Wednesday, December 03, 2008

Domestic Automakers Go Hat In Hand For Bailout

It's another day, and the automakers are trying to suck up to Congress by driving to Washington rather than flying on their private jets in order to get a massive bailout for their incompetence.

Too bad no one at the automakers actually says how they ever intend to make a profit. None of what they've said actually points to changing the fundamental structural failures that have plagued GM, Chrysler and Ford for years on end. None are willing to tackle the high fixed costs associated with the pension obligations and lagging sales. They are just holding their hands out and hoping that saying that a bailout is the patriotic thing to do will save union jobs. That comes even as sales figures continue to drop.

It's funny, but the automakers know that it's going to work. Nancy Pelosi and her fellow Democrats are already putting out feelers that a bailout is in the works.

Not for $25 billion, but for at least $34 billion.

It's for the union jobs, you see. They'll claim that 10% of the American workforce relies in some fashion on automaker jobs. Let's just ignore the part about the competitive imbalance between GM, Ford and Chrysler and how Honda, BMW, Toyota, and other foreign automakers are able to produce high quality vehicles at a fraction of the cost of the smallish three because union jobs don't sap the bottom line, they don't have the overhead of maintaining thousands of showrooms for products that aren't moving, and that the other automakers have managed to hold their own in the downturn in the market.

GM's proposals wouldn't even pass basic MBA accounting 101
. They lack the basic details that show that GM understands the structural defects within the company and what they must do to change them.
But the restructuring plan comes up short on the most fundamental question. Will this company actually make money? Just look at the details — or what details are lacking.

GM says it plans to focus on only four brands. So why does the number of models only drop from 48 to 40?

GM has 6,600 dealers, which it says it will cut to 4,700 by 2012. Honda has 1,300 dealers. Even Ford has only 4,100 — which it will cut further.

And nowhere in the document does GM lay out, year by year, its own projected market share. This is perhaps the most critical part of any business plan. The kind of thing you learn in the first day of business school.

Turn to Exhibit B-1 — and you find something interesting. It is only in an appendix entry — and not stated explicitly. GM appears to have changed its market share assumption for 2009 GM U.S. volume from 20.6% a year ago to 22.5% today.

In this environment, it seems strange that GM is actually increasing its market share assumptions. And car business is all about volumes.
In GM's case, they have the additional problem of GMAC and the failure of the credit market. GM used GMAC to pad its bottom line for years, and when the credit market went South, so too did GM's overall bottom line.

DJ Drummond takes apart the financial picture at GM, and it's uglier than you can possibly imagine. In fact, he's making the case that GM has been violating GAAP for years by shifting income and balance sheets to make it appear that the company was better off than it really was. He also tackles the situation at Ford and Chrysler, which are in nearly as bad shape.

All in all, it makes for a compelling case for not giving the automakers one cent. They've destroyed their own companies through negligence, incompetence, and bad business judgment that borders on the criminal.

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