that didn't get high CSI scores........

I'm not disagreeing with any of these statements. They say that it's hard for a dealer (maybe particularly a small dealer) to make money.

But, I thought that dealers are independent retailers. I still don't see why reducing the number of dealers is supposed to help GM financially.

 

[FinanceDude]

I'm not disagreeing with any of these statements. They say that it's hard for a dealer (maybe particularly a small dealer) to make money.

But, I thought that dealers are independent retailers. I still don't see why reducing the number of dealers is supposed to help GM financially.

They are independent franchises. I suppose it would lower the cost of shipping because you would dump more cars at fewer outlets. Toyota and Honda seem to sell plenty of cars with only 1/3 as many dealers as GM or Ford.

I suppose there are other costs, like the costs to have dealers hooked up to GM for service, etc, etc. I hope cardude can enlighten us, that world for me was a long time ago.

Bottom line, pension and health care promises killed the Big Three. As long as gas was cheap and folks couldn't get enough gas sucking behemoths, management gave the UAW whatever they wanted to keep the gravy train rolling..........

 

[samclem]

But, I thought that dealers are independent retailers. I still don't see why reducing the number of dealers is supposed to help GM financially.

I think it hurts the Big Three in two ways:
-- The manufacturers have to "service" more dealers. Support for training, support for sales, promotional materials, whatever support they provide when customers complain directly to the manufacturer, processing holdback amounts, tracking inventories. Just dealing with more paperwork.
-- Increases the cost of their cars to consumers. Sure, there needs to be some level of price competition, but there's a limit. Granting a very large number of small franchises is going to result in higher overhead costs than if there were fewer. These overhead costs get passed on to consumers, and that reduces the attractiveness of GM's cars. With qualty certainly no >better< than the competing foreign labels, the only thing GM has going for it is price. An inefficient sales chain reduces even that advantage.

It's time to clean house. It's going to be painful, and it would have been far easier to heed the writing on the wall for the last 25 years. I'm not interested in paying GM to start changing at this point. Tough love is what is needed--let's not help the automakers and the unions continue their addiction to business as usual.

 

[cardude]

Finance Dude has it right.

We are independent franchise owners who have a contract with the manufacturers to sell and service their vehicles. We buy the vehicles wholesale from the factory and pay the costs to keep the inventory on our lots (floorplan expense due every month). In addition, GM/Chrysler pass all training costs on to us, make us buy special tools as new models are introduced (whether we decide to stock them or not), and require us to pay a monthly fee for signage and use of their "computer systems", which are really nothing but a couple of websites.

So really, GM and Chrysler (my brands) have already passed on a lot of the sales-related expenses to the dealers that were normally paid by the factories. However, they would still like to close many of us down so they would have a "stronger" dealer network as far as profitability, and I'm sure they would save some more expense by eliminating some of us. This is no surprise, as they have been talking about reducing the dealer count for years. However, our strong state franchise laws make it really hard (or expensive) to do it in the past. Now, many of us are having to voluntarily terminate due to the volume dropping so much (2/3 in my case)-- we can't seem to cut expenses as fast as sales are falling.

Anyway, yes, I am very biased and obviously for the bailout for personal reasons. I just wish the government and the country could get us this relatively small 25B loan and give us a chance to save our family businesses.

 

[Independent]

Thanks for the replies. Sam points out the only two items that I could think of - fixed cost "servicing" a dealer, and inefficiencies at the dealer level that get passed along to the consumer.

CarDude says that much of the fixed cost is actually paid by the dealer - for example, I thought the company would cover the cost of computer systems, it looks like the dealers get it instead.

I'll do some very crude numbers. If there are 3,000 dealers that GM thinks are "way too small", and GM spends $33,000 per year on each of them, that's $100 million or 0.1% of North American revenue. I guess you can say that $100 million is a lot of money, or you can say that 0.1% is 42nd on your list of things to worry about. If those 3,000 dealers produce 20% of revenue, and only 25% of those sales migrate to other brands when these dealerships close, that's a 5% loss in gross revenue. This would worry me.

The efficiency argument is much tougher. There are so many dealerships that carry multiple brands that a dealer that seems small to GM, based on its GM sales, might be big enough in total sales to generate an efficient sales/service organization. I also think about the cases where it isn't two equal sized GM dealers competing with each other, but a big one and a little one. If the big one really is more efficient, it seems that it sets the local retail price, and the small one has to meet it.

But, I can still see the point. The average overhead of even smaller dealers must be millions per year. If that all gets into the cost to the consumer, a thousand "extra" dealers could be generating billions of extra consumer costs. That gets managment's attention -- especially if it gives them someone to blame besides the guy in the mirror.

I guess I can assume that the bean counters at GM and the stock analysts have done more of these calculations than I have, I'm sure I won't be making the decision.

 

[FinanceDude]

Thanks for the replies. Sam points out the only two items that I could think of - fixed cost "servicing" a dealer, and inefficiencies at the dealer level that get passed along to the consumer.

CarDude says that much of the fixed cost is actually paid by the dealer - for example, I thought the company would cover the cost of computer systems, it looks like the dealers get it instead.

I'll do some very crude numbers. If there are 3,000 dealers that GM thinks are "way too small", and GM spends $33,000 per year on each of them, that's $100 million or 0.1% of North American revenue. I guess you can say that $100 million is a lot of money, or you can say that 0.1% is 42nd on your list of things to worry about. If those 3,000 dealers produce 20% of revenue, and only 25% of those sales migrate to other brands when these dealerships close, that's a 5% loss in gross revenue. This would worry me.

The efficiency argument is much tougher. There are so many dealerships that carry multiple brands that a dealer that seems small to GM, based on its GM sales, might be big enough in total sales to generate an efficient sales/service organization. I also think about the cases where it isn't two equal sized GM dealers competing with each other, but a big one and a little one. If the big one really is more efficient, it seems that it sets the local retail price, and the small one has to meet it.

But, I can still see the point. The average overhead of even smaller dealers must be millions per year. If that all gets into the cost to the consumer, a thousand "extra" dealers could be generating billions of extra consumer costs. That gets managment's attention -- especially if it gives them someone to blame besides the guy in the mirror.

I guess I can assume that the bean counters at GM and the stock analysts have done more of these calculations than I have, I'm sure I won't be making the decision.

GM for years has been pushing dealers to sell out to each other. There used to be a Chevy Dealer, and a Pontiac Dealer, and a Buick dealer in a small town. Now you see more and more multi-point locations.

It is harder and harder for the small town dealers to survive. The Internet has changed car buying for all dealers. Now the customer expects the dealer to beat everyone else's price, get the color they want, eat the cost to get the car from 2 states away, and more.........

 

[cardude]

Hank Paulson kills the Auto Industry

Interesting, pro auto industry take.

TPMCafe | Talking Points Memo | Will Henry Paulson Sink Detroit?

 

[FinanceDude]

Interesting, pro auto industry take.

TPMCafe | Talking Points Memo | Will Henry Paulson Sink Detroit?

Interesting......... Keep in mind Paulson is a guy who got rich as an investment banker on Wall Street. So, it was "easier" for him to give money to Wall Street than the car makers.

TARP was a joke. Congress gave away money with no preconditions and no restrictions. The banks who got it used it to buy smaller weaker banks, NOT to provide credit.

Also, banks have very little legacy cost as compared to the UAW........

 

[al_bundy]

they also snuck a tax break for banks into the TARP legislation so they could write off the losses of a weak bank they buy making the bad loans somewhat valuable

 

[cardude]

Yes, TARP is a joke, and now the lawmakers are so pissed off they are refusing to keep an open mind about the domestic auto industry.

I just don't understand how TARP/Paulson can justify spending 140B on one insurance company but not 25B on three huge auto makers. Everyone rags on the detriot CEOs for being out of touch and having a crappy business model. Well, how good was AIG's model? It really looks to me like people just taking care of their own. Wall Street has always looked down on the domestic auto makers.

 

[CompoundInterestFan]

Everyone rags on the detriot CEOs for being out of touch and having a crappy business model. Well, how good was AIG's model?

There was plenty of that when AIG was getting their bailout. They're now under constant scrutiny (as they should be) to the point where if their execs stay anywhere but a Motel 6, congress is calling for them to resign. Also, I don't think anyone was claiming that AIG was doing things well prior to their bailout.

 

[Midpack]

Interesting, pro auto industry take.

TPMCafe | Talking Points Memo | Will Henry Paulson Sink Detroit?

Uninteresting. A lot of hand-wringing with no solution, the bailout forestalls the inevitable unless there are sweeping changes, and all we hear on that front is 'the UAW isn't giving up anything' and Wagoner 'is not resigning.' And if someone would explain how all domestic automakers, all their suppliers and all their dealers are going to fail - I'd love to hear it, that's never happened to any industry that I know of. Some will fail, and some will benefit as a result.

It's not that the rest of us don't sympathize, but most of us are also suffering the effects of this economy and there won't be a bailout for the rest of us. Our business is off 30%, and layoffs/closing will hit us within months if the economy doesn't turn around - doesn't look likely. So why should the rest of us making far less and having lost pensions and retiree health care long ago, bail out autoworkers who cost $73.20/hr (whether due to legacy benefits or not)?

 

[Gearhead Jim]

The general concept of a government-led Ch 11 has been on my mind for several months now, I'm glad the NYT finally agrees with me
But I wonder about a couple of the ideas in the article-
Is the typical UAW worker actually making $10-20/hr more than the foreign companies here? His next sentence suggests a confusion between pay and benefits, that's important because dealing with the problem requires a precise understanding of exactly what it is.
The government may be able to force the automakers to produce any kind of high-mileage vehicles the government desires, but Detroit's big problem has been that they are making vehicles the consumers don't want to buy. High-mileage might turn out to be another white elephant for years, until gas prices go up again.

 

[samclem]

The government may be able to force the automakers to produce any kind of high-mileage vehicles the government desires, but Detroit's big problem has been that they are making vehicles the consumers don't want to buy. High-mileage might turn out to be another white elephant for years, until gas prices go up again.

Yep. Apparently, along with the bailout money, Detroit will also get the free assistance of the 535 highly talented auto engineers and marketeers of US Congress. As if the auto companies weren't in enough trouble. High mileage will be a requirement, I'm sure that 500 lbs of added safety enhancements will be in the cards, expect some requirements for "made in the US content" to be stuffed in there, a mandated percentage of ethanol-capable vehicles - - the design by committee will continue with each new tranche.

A smart exec would hasten to bankruptcy (to beat the rush), and get the company trim and ready to compete when the auto market turns around. Yes, he might get the ax, but at least he would have done the right thing. The dinosaurs will repeat the begging game to Congress, put up with the mandates, and slowly bleed to death in the international marketplace.

GM: The new Amtrak.

 

[laurence]

Don't worry, the big three will now be able to compete with the Japanese and Korean auto makers:

UAW pushes for check card balloting

Hey, now they'll get all the Honda and Kia plants organized and make them pay $70/hour on labor costs, too! Nevermind the fact that a Civic will now cost 30k base.

 

[ERD50]

Not sure which of the many Auto Bailout threads to add this to, but I saw this one first, so you win/lose depending on POV:

Pelosi hopeful Big Three can show roadmap to 'viability' - MarketWatch

Pelosi also rejected Chapter 11 bankruptcy as an alternative for the Big Three.

"I just think that would be digging a hole far too deep," she said, adding that such a scenario would prove devastating for workers, the economy and the U.S. manufacturing base.

I fail to understand how throwing tax money into what appears to be an unsustainable business model would NOT prove devastating for the economy.

What would have Pelosi done with the buggy-whip industry? I sure would like to be supporting them with my tax dollars

-ERD50