Page 3 of 3 US auto rescue - a society health check
By Julian Delasantellis
The dangers in this decision were obvious. Big, heavy 4,000 to 6,000 or more
kilogram vehicles need a big engine to push all that metal down the street.
Big, six-, and more likely eight -cylinder engines, by the very nature of the
laws of physics, used more gasoline than vehicles with smaller engines.
Probably the Tyrannosaurus Rex of this now rapidly becoming extinct breed was a
version of the massive 2008 Dodge Ram truck, with a 5.7 liter, 345 horsepower
engine. It tipped the scale at almost 9,000 kg. That was 10 times heavier than
the artillery shells fired by the dreaded World War I German artillery howitzer
Big Bertha, and, if it collided with a smaller vehicle at highway speeds,
probably just as lethal.
In the winter of 1998-99, world oil prices reached lows they had not seen since
before the second oil shock in 1979, under $11 barrel for oil, and a US average
price of just over 90 cents a gallon for gasoline. With interest rates lowered
by Federal Reserve chairman Alan Greenspan to counteract the effects of that
autumn's Russian debt and Long Term Capital Management crises, it was as if
someone was ringing the dinner bell for Detroit.
Sales of their heavy-metal, big-profit monstrosities shot through the roof,
barely slowing down at all for the 2001 recession. As world oil prices began
their slow and steady climb off their 1999 lows, analysts marveled how first $2
a gallon retail price for gasoline, then $3 gasoline, failed to make much of a
dent in the demand for the big gas guzzlers.
Until this year. World oil prices virtually tripled from early 2007 to July of
this year; at the same time, US retail gasoline prices doubled. It was the
prospect of weekly $100 or more gas fill ups that at last had Americans
climbing down out of the saddle of their SUVs and light trucks, and when they
did, they weren't climbing back. Sales of the Dodge RAM, which averaged nearly
40,000 units a month in 2006, fell to just over 15,000 a month in the summer of
2008.
Of course, this was the hemlock-filled chalice for US automakers, who had gone
all-in with this section of the market, and now were getting called. Sales of
Japan's, and of the Japanese transplant plants, trucks were also getting
clobbered, but they had advantages that the US nameplates lacked, specifically,
a much stronger presence in the small and mid-size car line, plus a capital
cushion obtained through the fact that they, unlike Detroit, actually made
money when they sold their product.
Many congressmen and media types claim that Detroit's tribulations with high
energy prices are the just recompense for Detroit's own incompetence in not
developing and bringing to market fuel efficient and "green" automobiles, in
short, in failing to make the product "that America wanted".
Here is one of the greatest hypocrisies in the public's opposition to aiding
the Detroit automakers. For, by specializing in the big gas guzzlers, the US
nameplates were giving the American public precisely what it wanted - right up
until the moment this year when the public suddenly decided that that was not
what it wanted. The Japanese nameplates may have had the capital reserves to
push research and development across the entire spectrum of the automobile
product line, but Detroit didn't, so it gambled - and lost.
One might think that the recent off-the-cliff decline in energy prices,
considering its product line, would have been Detroit's godsend, but that has
not proven to be the case. As soon as oil prices fell enough this autumn to
make driving a gas guzzler not a proposition that would have made your children
go hungry at night, Detroit was felled by its latest plague - the credit
crisis. With the US financial system rapidly retreating within itself to
extinction, it now appears that lenders are demanding much higher FICO credit
scores - that vital measure of credit worthiness in the US - on the order if
750-780 (on the scale's 300-850 range) before approving an auto loan.
Of all the chronic problems I have elaborated above, this is the acute malady
that has driven Detroit to the arms of Congress. America may be many things,
but one thing it is not is a 780 credit-score nation. It is a nation of big
dreamers dreaming big dreams of big things, namely, big cars, big plasma TVs,
big home additions, big week-long shopping sprees at Minneapolis' Mall of
America - none of which is likely any time soon to result in one having a 780
credit score. Even as gas prices continue to plummet, it is providing
surprisingly little joy for Detroit, for it matters little if you can afford
the gas if you can't afford the car.
Here is seen once again the vicious circle of deleveraging. Credit evaporates
for cars, leading to car sales declines, auto worker layoffs, more
delinquencies and subsequent foreclosures of auto-workers' houses, leading to
more losses in mortgage-backed securities, and another round down.
Even considering the estimated $7 trillion in cash and credit spent and pledged
by the US Treasury and Federal Reserve these past 15 months to try to counter
this fearsome process, the catastrophe, to paraphrase NASA scientist Ronald
Quincy (Jason Isaacs) explaining the inexorable approach of a planet-killing
asteroid in 1998's Armageddon, of deleveraging just keeps smiling and
heading towards us.
As this is being written, reports continue to leak out of Washington of an
imminent deal to provide up to $15 billion in short-term loans to Chrysler and
General Motors - supposedly, these two are in imminent need of rescue, with
perhaps only hours to spare outside of bankruptcy court if they don't get it.
Ford has said that it does not need assistance immediately, but it still would
like a government line of credit of about $10 billion - well, who wouldn't? GM
is particularly in need of assistance due to the heavy burden of its legacy
costs described above. Remarkably, GM is profitable in its non-North American
operations, as newly rich arriviste all over the world crave the status and
prestige of a big honkin' American yachtmobile way too big for the local roads
it will drive on. However, GM loses money on every car it sells in its home
market, North America.
In his testimony before Congress, GM chief executive Rick Waggoner has said
that sales in North America are burdened by what he calls "the burden of the
past", an obvious euphemism for consumers' memories of all the crappy products
it has put out over the past 30 years. Chrysler is burdened by some of the
worst current quality ratings of the Big Three, also, by all the debt service
costs originating from the 2007 $7.4 billion buyout of the company from Daimler
by its current owner, the private equity group Cerberus. Once again, corporate
America is seemingly astounded to learn that, eventually, it has to pay back
what it borrows.
I think that the companies should get the funds. The economic arguments alone
are compelling; should either or both GM and Chrysler have to completely shut
down operations (a real possibility should the companies' creditors force a
bankruptcy liquidation) the prospect of possibly millions more unemployed
workers, in a nation that has already lost 1.9 million jobs this year, could
easily tip this severe recession into a depression.
The effects would spread out into the American economy like a cancer; for
instance, even if only one of the big three failed, it is questionable whether
the industries' generally shared parts suppliers could survive the subsequent
20-50% falloff in demand.
But there is also a moral argument in favor of assistance. In one sense,
Detroit's failings are directly resultant from the society it was born from.
Detroit ignored the threat from foreign automakers. Well, why shouldn't it
have, for ignoring things foreign is as central to the American lifestyle as
another factor inhibiting American innovation - its students' poor test scores
in math and science.
Barack Obama's election was front-page news all over the world; the only time a
foreign political event makes news in the US is if a leader gets caught in a
sex scandal. Indeed, the success of movies such as The Princess Diaries and
TV shows such as How to Marry a Prince are indicative of the fact that a
good part of the population still thinks that the rest of the world is ruled by
romantic hereditary monarchies.
A very credible argument can be made that the auto industry bailout would be a
violation of the World Trade Organization anti-government subsidy rules that
America has always trumpeted for, and imposed on, foreign nations, but this,
much like with the Kyoto global warming protocols, only illustrates the
nation's continuing belief that foreign treaties can and should be abrogated
should any American ever be inconvenienced by them.
The US has needed a comprehensive national health insurance system for years,
but that issue has always been demagogued by those who claim it would mean
inferior medical care that would benefit only those on the margins of society.
It was low gas prices that enabled the SUV/light truck craze, but it is
political suicide to advocate higher gas taxes in the US.
Detroit has been particularly successful in staving off Congressional
initiatives for higher government-mandated Corporate Average Fuel Economy
(CAFE) regulations that would have forced it to both put its behemoths on a
diet and diversify its product line. The insistence on low gas prices as an
inalienable right of Americans has cost the country its auto industry, along
with, of course, a good portion of the 4,300 soldiers lost in Iraq.
Finally, the trouble in the credit markets currently preventing consumers from
getting auto loans is emblematic of how the nation, in worshipping the fast
cheap buck to be made through financial speculation rather than actually
producing something, allowed the development of an over-leveraged financial
system that currently acts more as the real economy's parasite than as its
adjutant.
Psalm 86 of the Bible's Old Testament has David calling out to the Lord, "Save
your servant, who trusts in you." Likewise, Detroit can plead to the nation,
"Save your mediocre car companies, we're only just as mediocre as the rest of
the society."
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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