Autoline on Autoblog with John McElroy
How The Big Three Will Come Roaring Back
Way back in 1979 when Chrysler needed government help, there was a political cartoon that perfectly captured the situation. If featured an old Plymouth Fury with giant tail fins teetering halfway over a cliff, with a tow truck parked nearby. A bystander wearing a shirt labeled U.S. Taxpayer was staring at the car on the cliff. The tow truck driver was nonchalantly picking his teeth and telling the taxpayer, "I can tow it out, or push it over the cliff, but either way it's going to cost you."
And so here we are again, only this time it's not just Chrysler. Now GM and Ford need to get towed back onto solid ground, too. And while there are plenty of people saying, "Let them die," the reality is that it'll be cheaper to bail them out.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
While it's frustrating to see that Chrysler needs help again, it's important to remember what happened after the government bailout of 30 years ago. Not only did Chrysler come roaring back and pay off the loans seven years early, Uncle Sam made a $350 million profit on the whole deal. Investors who stuck with the company made a fortune, too. Chrysler stock shot from $3 a share to over $30, a 1,000% return in just a few years time.
If the Big Three get a government bailout this time, I see history repeating itself. Most people seem to miss the fact that they are on the verge of a massive turnaround. I'm not trying to be a rah-rah cheerleader here. I'm persuaded simply by the facts.
Last year's UAW contract was truly historic in that it will completely remove the health care cost burden off the Big Three. Though they have to give the union the money to assume this burden, they're paying 40% less than it would otherwise cost them. After 2010 they stop paying billions in health care every year and start dropping that money to the bottom line.
Moreover, there will no longer be any pensions for new hires. They'll get 401k's instead. Again, massive cost savings going forward.
On top of that the UAW workforce takes big pay cuts, and new hires come in at a wage rate that is roughly the same that Toyota, Honda, Nissan, et al, are paying their American workers. In other words, the Big Three can finally compete with the transplants from a labor cost standpoint. That means they can now make small cars in America without losing money on every one they make.
Another benefit of that new labor contract is that the Big Three are no longer pressured to keep building cars and trucks in the face of weak demand. Under the old labor contract it was cheaper to build cars and slap big incentives on them than it was to not build them in the first place. Now, they can build to actual demand, and they're running on much tighter inventory.
That means they'll be able to slash their incentives. Every $1,000 that General Motors cuts from incentives will drop roughly $4 billion to the bottom line. And GM has an average of $3,500 in incentives!
Plus, the Big Three are taking out a huge amount of overcapacity, roughly two million units. To fulfill demand in the future their plants will have to run at full capacity, and that's when car companies literally become cash machines.
What this means is that when the economy finally starts to recover and the car market begins to grow again, GM, Ford and Chrysler will be in an extremely competitive position, one they haven't been in for more than 40 years.
And that's why those who say giving them a bailout is just throwing good money after bad are dead wrong. The Big Three are not only on the verge of a roaring comeback, I predict that in the next decade they'll go on to hit record profits.
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Autoline Daily
Way back in 1979 when Chrysler needed government help, there was a political cartoon that perfectly captured the situation. If featured an old Plymouth Fury with giant tail fins teetering halfway over a cliff, with a tow truck parked nearby. A bystander wearing a shirt labeled U.S. Taxpayer was staring at the car on the cliff. The tow truck driver was nonchalantly picking his teeth and telling the taxpayer, "I can tow it out, or push it over the cliff, but either way it's going to cost you."And so here we are again, only this time it's not just Chrysler. Now GM and Ford need to get towed back onto solid ground, too. And while there are plenty of people saying, "Let them die," the reality is that it'll be cheaper to bail them out.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
While it's frustrating to see that Chrysler needs help again, it's important to remember what happened after the government bailout of 30 years ago. Not only did Chrysler come roaring back and pay off the loans seven years early, Uncle Sam made a $350 million profit on the whole deal. Investors who stuck with the company made a fortune, too. Chrysler stock shot from $3 a share to over $30, a 1,000% return in just a few years time.
Most people seem to miss the fact that they are on the verge of a massive turnaround.
If the Big Three get a government bailout this time, I see history repeating itself. Most people seem to miss the fact that they are on the verge of a massive turnaround. I'm not trying to be a rah-rah cheerleader here. I'm persuaded simply by the facts.
Last year's UAW contract was truly historic in that it will completely remove the health care cost burden off the Big Three. Though they have to give the union the money to assume this burden, they're paying 40% less than it would otherwise cost them. After 2010 they stop paying billions in health care every year and start dropping that money to the bottom line.
Moreover, there will no longer be any pensions for new hires. They'll get 401k's instead. Again, massive cost savings going forward.
On top of that the UAW workforce takes big pay cuts, and new hires come in at a wage rate that is roughly the same that Toyota, Honda, Nissan, et al, are paying their American workers. In other words, the Big Three can finally compete with the transplants from a labor cost standpoint. That means they can now make small cars in America without losing money on every one they make.
The Big Three can finally compete with the transplants from a labor cost standpoint.
Another benefit of that new labor contract is that the Big Three are no longer pressured to keep building cars and trucks in the face of weak demand. Under the old labor contract it was cheaper to build cars and slap big incentives on them than it was to not build them in the first place. Now, they can build to actual demand, and they're running on much tighter inventory.
That means they'll be able to slash their incentives. Every $1,000 that General Motors cuts from incentives will drop roughly $4 billion to the bottom line. And GM has an average of $3,500 in incentives!
Plus, the Big Three are taking out a huge amount of overcapacity, roughly two million units. To fulfill demand in the future their plants will have to run at full capacity, and that's when car companies literally become cash machines.
What this means is that when the economy finally starts to recover and the car market begins to grow again, GM, Ford and Chrysler will be in an extremely competitive position, one they haven't been in for more than 40 years.
And that's why those who say giving them a bailout is just throwing good money after bad are dead wrong. The Big Three are not only on the verge of a roaring comeback, I predict that in the next decade they'll go on to hit record profits.
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Autoline Daily
Reader Comments (Page 1 of 5)
Hanoi Jane 7:32PM (11/14/2008)
John, what are you smocking?
Reply
gforce 7:38PM (11/14/2008)
He looks like he's wearing a sport jacket, more than a smock actually.
Frankly, I agree with him.
Big Rocket 7:42PM (11/14/2008)
@gforce: Let's take a look at John McElroy's ties to the domestic auto industry, and why he might be lobbying for federal bailouts for the Big 3.
Autoline: "John McElroy brings an extensive background to covering the auto industry... He also gained valuable insight to the industry working as an hourly UAW employee in various automotive manufacturing plants while working his way through college... He is frequently asked to speak to automakers, suppliers and industry organizations."
In other words, John McElroy was tied to the UAW, and he continues to be tied to the Big 3 through speaking engagements, which usually entail a speaking fee paid out to the speaker. With these conflicts of interest, how can I trust John McElroy to offer unbiased opinions on taking a bigger cut off my paycheck, and yours, to bailout organizations plundered by overpaid executives and union labor?
Source:
http://www.autolinedetroit.tv/whatisad/
Hanoi Jane 7:42PM (11/14/2008)
I like John, he is a great guy. But come on, 2.1 are not coming back, simply because they make an inferior product. As simple as that.
Do you have a problem with what i just said? OK, Go to a Chevy dealership sit in the highest trim Cobalt with leather and all that. Then go to a Honda dealership and sit in a mid level Civic, see which is better. Cobalt looks like its a car from 6 years ago.
And if you are still not convinced take both for a drive.
Hanoi Jane 7:44PM (11/14/2008)
Rocket is bringing out big guns.
PhattyDre16 8:15PM (11/14/2008)
@ Hanoi Jane
So you single out one GM product that was introduced several years before the launch of the new Civic and base your whole argument on that.
That makes sense.
Most car reviewers agree that the new Malibu is, on many levels, superior to its Japanese counterparts in terms of ride quality, interior quality, handling, etc. And oh ya, its 33mpg higway is superior to that of the japs.
How bout the Caddillac CTS? Silverado? And what about the new Cruze? Clearly that is going to compete on a different level with the Civic.
You are clearly an arrogent, biased fanboy.
Tim 8:13PM (11/14/2008)
I agree with rocket. to have a honset debate we need a little disclosure hear. Can't help where you came from but need to be upfront about it.
I can tell you I haven't bought an American car in 7 years now and sold it this year because it wouldn't start and no one knew why
Tourian 8:26PM (11/14/2008)
Big Rocket posts the same thing in every one of these. So if you think the guy is biased, why not post a counterpoint and list your credentials? Should these discussions only include people who don't have any ties to the industry, just armchair quarterbacks, or people who post on the blog who may not have a clue?
Big Rocket 8:56PM (11/14/2008)
@Tourian: Fair enough. Some of what I am about to mention is something you've seen me mention before, but I'll mention it again since you asked for a counterpoint. The main argument that GM advocates have used to lobby for government bailout is that it would cost more to let GM fail. In this particular article, John McElroy writes, "... the reality is that it'll be cheaper to bail them out." The problem with this argument is two-fold.
First, nobody knows exactly how much money GM (and the Big 3) is really asking for. Right now, it stands at $25 billion. If they get that $25 billion, what is to prevent them from asking for another $25 billion later on? And after that? Simply put, it is impossible to know how much money it would cost the taxpayers -- you and I -- to fix GM.
Second, nobody knows exactly how much money it would cost to let GM fail. Others have mentioned 2.5 to 3 million jobs that might potentially be lost, but as I had already pointed out, this number came from the Center for Automotive Research, which is little more than a lobbyist organization. John McElroy claims it is expensive to let GM fail, but there is a distinct lack of any substantiated facts and figures to back up that claim.
In summary, the entire notion that it is more expensive to let GM fail than to bail it out is completely fictitious. No one knows how expensive GM's failure would be, and no one knows how expensive GM's bailout would be. In the absence of accurate and unbiased information, I would urge my fellow taxpayers to be wary of industry advocates and lobbyists pretending to present cold, hard facts.
Hanoi Jane 9:15PM (11/14/2008)
Phatty, you are right about that Cobalt is older than Civic.
But let's compare Malibu and Accord, let me tell you this I have seen Impala, Malibu is light years ahead of it. While Malibu has a nice interior, to the touch it is not all that, it is better than all other GM cars but it is not better than Accord. I personally think that Accord is a semi luxury car. Fit and finish is amazing. Malibu is a huge improvement it is not quest as good as some other cars out there. Malibu's Chocolate color is nice but once you touch it it is cheapish, not bad at all, but not better than Accord.
But my point is the same nevertheless GM is dying because of the product, yes Cobalt is old but but Cobalt and Civic are on the market at the same time nevertheless.
Jeff 12:56AM (11/15/2008)
oh come on! The guy talks about the automotive industry so you think he's got a biased opinion?? What are you smocking? When you said : "Let's take a look at John McElroy's ties to the domestic auto industry" i thought you were gonna say something interesting, like "John McElroy is on the board of directors for Delphi" or something.
But please, he worked at a plant when he was in college, and he gives talks in the industry? That produces a lot less of a biased opinion than the simple fact that he's American and probably doesn't want to see his country's industry fall apart.
Tourian 10:09AM (11/15/2008)
@Big Rocket
Okay, so you're right what's to stop them from asking for another 25 billion later, or 50 billion later. What's to stop me from asking for 25 billion, the answer is nothing. The key word is asking, whether they get it is another matter. Its unimportant to worry about what they will ASK for down the road. They have to make a business case for this money and have a plan, it isn't going to be just tossed over in a briefcase.
Secondly this whole thing, TO ME, is kind of like a big bridge that goes over a bunch of houses. One of the supports is old and the community is trying to decide whether to spend money to reinforce it, or let it rot and crumble. No one really knows if the bridge will fall down, some think it will stay up for years, others think the houses will be destroyed. People in Detroit who live under it want the bridge fixed, people who live everywhere else and have jobs in other industry say don't fix it or, you should move out from under the bridge, or its your fault for not fixing it a long time ago, whatever.
This is everybody's problem and we should treat it that way.
Billy C. 7:15PM (11/16/2008)
I think he should start writing about a topic he knows something about. He's just not making it on this one.
Torrent 7:43PM (11/14/2008)
John. I seriously couldn't have put it better myself. Flawless.
Reply
Tim 7:57PM (11/14/2008)
Disageree completely.
John did not even mention the fact the Detroit is hemorrhaging billions in cash each month. If Costs are coming down so fast where is all the cash going each month? Pension liabilities to existing retirees (that can't be fixed by giving new hires 401ks) and high interest payments. GM's liabilities alone are in the 10's of billions 25 billion in aid will be just the start. Even if new workers were paid minimum wage retirees would still be getting the same retirement packages and GM would still be in a deficit for each car made. As they take out capacity those costs per unit will climb even higher.
I don't disagree with some sort of assistance but i don't think all the facts and truths were put on the table...
Tourian 8:23PM (11/14/2008)
@Tim
Because the savings from the new contracts won't take effect until 2010-2011, that's why they need the help now to bridge them until the can reap the benfits of the new UAW deals.
Tim 8:46PM (11/14/2008)
Glad you mentioned this.
While i agree that there will be huge cost savings on the health care front the fund that the UAW set up will need periodic cash injections by the big three or the US gov't to keep up with ballooning health care costs. Also how will GM pay the interests on its loans while paying wages, while funding R&D to stay competitive.
james 7:45PM (11/14/2008)
Isn't it about time we quit calling them The Big Three, and go with something more accurate: The Remaining Three?
Reply
Gardiner Westbound 7:45PM (11/14/2008)
Doesn't matter if consumers won't buy 'em. Decades of disposable cars and shoddy business practices have taken their toll. Embittered by appalling product quality and inexcusable customer care tens of millions of potential buyers, an entire generation, has permanently deleted domestic brands from consideration.
Reply
David 8:07PM (11/14/2008)
Anybody who has permanently deleted domestic cars from consideration is myopic and deserves to get bent over by the import manufacturers. Thank you guys for blindly sending your dollars to Japan.
I currently own an import, primarily because there was no competing product made by any of the big three, and while I really like my car I have to say I'm not as impressed with the build quality or reliability as I was expecting. These are supposed to be perfect, and yet my experience has been pretty similar to the domestic cars I've owned. All of them have had a few issues, none major.