President Bush on Tuesday signed into law a low-interest loan package to aid U.S. auto makers, but those struggling companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.
The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government. But the funding for the package wasn't passed by Congress until this year. One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020.
General Motors Corp., Ford Motor Co. and Chrysler LLC have argued it was essential to get the loan help as soon as possible to rejigger plants to build smaller cars and infuse money into programs for gas-electric hybrids and other vehicles relying on alternative fuels. The recent credit crunch, along with double-digit declines in U.S. auto sales, have only put additional pressure on the auto makers to gain quick access government-backed loans, according to industry analysts.
"The auto loans can't come soon enough," said Kip Penniman, automotive analyst at KDP investment Advisors. Calling the loans a "lifeline" for GM in particular, Mr. Penniman said each of the auto makers will likely need to access some of that funding next year. Detroit's Big Three, once bullish on a turnaround in the auto sector in 2009, now expect to be another challenging year for auto sales in the U.S.
This infuriates me to no end. These companies relied on the gas guzzler model of business -- build it big, powerful and without any concept of fuel efficiency. Price them at a good price point so we make good money on them. Deny the possibility of peak oil whenever possible. Rinse. Repeat.
When that stopped being effective, they started to give cars away with "employee pricing". That means the car companies started selling cars at really low levels -- just barely enough to make a profit (if that). But there was a problem with this model. Consumers are now conditioned to expect car companies to offer fire sale prices on their models. So they're going to wait until car companies offer these prices again before they buy.
And as profits circled the bowel, the car companies are coming to the US government and saying, "lend me a ton of money, or half a million people will be unemployed withing two years." That's the real leverage in this deal -- the employees.
Seriously -- would you make a low interest loan to companies with the following stock charts?
8 comments:
That depends, BD. How senior is the obligation to repay the loans? If it took its place at the head of the line, it might not be such a bad idea.
Of course, a more sensible thing would have been to tie the loan toward development of non-oil-based technology.
I agree with you that this is a terrible idea. I am so tired of all of the government bailouts and programs that actually encourage mediocrity and failure of big businesses.
I think of the corporate head of a Japanese automobile company who was quoted on NPR a year or so ago. He said the difference between US and Japanese automakers is this-
US auto industry asks, "How do we please the shareholders?"
Japanese industry says, "How do we please the people buying cars?"
Safety. Reliability. Fuel efficient. Decent price. If I could get all that from a US car I'd get one in a heartbeat. They just didn't seem to know what I wanted, which was a van that didn't break down or have bizarre electrical fits (like the Chevy Lumina I once owned).
Loans???? Why didn't their marketing departments go out in years past and find out what customers really, truly wanted? Make it and they will buy it.
Oh, I forgot. Free money to corporations who screw up....
I love the smell of Free Market Capitalism (TM) in the morning, it smells like corporate welfare.
I think the automakers weren't ambitious enough. They should have sold their entire inventory to the Treasury. After all if the markets were functioning "normally" they would be able to sell their product at their asking price. Now the markets have broken down (i.e. no one will pay them what they think their product is worth). That logic seems to be working for the financials.
I bet the treasury could clean out the inventory of the big 3 for way less than 700 billion. Probably we would lose less on the deal too.
Both Ford and GM have announced sales within 4-6 months of new designs; "World Cars" originating in European studios with participation from designers from many other worldly design centers. They are finally becoming as smart as their Japanese competition. Furthermore, GM in particular is tooling up China so heavily to make their products that the will be a Chinese based company in 10 years. Ford will do the same, retaining Korea as a main Parts supplier. The bailouts are to be used for normal business. For companies who sucked since the 1973 oil embargo at making what was wanted.
This is an truly bad idea, a real copper bottomed mistake.
These loans are a government commitment to under-perform. We are taking capital, badly needed capital, and lending it to corporations with the expectation that they cannot generate a return on it that would attract investment.
This is an endorsement of bad management, we are not expecting them to come up with plans to generate a return that would be attractive in the market, no we are expecting them to continue their current behavior.
It could be marginally justifiable in the short term given the employment picture if you had a plan to address the automakers problems.
But that is not what we are doing. We are loaning money to automakers who have a demonstrated history of poor perfomance. GM has been losing an average of 2% market share since the 70's. They cannot say they didn't see this coming, they decided to they didn't want to see it coming.
What I find interesting is that despite the continuing decline in market share, they did not need low interest government loans to develop, produce, and market oversized, inefficient crap but they need them now to produce what the market is demanding.
Of course there is the possibility that the automakers will turn things around and start generating growth, under that scenario though, their shareholders are earning a return on the taxpayers investment. The return should go to the people who made the investment.
America needs this money to invest in infrastructure with a real rate of return. We cannot afford to lend it to corporations that continue to underperform.
The successful ones are the ones that are actually good at it. Lies come in different sizes and shapes. Something like “Buy this stuff and you will gain 1 million bucks in 3 days” falls in the fail category. Something like “Warning: Do not leave this page. This is a genuine one time offer” on the other hand might actually work. The whole secret is to not overdo it and to keep the whole thing consistent.
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jacksen
word of mouth
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