By David L. Brown
As I wrote just a few days ago (“Detroit — Death Throes of an Industry,” posted July 7), the entire American auto industry seems to be in a downward spiral from which there may be no return. But it is almost inconceivable how fast the bad news has been coming.
Things are unwinding particularly fast for General Motors, which has recently announced major plant closings and other draconian steps. And today they made further announcements that underline the very difficult situation they are in. They suspended their dividend, a wise move since they are reportedly bleeding a billion dollars a month and their stock is below $10 for the first time since 1954. They announced plans to lay off numbers of white collar workers. They announced further plans to sell off assets. And, they said they will even further reduce their manufacturing focus on pickup trucks, large cars, and SUVs.
I will take a closer look at these in a moment, but the news report I read had an interesting quote from the company’s CEO. He said something like, “no one could have seen this coming,” and then backed off slightly and stated that 99.999 percent of people would not have seen it coming. Let’s examine that statement with a little basic mathematics, nothing hard, just plain division.
According to the calculator built into my iPhone, and assuming that there are 300 million people in the United States, his admission that 0.001 percent of people would have suspected there might be trouble ahead for GM and other car companies means that a total of 300,000 Americans did foresee it. As one of those, I am glad to know that I am in good company with a fairly large number of individuals.
It wasn’t even something that was particularly hard to grasp, once you realized that the entire world infrastructure was built on the shifting sands of cheap oil, and recognized that there were limits to how much of the stuff could be pumped out of the ground. The facts were there, plain to see, and the conclusion that Peak Oil would pose a significant threat to the Detroit business model in particular was a straight forward one.
Now my question is, with one of the largest and richest companies in the world at stake, why wasn’t GM’s CEO or at least some of his advisors among those 300,000 individuals? Wasn’t it a pretty important thing to be aware of? Isn’t the price that GM is paying now so severe that almost any effort to accurately predict the future and make preparations would have been worth the cost?
Well, yes, but the fact is that they and all the other major car makers in the world inexplicably did not believe warnings of the coming Oil Peak or understand that it was going to sweep away their business models like straws in the wind. That includes not only Ford and Chrysler, but also Toyota and Nissan which began building large pickup trucks and SUVs like there was no tomorrow.
Now to comment on the other factoids in GM’s announcement today. Factoid number one: The elimination of their dividend and a stock price that is in the toilet (it closed today at $9.84 but was as low as $8.81 during a chaotic trading day). This is extraordinary because of what GM shares are. They have been absolute icons of the investment world, one of the true blue chip stocks of history, a gold standard stock that millions of small investors have held for generations in the assurance that it would not only hold its value but would continue to generate dividends as regular as clockwork. That is what it was, and now it is, well, just another failed stock. The company’s investors have lost billions of dollars as what was a rock solid investment has turned into just so much wastepaper.
I cannot think of anything to compare with this meltdown. Enron was small potatoes compared with this. Only perhaps Edward Gibbon, the author of The Decline and Fall of the Roman Empire might be able to grok the magnitude of the ongoing collapse of General Motors. And remember that it took hundreds of years for Rome to collapse, while this company has slid over the brink toward what seems to be inevitable bankruptcy in a matter of months.
Factoid number two: Further layoffs of white collar workers (and the company has already eliminated tens of thousands of these jobs). Why only white collar workers, you may ask? Why quite simply because GM is held in a stranglehold by the unions, whose members it must pay whether they actually produce vehicles or simply stay at home watching Archie Bunker reruns and Wheel of Fortune (how about that Vanna White, eh?).
That is one reason why GM, like Ford and Chrysler, has continued to manufacture vehicles that it cannot sell. It must pay for the factories, it must pay for the workers, and it must pay for the contracted parts that flow into those plants … so, they might as well assemble the pickups, SUVs, Cadillacs and other monstrosities and hope for the best. Ford, Chrysler, and even Toyota and Nissan are in a similar situation, with perhaps millions of brand new 2008 model trucks, SUVs and large cars parked on dealer lots or just sitting outside the factories depreciating.
So the only option GM has is to lay off more white collar workers, which just might include the very people that could help turn the company around. People like manufacturing engineers, designers, marketing people, and a host of other highly trained and experienced staff. They say that a company is only as good as its people, and for GM to shed another layer of its professional staff is like a man cutting off his own arm. It is a sure thing that the union workers are not going to come up with ideas for new products and manufacturing strategies that are needed to launch the company in a new direction.
Meanwhile, what will all those United Autoworkers members do when all these auto companies evaporate into nothing but memories and unpaid liabilities? Well, not much, but there’s always the Cartoon Channel and lots of cold Budweiser (another American icon that just yesterday agreed to be bought by a Belgian company).
Factoid number three: The sale of assets. GM has already said it would like to sell its Hummer division, and would consider the sale of other brands. Well, that’s great except that it raises the question of who exactly would buy them? With the economy in trouble in general, and in the automobile business in particular, I doubt there is much market for old-style automobile brands.
Oh, yes, there are GM’s overseas divisions, where small, efficient cars are made and which have remained profitable. Yes, they could probably sell those, to Red China or Tata Motors of India perhaps. Tata recently purchased the Jaguar and Land Rover brands and might be interested in further extending its reach into Europe and other markets. And should GM sell off its profitable overseas divisions, those capable of making smaller and more efficient vehicles, it would be committing corporate suicide.
And finally, one more factoid: The company’s switch from making large vehicles. The trouble with that is that General Motors does not know how to make small vehicles at a profit in the U.S. market. Until recently Hummer was GM’s biggest earning division, and those sales have evaporated like dew in the Sahara Desert in July. According to Lee Iococca in his recent book Where Have All the Leaders Gone?, GM’s Saturn division has never made a profit. Saturn was supposed to be the company’s preparation for the future, and it has come to naught. In fact, there have been rumors it might close down the Saturn division entirely.
I saw a quote from a California auto dealer the other day that puts this into perspective. He said that he could make more money selling ten pickups or large SUVs than by selling fifty small, efficient vehicles. In other words, his dealership could not survive without the big iron — and now they cannot even give away the big, gas guzzlers. What does that mean for the future of the dealerships, and the companies they represent? Well, as the cowboy said after he kissed a pig, “It warn’t pretty, that’s fer shore!”
I suggest that GM may very likely be beyond saving, and that we are not going to see a government bailout because there are too many other demands on our nation’s purse. For one thing, a bailout would probably have to include the entire auto industry including Ford and Chrysler as well as GM. For another the Fannie Mae and Freddie Mac bailouts, the housing market bailout, the Wall Street bailouts, the mortgage company bailouts, the banking system bailout, the mess in the Mideast bailout, and who knows what other bailout candidates, all of them already standing in line ahead of the auto industry with their hands out.
Sorry, but I think the former auto giants are going to be left to twist in the wind, and in their case the term “bailout” may refer to what one does when the wings fall off of the airplane in which one is riding. Assuming that one has a parachute, that is. Too bad Detroit didn’t.