Reports of the Big Three’s deaths have been greatly exaggerated

If I hear another journalist predict the death of one of the Big Three automakers again in the next few weeks, I think I might hurl. No matter where I turn – the local newspaper, a business publication or online, some so-called expert is again spouting the certainty of GM, Ford or Chrysler failing.

There’s no doubt that times have been better for the Big Three. Lending, real estate and stock markets have led to a crappy economy for much of America. While jobless rates are extremely low, the median salaries have fallen adjusted for inflation over the last eight years. While some cite fuel prices as a reason that people aren’t buying expensive goods and services, this actually is probably more of an incentive than detraction when it applies to cars. After all, there are literally millions of people out there dying to get rid of their fuel guzzling Silverados, F150s, Durangos, Suburbans, and Expeditions.

Beyond external economic factors, there are the internal cash flow issues. Chrysler is probably the most cash-strapped, having been privately purchased from Daimler-Benz. Ford and GM have their own woes, because losing money each quarter hand-over-fist has a funny way of taking a toll on your liquidity.

Then there’s the whole lending market as it applies to these companies actually getting money. Just like Joe Six-Pack with his 400 credit score, GM and Ford are also finding their bad credit can be seen as a liability not worth taking when going in for a loan. Each of the Big Three relies on borrowed money to survive.

So at this point it probably seems like I’m not disagreeing with the other journalists at all! This is probably because this is where the others stop thinking about the issue and send their articles to their editors. I’m a bit different – I was a Business major with a minor in History, so I have a tendency to look at the past to give indications of where the future is headed.

Predicting the demise of companies is nothing new. Forty years ago, everyone thought Boeing was dead meat. Even ex-employees bought a billboard that asked that the last person leaving Seattle to please “turn out the lights.” Boeing obviously survived, and even has had long periods of thriving. It exists today in a functional duopoly.

Then there was Chrysler, which was on its way into the toilet when Lee Iacocca was a part of securing a federal bailout. A few K-cars and minivans later, and Chrysler was back in the mix. Even stupid moves like purchasing Lamborghini couldn’t stunt momentum in the 1980s and 1990s.

And this is the basis for my argument – business is all about ebb and flow. When the markets get tight, small companies fall off the face of the earth, but 800-pound gorillas hang in there…mostly because it’s too damn difficult for them to truly fail.

The reason is simple: huge corporations are so intertwined into the fabric of other businesses, as well as federal, state and local economies that there is simply too much at stake. In addition, because there is so much meat and fat, that a company like GM can literally spend a decade cutting waste and squeezing last bits of cash out of profit centers.

Journalists still seem to think of corporations like GM or Ford as a bunch of suits and line workers in Michigan. Nothing could be further from the truth. Beyond an employer of 266,000 people, GM is also an owner of contracts and relationships with thousands of suppliers, consultants, manufacturers, financial partners, and media conglomerates. Then there are the hundreds of thousands of employees of independently-owned dealerships worldwide. When GM shuttered Oldsmobile, the cost to handle the dealerships was over a billion dollars. Imagine the cost of dealing with Chevy, Pontiac, GMC, Buick, Saturn, Hummer, Saab, and Cadillac all at once! The cost to federal and state governments alone in lost tax revenue and unemployment insurance guarantees would be staggering.

Before someone throws out Enron or Worldcom as examples of how mighty can fall, please keep in mind that the auto industry is much different. Enron was a true shell game with an astonishing little amount of assets. Worldcom had fiber, but it also had debts in excess of the network’s value – especially after all the cooked books were straightened.

Even if any of the Big Three reached a critical point of no return, the federal government would again step in with a bailout. Just like with the mortgage lenders, the boys in DC know it is cheaper to borrow money from the Chinese and use it to keep the companies afloat until better times than to support all the layoffs, decreases in tax revenues and stock prices during an extended recession.

Keeping afloat for the next few years will be tough, but it provides the opportunity for GM, Ford and Chrysler to rethink brands, products, services, contracts, operations, financial management, and organization. Each company will need to meet increasing CAFE and safety standards, so what better time than now to make tough decisions that could position each for thriving in decades to come?

Maybe The Kinks were thinking about the Big Three when they wrote Low Budget. “Times are hard, but we’ll all survive – we just gotta learn to economize!”

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2 Responses to Reports of the Big Three’s deaths have been greatly exaggerated

  1. Outright Death? Doubtful.

    Major Re-org? Brand shedding? Chapter 11? Almost certain. In fact I’d wager it is inevitable.

    –chuck

  2. amigaboy says:

    I largely agree with you Sam – I’d also posit that their current woes (besides oil company profiteering) are largely of their own making – if they had spent 40% of the time, effort and money truly figuring out how to make small cars profitably, instead of spending that money and time on Congress trying to prevent new regulation since 1980, we’d all be far better off, and, they wouldn’t have put themselves into relying on trucks and SUVs to maintain profit margins! Even Toyota isn’t immune to that one, only Honda (since they came very late to the truck game to begin with and arguably still don’t really build a ‘big’ truck when you compare the Ridgeline to other traditional fare) has managed to keep in the black at a desirable profit lately….

    In reading the recent article on Chrysler in Fortune this past week, I’d wager the next time Carlos Ghosn comes calling, Bob Nardelli will all but have to listen…..but it does seem like he’s trying to correct the mess the Germans left behind in the meantime…

    amigaboy

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