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Automotive Market Uncovered


Each of the Big Three must put together 3 to 5 year budget plan in order to project their capital requirements. Ford for the next 3 years in their spending plan procedure is revealing continued market share erosion in each of the next three years. It is likely that both General Motors and DaimlerChrysler are acting out the same situation.

Jerry Sullivan is the head of the largest UAW car employee’s union at Ford. He has 36 years with Ford, and the last 10 years as head of UAW Local 600. Sullivan is prompting his fellow workers to accept the present Ford buyout arrangement which is on the table for Ford workers to consider.

Ford lost almost $13 billion in the last 12 months. The union recognizes that Ford’s back is up against the wall, and it’s time to try to conserve the company. Ford is reorganizing the way it develops cars, more along the lines of Japanese manufacturing strategies. As an example, many of their employees are now working 4 day shifts of 10 hours. These shifts can include weekends. The workers are consenting to work at routine incomes instead of overtime rates.

For those who need a car to go to work every day, buying a car has been more expense efficient considering that paying for gas is less costly than paying a certain quantity of fear. This is especially true for those who live far away from their office or those who need to take a trip a lot in their work.

How Would You Have Known?

This summer, the National Union will be working out health care advantages among other problems. Now health care costs are at least 50 % higher than overseas employees. It’s extremely hard for Ford, or anyone for that matter to make up the incremental difference in these costs, and still offer cars at a competitive rate in view of world markets. The Japanese operating under a various rate structure are in a position to basically more goodies into the cars, and still offer them at a more affordable rate than our domestic products, then there’s the quality concern.

Let’s look at it this way. Our stock study reveals that the average car Ford produces compared with Japan has about $2400 of additional profits constructed in the Japanese car as compared to the American produced automobile. About half of that space is higher labor costs for the American item, and about half of the labor costs are higher medical care costs for retired automotive workers. The Japanese companies have -0- costs, that’s right, zero associated medical care costs for their RETIRED employees. This is due to the fact that in Japan those medical care costs are picked up at the nationwide level by the government, who gets medical costs for all retired people.

General Motors like all openly traded companies should submit its yearly report with the Securities Exchange Commission on a timely basis. Would you believe that GM has asked the SEC for an extension for its filing to March 16th of this year? GM continues to be unable to act its financial act together. This, paired with an inability to make cars that people want to purchase makes the future not altogether too bright for America’s biggest car manufacturer.

GM has also revealed an interest in obtaining the Chrysler unit of DaimlerChrysler, which is up for sale. This presumes there will certainly be proposals for the Chrysler unit. DaimlerChrysler in German has announced that if there are no bids, they will keep the unit, and continue to attempt to turn it around.

It’s seems that GM’s newest trouble is their General Motor Acceptance Corporation (GMAC) subsidiary. The funding subsidiary was partly sold to a group of personal equity players last April. The problem is when you do such a deal; you need to put in stipulations that everything is lovely, or just as it needs to be. Apparently GMAC has several lenders who are what you would call subprime borrowers.

Subprime is not so prime any longer if you have actually been reading the papers lately. With the housing market still on its back, borrowers with less than extremely credit seem to be in problem. Equated, that means they are not paying their expenses on a prompt basis. This entire big market is called the subprime market. When the economy has something of a decline historically, these borrowers surfaces as individuals who just cannot keep up with their debt payments.

A number of companies who have actually been accommodating them, all of a sudden start to take hits. If you are a company working with a subprime borrower, you have a certain reserve or cushion constructed into your numbers for the analytical variety of people that you think will certainly default. It is becoming progressively obvious in our stock research as stock investors that the subprime companies involved with such borrowers have FRANKLY blown up with their numbers. These companies simply have no concept where their borrowers stand today in their capability to service their debt.

While the root of the cynicism is reasonable, such absolute power is simply not possible. Why? There is no such thing as ‘Big Pharma’. The pharmaceutical industry is in fact composed of hundreds of pharmaceutical companies that include a few giants and numerous small companies wishing to end up being giants. The big pharmaceutical business manages approximately 10 % of the whole market. The top 10 pharmaceutical companies control less than 50 % of the entire market. This means that no person, business or group of companies are so powerful to manage the market.

As a comparison, think about the vehicle industry. The leading ten car manufacturers control about 2/3 of the marketplace. There are a couple of, really powerful car companies. But when the US makers got lazy and failed to produce cars which fulfilled the need of the market, these effective giants were not able to manage the marketplace and force customers to purchase exactly what they were producing. The effective huge car companies were not able to avoid smaller hungry rivals from rushing in to take and fulfill the need market share away. A pharmaceutical giant would have even less ability to regulate the market.

GMAC is in the exact same position as the subprime industry, and that is why in our viewpoint they have actually asked the SEC for a postponed filing authorization. They are literally attempting to figure out where they stand. Presuming the situation is even worse than what they informed the private equity gamers who acquired a majority of GMAC last year, GM will certainly be accountable depending upon the covenants in the agreement to ante up extra cash to the purchasers.

This is just one more illustration of inefficient management at General Motors. They are a management group that lets things take place to them. They are in a responsive mode rather than being out in front of the troubles attempting to expect, and repair them prior to they get blown out of proportion. At our company, we have actually been observers of the American automotive experience for numerous years. We understand there are Lee Iacocca type people out there that can reverse GM, Ford, and Chrysler. These individuals simply aren’t in the car market anymore.

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