Sunday, September 30, 2012

Our Government Says It Has "Saved" GM ... Other Governments Are Propping Up European Car Makers ... But For How Long?

 Our government claims that it successfully bailed out or saved Government Motors, aka GM, recently. That we all know. We also know that government gets its bailout money from its owners -- the taxpayers -- We the People.

So how should we feel about the GM bailout and its success, whatever that means? For an answer to that question, in addition to the U.S., let's look to what's happening in Europe and beyond.

The conclusion is straightforward. There's a glut of global capacity, and that says the fallout will be severe, and many jobs and dollars will be lost. The jobs lost will result from factory related shutdowns and market share losses in a stagnant global economic environment, and the dollars lost will either be those of the companies' shareholders, governments, or both. Now let's talk about GM and its "salvation."

We're in effect helping GM stay in a losing game in Europe with billions of dollars of U.S. taxpayer money. But it's even worse than bailing out GM's European operations. We're making things tougher right here in the U.S. for not only GM but Ford and Chrysler, too.

To begin the discussion (and which is one you won't hear anything like from our politicians), let's address a few questions. Such as how many of We the People know that GM and Ford are EACH losing about one billion dollars annually in their European operations? Or that Europe's car producing capability is currently underutilized by approximately EIGHT million cars? Or that European governments and auto companies, along with the Japanese, Koreans and others are all planning to solve their capacity utilizations issues in large part by exporting more of their locally manufactured cars to the U.S.? And how well have our government officials thought through what all this means to the longer term success or failure of the taxpayer financed GM bailout that already has been declared a success?

The victory celebration is premature at best. Here's what I say. Let's all put the successful GM bailout story on hold, at least for now.

By definition, the global market for car sales, as with any other market, is always and only a grand total of 100%.

Thus, if U.S. taxpayer money is being used to keep GM afloat in Europe, that means the excess capacity in Europe will be increased and this will simply make things tougher for all competitors. In turn that means European governments and European manufacturers will try to export more of their production to the U.S., thereby making it even tougher to save GM and other U.S. manufacturers over the long term. Something has to give.

In other words, the global excess auto making capacity won't go away by refusing to let the market work as governments use taxpayer money to keep the weak players in the game through government subsidies. Such as bailing out GM in Europe, as an example.

And this trick of trying to sell out excess capacity in other markets instead of downsizing as required will only prolong the agony. In the meantime, companies will lose money, car prices will decline and things will just get worse. I guess the good part is that buying consumers will be able to get good deals on purchases which are indirectly being subsidized by their fellow taxpayers.

Let's use a simple example of how this all works when governments interfere with the market system.

If the global car market is 100 and isn't growing or shrinking as a whole, and if company A sells 50 this year compared to the 25 it sold last year, its competitors will sell 25 less this year than they sold last year. That's the simple math.

So when some companies are growing their share of the pie, others of necessity are shrinking their relative share.

Now let's move to some specifics and away from the local European eight million in excess manufacturing capacity issue. We'll look more broadly at excess capacity, weak demand, government involvement and exports.

Japanese auto makers have very big plans for their sales the next several years. So do the Koreans. And European makers plan to export lots of cars to the U.S. as well.

If they come close to achieving their goals, others will suffer. U.S. companies like GM and Ford, as examples.

Honda Aims to Double Sales in Five Years tells of Honda's aggressive global sales goals for the future. Toyota and Nissan have big plans as well:

"TOKYO—Honda Motor Co. set a goal of nearly doubling its global vehicles sales in five years, a move that would rely heavily on expanding its footprint in fast-growing emerging auto markets and on new small car models,

Japan's third biggest car maker by volume on Friday said it aims to sell more than 6 million vehicles in the fiscal year ending March 2017, a move that will heavily rely on its new Fit compact and low-cost Brio small model in mature and emerging markets.

In the last fiscal year, the car maker sold 3.11 million vehicles world-wide.

"We achieved a speedy recovery [from last year's natural disasters in Japan and Thailand] and as of today we are ready to make a counterattack," Honda President and Chief Executive Takanobu Ito said at a news conference.

The ambitious target means the company would have to sell 1.7 million more vehicles compared with its goal for the current fiscal year—and double the pace of growth in the four years through March 2008, when its global sales hit a record 3.92 million vehicles.

Honda joins its two bigger local rivals—Toyota Motor Corp. and Nissan Motor Co. —in pursuing a lofty growth plan.

Toyota projects global sales of 10 million vehicles by 2015 . . . a record level for the auto industry and a 36% jump from 7.35 million it sold in the last fiscal year. Nissan expects its world-wide sales to reach at least 7.2 million vehicles by the year ending March 2017, up 48% from 4.85 million in the last fiscal year. . . .

Emerging markets will play a bigger part of its global sales, accounting for half of the total sales by the year through March 2017, up from 38% expected for the current fiscal year.

The plan comes as Honda gets back on its feet after the March earthquake and tsunami in Japan and massive floods in Thailand last year, which crimped its production networks and dented its sales world-wide.

Honda expects its net profit to more than double to ¥470 billion ($6.01 billion) this fiscal year, as it predicts its sales will rebound in all markets. . . .

Honda will focus more on mini cars in Japan with a plan to roll out six new mini cars to boost its home market sales as that would help keep the company's pledge to maintain a domestic production of at least 1 million vehicles.

The maker of the Accord and the Civic cars, as well as the Acura upscale brand, is introducing new vehicle development operations to become even leaner to fight the difficult environment.

Starting with the coming new Fit, known as the Jazz in some markets, each of six regions—North America, Europe, China, South America, Japan and other Asian countries—participates in product development concurrently so that the same model can be introduced in all regions within a short period.

The new approach will enable the car maker to reap economies of scale in purchasing parts, Mr. Ito said.

Until now, the company has developed a new model mainly in the home market first and each region partially redesign the body to meet customers' tastes in each market."

Now let's look at Italy and Fiat. They have big plans for America as outlined in Italy to Work With Fiat on Exports:

"FLORENCE, Italy—Italy's government (recently) vowed to help Fiat become more competitive in exporting cars outside Europe after the auto maker reiterated its intention to stay in the country, dismissing fears of factory closures and mass layoffs.

After an almost four-hour meeting between Italian Prime Minister Mario Monti and Fiat Chief Executive Sergio Marchionne, the government said it would set up a task force in the coming weeks.

"The government and Fiat have agreed to work strengthen the company's competitiveness," it said in a joint statement. No reference was made to whether an exceptional extension of wage subsidies would be given to Fiat's thousands of furloughed workers.

It is also unclear what Italy's technocrat government—which is already struggling to find ways to cut spending in order to fulfill a pledge to balance its budget by next year—can do in material terms to help Fiat.

"Fiat intends to reorient its business model in Italy towards privileging the export [of cars], in particular outside of Europe," it said.

Fiat's unprofitable European car-making division is highly reliant on Italy, where sales have plummeted amid the recession. Unlike Germany, France, Spain and the U.K., the country has for years imported more cars than it exports. That has stoked fear that Fiat, which controls Chrysler Group LLC, would finally desert its home base.

"Fiat's executives have expressed their commitment to keep the group's industrial presence in Italy," the government said. . . .

Mr. Marchionne has previously suggested that Fiat make cars for export to the U.S., where demand is recovering. . . .

Summing Up

U.S. automobile makers have global competitors, of course, and everybody is looking to sell more cars in the U.S. market and everywhere else as well. A reasonable guesstimate would be that excess global capacity is perhaps close to twenty million units.

Accordingly, regardless of what the U.S. politicians may say, GM cannot be put in the long term "saved" category. Customers will decide who stays and goes, regardless of what governments do to prop up auto manufacturers. And GM and Ford definitely have a tough uphill competitive battle to fight, especially in their European operations. European companies, Japanese companies, Korean companies, Latin American companies, Chinese companies and so on all are facing difficult excess capacity utilization issues as well.

It's long past time to recognize and accept the facts of life in a global marketplace which is heavily indebted and plagued by less demand than manufacturing capability. Simply put, we're in the first innings of a long doubleheader. We're going to have to learn to play a whole new ball game when it comes to global competition. And that includes the UAW.

We'll have more to say on all this globalization and what it means at a later time, but for now suffice it to say that the world is much different now than it was ten, twenty, thirty, forty or fifty years ago.  We're not the only game in town.

The road ahead will not be an easy one, especially for the "middle class" that's going to be saved.

Global competition is real and no government can stop that. Not even ours.

 And that's regardless of who is elected president in November.

Thanks. Bob.

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