The Automotive Consulting Group's position on the automotive industry 'bailout'
Ask anyone of their opinion of General Motors and you will get a number of descriptive comments like ‘bloated giant, inept management, overpaid employees, etc.” Ask the average taxpayer if we should bail-out GM and you get a resounding NO! Add me to that group . . . . until I begin to think of the unintended consequences.
If GM were to declare Chapter 11, it would set the broad automotive industry, and many connected industries, into turmoil. That would set off a chain reaction throughout the U.S. economy, impacting service industries, small businesses, mom and pop stores, communities, states, and, perhaps, even foreign economies.
What seems like a tough-love decision to punish GM for past missteps and out-and-out arrogance will cause unimaginable hardship to closely aligned industries. Steel, aluminum, copper, tire and rubber, and electronics would be severely damaged, creating a real national security threat.
The automotive industry is based on volume. This scale allows automotive OEMs and suppliers to operate on thin profit margins, while making a reasonable total profit. This is true for both domestic and transplant automakers. Thus, the key to success, or survival, is volume.
Looking back over time, the U.S. economy experiences a recession every decade with a resultant downturn in new vehicle sales. Historically, the new vehicle sales declined an average of 24% during these recessionary periods, with the steepest decline being 32% in 1982.
In 2008, the industry was hit with a double whammy, fuel prices over $4 per gallon and the credit debacle. The resultant effect is a change in mix in the types of vehicles consumers are demanding and an erosion of credit availability, leading to a 38% decline in sales and the loss of profitability at the domestic Big 3 and many of their suppliers.
Without a doubt, the credit crisis has exacerbated an already bad time for automakers; not just for domestic manufacturers, but for all automakers. Even world-class companies like Honda and Toyota are experiencing significant reductions in U.S. sales since the Lehman Brothers collapse with declines of 25% and 23% respectively.
Back to the GM situation and the potential repercussions, should they be forced into bankruptcy. As previously discussed, many automotive suppliers are already feeling the pinch of the 2008 recession. Should GM file for protection under Chapter 11, numerous forces would come into play. These are:
Lack of liquidity at marginally profitable suppliers would force them into bankruptcy,
A further erosion of consumer confidence would result in a further auto sales decline, perhaps to levels not seen since the 1950s,
The domino effect would bring down Ford and Chrysler, and severely damage the transplant OEMs who are also dependent of volume sales,
Related industries would be succumb to the erosion of volume in the auto sector,
With a further erosion in consumer confidence, auto sales could plummet to 7 - 8 million units,
The ripple would be felt by all automakers, including the transplants,
More forecloses would ensue as laid off workers are unable to meet mortgage payments,
Communities, schools and local services in blighted areas would be affected,
States will face massive cuts or face bankruptcy,
The U.S. economy would face a massive unemployment, loss of taxes and an erosion of national security capabilities.