JONATHAN COHN MAY 5, 2011
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Will the voters will ever give President Obama credit for rescuing the American auto industry? I have no idea. But it looks more and more like they should.
On Thursday General Motors announced that, for the fifth consecutive quarter, it had made a profit. And not just a measly one, either. The $3.2 billion was higher than experts had predicted and more than three times the profit of the same quarter in 2010, when the company was still struggling to emerge from its bankruptcy.
GM sales in North America were up 25 percent over that period. That reflects the recovery, obviously, but the increase in GM sales was still larger than the industry average. Even if GM can't keep up that pace, it's an sign of increasing health.
Still, the most interesting part of the news is not the profit itself. It's how GM made it. From the New York Times:
The company has benefited from a better lineup of fuel-efficient cars and crossover vehicles in an environment where the national average for gasoline is almost $4 a gallon.
The new Chevrolet Cruze, for example, has been G.M.’s most successful entry in the compact car segment in years. G.M. has also transitioned away from large, seven-passenger S.U.V.’s to smaller crossovers like the Chevrolet Equinox. ...
The automaker has also reduced excess capacity in its assembly plants, and cut tens of thousands of jobs through buyouts and early retirements. Its break-even point in the United States has been lowered to about two million vehicles, a sales goal that it should achieve easily this year.
Excess capacity and an inability to produce competitive fuel-efficient cars were major factors in GM's crisis. This suggests the company is well on its way to addressing both issues.
None of which is to say it's all good news for GM. The company is still relying too heavily on incentives to lure sales, according to various media reports, and the highly touted Chevy Volt got a decidedly lackluster review from Consumer Reports.
It's also worth remembering that "reducing excess capacity" is a Wall Street euphemism for eliminating jobs. A lot of people suffered, and still are suffering, because they lost their livelihoods.
Still, if not for the Obama Administration's intervention, the entire American auto industry might very well have collapsed and taken the Midwest with it. Instead, the industry is on the rebound, at least for now.
That's not bad for government work. Not bad at all.
13 comments
Having lived through several corporate reorganizations, including Chrysler I, the one thing that stands out is that when an industry or firm can no longer support more than a certain level of employment, it can't. That is that. The faster the reality is accepted and the adjustment made, the better the outcome. Unfortunately, this is seldom what occurs. Everyone hangs on with a deathgrip, draining the firm/industry of resources, markets, whatever in the refusal to recognize the looming reality. This case was no different, and the outcome would have been disastrous but for the intervention of government. I made the case at the time that the Federal government needs standing authority for reorganization "in place" of any firm deemed of "national importance." This would involve the immediate ejection of all capital claims to be settled later from the value recovered, leaving the government free to organize for optimum market and economic value, more or less what it was able to do with the autos because it was willing to pay heavily. That should not have been necessary. The Federal government still does need that kind of authority. That could have made the banking reorganization a lot less painful for the public (albeit a lot more costly for the culprits, which would have been a good thing).
- roidubouloi
May 5, 2011 at 11:55am
My first deal with a car company (in the mid-80s with GM) was a real shocker for me, coming from a region (SE) that is not friendly to labor and a business environment that is more like the wild west. My first meeting to negotiate terms was in a sprawling GM plant, with a parking lot that had to be seen to be believed; definitely no car pooling or taking transit there. And the conference table was almost as big as the parking lot, with a white shirt and tie in every seat. My client and I (just the two of us) sat there for several minutes not knowing who to address, until finally one of the white shirts spoke. And on it went for several hours as all the other white shirts sat mute. I can report that the project was a success for my client (though GM abandoned the project well before the end of the lease term, GM paid all the rent in a timely manner). Needless to say, I came away from the experience vowing never, ever to invest in GM. This anecdote is intended as background for my comment to Cohn's post. First, GM was no more a "private" enterprise than the USPS. Anybody familiar with the car companies knows they have been subsidized by federal, state, and local governments forever; my project received direct local government financing, a UDAG, and the TIF in addition to a conventional first mortgage loan. Second, I wouldn't object to "resolution authority" (or whatever you wish to call it) with respect to companies of national importance, if but only if it can be exercised as a last resort. Third, end all the direct and indirect subsidies that perpetuate the inefficiencies.
- rayward
May 5, 2011 at 1:31pm
Is it not the case that the picture is more coloured than that Jonathan? Yes, China's market is up 10% for GM but the real growth driver is the 25% push in the US and... Autonation's President Michael Maroone: "...almost every day there`s a new incentive. They`re used in a very tactical manner. The incentives are relatively flat with prior periods. But today we saw GM announce zero percent financing, up to 72 months on specific models...it`s gotten much easier. The big driver of the recovery in 2010 was the restoration of credit. The change in 2011 is we`re now seeing an improving environment for sub-prime. So last year prime and near prime were more normal and this year we`re starting to see the sub- prime segment come along and that`s very important for our industry." Subprime? Remember when that was a bad thing? 0% finance for 72 months! People buying cars they can't afford with credit they couldn't normally obtain. And how did this happen? Exceptions for the motor industry from crucialy elements of Dodd-Frank. If there's a B leg to this credit implosion then it's Obama's double dip. Don't they know of any other way to grow an economy? GM's success is as worrying as it is welcome.
- IggyPop
May 5, 2011 at 2:20pm
Iggy, iggy, iggy, Don't you realize that consumer credit, lots of it, is the necessary flipside of plutocratic policies that give outlandish income shares to the rich? They want all the money, but then there isn't enough demand in the middle to sustain their enterprises. So, they have to lend back to the working population the money they wouldn't pay them in wages. Of course, this renders the system unstable and unsustainable, but the plutocrats don't care. When the worst happens, they figure they can count on the Treasury to bail them out. It is all a big confidence game. Guess who loses. People who work for a living.
- roidubouloi
May 5, 2011 at 3:36pm
Of course the sub prime byitself isn't the problem. It's the "securitization" of this crap that is really dangerous. You can be sure these sub prime car loans are being resold and resold and...adding more risk to an already risky credit market. All at a time when real wages and living standards are falling, not rising. Exactly how people are ever expected to be able to pay these extra loans back is a mystery only Obama and the Fed can answer. http://articles.orlandosentinel.com/2011-04-25/business/os-cfb-cover-digitalrisk-0425-20110425_1_subprime-peter-kassabov-digital-risk-llc
- IggyPop
May 5, 2011 at 3:43pm
You've summed it up quite nicely Roi.
- IggyPop
May 5, 2011 at 3:48pm
Final related word on this has to be your 800 Billion plus chunk of that subprime market - student loans. That whole for-profit education sector looks like quite a racket with it's high pressure sales targets and a 25 - 40% default rate. Condemning a generation into debt slavery before they even get out of college. Sad. Handy graphic cuts through the spin: http://philebersole.files.wordpress.com/2010/09/student-loan-scheme.jpg
- IggyPop
May 5, 2011 at 5:14pm
Iggy, the auto industry's "sub-prime" loans tend to be done with a lot more common sense. To qualify for a 0% loan, you usually need to have a good or great credit rating. The most lenient they ever get is proof of sufficient, steady employment to afford the payments (although I knew a girl that was sold a vehicle that the dealer knew they couldn't afford, she never bought another car she was so pissed). That's where the housing market broke down, as realtors and bankers and buyers and sellers kept falsifying documentation to overreport assets on hand or income. It's not nearly as risky as you think, and in this market where every dollar counts, getting 0% financing can win a lot of customers that might go elsewhere (assuming they'll even buy from that dealer in the first place). The price of the vehicle ensures that the dealership and manufacturer will get enough money to get by.
- GSpinks
May 5, 2011 at 5:28pm
Interesting spink. GM's subprime loan book is only 4% but rising of course. You could point to stuff like this from Forbes to bolster your argument (there's no football on tonight): http://www.forbes.com/2010/07/22/general-motors-americredit-subprime-business-autos-gm.html Howinever - this jumped out from that article: "About 40% of consumers fall in credit risk tiers of nonprime or below, according to data analysis firm Experian." 40% of US consumers are considered "nonprime". I don't know, it's quite a pivot, isn't it? Either Obama and the Fed will succeed and consumers real purchasing power will rise from that self sustaining recovery, just in time to cross that debt coping threshold or...
- IggyPop
May 5, 2011 at 5:58pm
Nonprime and subprime borrowers appear to be classifications of people with less than perfect credit. This is technically new to me, but I do know that credit rating isn't an indicator of purchasing power, its an indicator of reliability as a borrower. These two things, purchasing power and a good history of making payments on debts, go hand in hand, but don't confound them. Someone who gets laid off for 6 months loses purchasing power, and probably misses a bunch of payments. Once they're employed again their purchasing power returns and they start paying everything on time again, but now their credit history will be marred for several years. As it says in the article, right below the portion you cited: If managed properly, lending to nonprime and subprime customers can be a source of profitability for automakers, retailers and lenders. "Managed properly" really just means making sure the borrow has enough income to afford the payments, which is actually a function of the debt to income ratio, not their credit score. So, like I said, it's not as risky as you seem to think; it's a good, intelligent move on GM's part, if done properly.
- GSpinks
May 6, 2011 at 6:16pm
Point taken and well made. What about student loans, which has overtaken credit card debt and has a default rate upto 40% and, more importantly, it's "securitization"?
- IggyPop
May 6, 2011 at 7:12pm
Interesting take, Roi. Don't agree though on the need for standing govt authorization for "nationally important" industries. Hard to define, and who would provide capital to said industries without a known and fair workout facility. Certainly not the just-burned GM bondholders. I agree conceptually on the value of staggered and deep capital structures, and think they'd be very workable in practice (coco's mainly). They could be valued by the market, and would be a good signAling mechanism. I also agree that the capital structure should be responsible for losses, equity first, other claimants, and then debt. That needs to be clear to potential capital providers, and perhaps on reflection the inside info from your white shirt meeting would have translated into a proper capital strike!
- ds111
May 8, 2011 at 9:52pm
It is just a form of eminent domain and bankruptcy, ds. It doesn't matter whether it is hard to define. The government does not have to define why it wants to take property; it just needs a bona fide public purpose. If the Federal government wants to take over a failing company and recapitalize it, it should be able to take it in its entirety, exclude the holders of its capital, and compensate them later, if any compensations is due, at a court-determined price than could consist of cash or securities, junior securities, in the recapitalized enterprise, deemed to be of no lesser value than what they lost. You can find all of the precedent needed in the eminent domain and reorganization/recapitalization laws. It is just a matter of bringing them together in one place to serve a national interest. Of course, seizing control does not by itself solve the business problem or provide financing. But if the government stands ready to provide the financing, there is no reason that it should have to stand around haggling with the owners of the failed enterprise or allow them to pull it down if they don't receive a ransom. As you say, they should eat their losses. We should not have to eat their losses as the price for maintaining some important employer as a going concern.
- roidubouloi
May 9, 2011 at 8:27am