The Day of Reckoning for the Auto Industry is Nigh

March 31 is supposed to be the deadline on decisions regarding loans to the auto industry.  Unfortunately, the industry is setting itself up for failure by using a forecast for sales this year of 11.2mm.  That number is problematic given that the current sales rate is closer to 9mm.  While that is below the normal scrappage rate, cars are being repaired not scrapped. This ripples through the food chain resulting in good results for the Autozones of the world, but lousy results for the major auto companies. No one, not even Toyota, can make money at 9mm cars per year. The federal government needs to be prepared to lend sufficient funds to keep the industry alive until sales approach 12 or 13mm cars annually. GM, for example, assuming they sell 25% of the new cars, would fall 500,000 cars short of its forecast if sales stay at 9 vs. 11mm.  500,000 times a wholesale selling price of, say, $25,000, would be a revenue shortfall of $12.5 Billion and missed contribution to overhead of maybe a third of that. At some point, sales will return to a normal scrappage level at least, but probably not until mileage improves substantially on new cars and the consumer’s balance sheet looks better.

 

Don’t blame the auto industry for today’s sales rate. If you need to have someone to blame focus on the financial services industry.  However, do realize that at this critical juncture it is particularly important that the US auto industry continue to operate without having to fight through the intended and unintended consequences of bankruptcy and the ripple effects of that on an already struggling US economy. A disruption of the improvements wrought by the design and engineering efforts surrounding the Camaro, the eVolt, and Ford’s work on hybrids would set the whole global auto industry back in its contribution to reduced CO2 emissions.  I know that sounds like a stretch, but the Camaro at 29mpg, winning kudos for design and engineering and the eVolt following next year as a real game changer in power trains, can start making a difference. The Camaro is not the best car for today’s environment.  Lutz did a great job shaking up the design and engineering efforts at GM but his vision of where the world was going with fuel consumption fell short. Nobody’s perfect, but the direction is right. We don’t need the risk to the momentum of the US position in the industry and to the overall economy of a bankruptcy right now. And don’t believe that Ford will be unaffected just because it doesn’t file immediately.

 

Don’t let the anger with AIG and the financial services industry affect the political will to preserve an important manufacturing and consumer industry in this country. The unintended consequences on CO2 emissions will be severe.

This entry was posted in Automobile Industry by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

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