The “Big Three” Sinking Fast – Along with America’s Economy

If, while reading some of my more recent posts, you thought I was exaggerating the dire condition of America’s “Big Three” automakers, here’s an article that may change your mind.

The mounting trouble for U.S. automakers has cost them any chance of winning more than partial help from a foreign investor or overseas rival.

Bankers and analysts say Detroit-based automakers could still find partners for limited tie-ups but caution it could prove impossible to find a deep pocket overseas for the cash the U.S. industry could need to ride out the current downturn.

European and Asian automakers are investing in more promising markets and face their own challenges from the rise in prices for fuel and raw materials like steel, analysts say.

The “more promising markets” referenced in that last sentence are, of course, China and India. But that’s all these markets have – promise. They’ll never materialize into the kind of auto market we have in the U.S. because they are far too crowded (especially India) for their citizens to consume vehicles at anywhere near the rate of the U.S. Consequently, if we give them free access to our market, we won’t get access to equivalent markets in return. Their auto production capacity (for export) will overwhelm ours and destroy what is left of our domestic auto industry. Unfortunately for the “Big Three,” even they fail to recognize this. Like the fabled dog that looks into a calm pool and sees another dog with a bone, and drops his to snap at the illusory one, American auto manufacturers surrendered the domestic market and joined the chorus of free trade cheerleaders in the hopes of cashing in on the big, potential, imaginary auto markets of Asia. Have they made money there? Sure, but only a tiny fraction of what they used to make in the U.S., now wiped out by invading hordes of manufacturers from foreign countries who have virtually no market to offer in return for access to ours. Still, the “Big Three” remain free trade cheerleaders, chasing the pot of gold at the end of the Asian rainbow. There is no pot of gold. What they will find is bankruptcy and oblivion.

How bad is it for GM?

With a market capitalization of $6.5 billion, GM is now worth less than a third of Renault SA ($23.7 billion), the French automaker that was spurned when it sought an alliance with GM in 2006.

The leading U.S. automaker is worth just one-fifteenth of Toyota Motor Corp ($99 billion), which overtook GM this year as the global sales leader by volume.

Once seen as a bellwether for the U.S. economy, GM is also in danger of being eclipsed in value by the likes of India’s Tata Motors ($4.4 billion) and Russia’s Avtovaz ($4.6 billion), home of the Lada brand.

$6.5 billion – that’s all it would take to buy General Motors right now, one of America’s biggest corporations. That’s less money than the value of the vehicles they build in one month.

“What’s wrong with GM is it’s too big now. GM is also deep in the red and no one would want to buy it. I can’t think of ways to help it except through restructuring,” said Koji Endo, a Credit Suisse analyst in Tokyo.

Notice that Mr. Endo says nothing about Toyota, the same size as General Motors, being too big. If Mr. Endo can’t think of other ways to help GM besides restructuring, here’s a couple of ideas: 1) Change U.S. trade policy to impose population density-based tariffs on countries like Japan and Korea, and 2) Commit Japan to buying as many vehicles from the U.S. as we buy from them. I wonder if Endo didn’t think of these things or if he thought them but dared not say them.

Capital could come from a foreign sovereign fund, but Pflum said he did not expect it to happen. “The automotive sector has been volatile. It is cyclical. The issue is that in the United States it is not a growth business,” he said.

If the U.S. is such a lousy business, then why don’t Toyota, Honda, Nissan, Lexus, Infiniti, Kia, Hyundai, Mercedes, Volkswagen, Porsche, BMW and the countless others just leave? Oh, wait, I forgot. The auto markets in Japan, Korea and Germany are much worse. Their companies couldn’t survive on just their domestic markets. Luckily for them, there are suckers like the U.S. who happily give away most of their markets.

If foreign car makers step in, they will do it by buying an asset or forming a narrowly defined partnership to contain any potential risks, analysts said.

Italy’s Fiat, for example, wants to build Alfa Romeo cars in North America and has been talking with the three U.S. automakers about using one of their plants.

That could ease the burden of the excess production capacity U.S. automakers have been left with due to dwindling share in their home market and the slump in light truck sales.

You may think that this is good news that more foreign companies want to assemble cars in the U.S. Think again. Those Alfa Romeos will simply take more market share from a domestic company. Selling or renting factory space to Alfa Romeo will accomplish nothing because domestic automakers will have to shut down another factory to compensate for the market share now lost to Alfa Romeo. And Alfa Romeo won’t be designing those cars in the U.S. or procuring the parts domestically. All of that will come from Italy.

Here’s an example. Visit the Detroit area and you will see automotive parts suppliers, suppliers for parts suppliers, and so on, everywhere you go. They’re called “tier one, tier two and tier three suppliers” and so on down the line. Assembly plants are surrounded by parts manufacturers and other industries providing support.

By contrast, I recently drove past a Nissan plant in the middle of nowhere in Mississippi. It was surrounded by empty field. Not a part supplier anywhere in sight. Why? Because most of the parts are funneled in from Japan, along with all of the design and engineering.

So why assemble them in the U.S.? Because cars are mostly empty space. A whole lot more unassembled parts can be fit on a container ship and shipped much more cheaply than finished autos.

Meanwhile, India’s Mahindra & Mahindra is seen as a possible bidder for GM’s Hummer brand, which is on sale. Mahindra is keen to get a foothold in the U.S. market, where it plans to launch its Scorpio SUV next year.

Nice timing, Mahindra. I’m sure those Scorpio SUV’s will really sell like hot cakes in today’s environment. But forget about that. The real question is: isn’t Hummer the maker of vehicles for the military? Do we really want to hand over Hummer production to a country who doesn’t give a rat’s you-know-what about U.S. national security? Do we want Sergeant Smith from the motor pool to have to deal with the same crappy telephone support that American computer and software customers get?

And along with all of these new foreign companies setting up shop in the U.S. will come a new tidal wave of foreign workers, pushing aside U.S. workers in all but the lowest-paying jobs. With workers and the engineering know-how all being imported, the U.S. will finally have lost the intellectual assets and critical mass needed to sustain  or restore the manufacturing sector of our economy. It will be lost forever, rendering the U.S. incapable of ever again meeting the needs of its citizens through domestic manufacturing. We’ll be completely at the mercy of foreign corporations. Essentially, we will have ceased to exist as a country, except in name only. Foreigners will command all of industry and call all the shots. Government will be at their beck and call. You and I will be like poor tourists in our own country, watching it all happen but powerless to do anything about it.

For a long time I have pointed out that our trade deficit is financed by the sell-off of American assets and have asked what will happen when those assets are depleted. As we draw closer to that point, American assets will become ever-more worthless. At that point, their foreign owners will likely shut them down and abandon them in order to stop throwing good money after bad to keep them going. Our economy could grind to a halt and the 1930s would like boom times in comparison. With GM, one of our biggest corporations, now worth only $6.5 billion – about the value of one month’s worth of vehicle production – we may be very near that point.

There’s little time left to act. We badly need the population density-indexed tariff structure laid out in Five Short Blasts if the manufacturing sector of our economy is to have any chance of survival. Indeed, our entire economy is at risk if the last of our manufacturing capacity vanishes.


One Response to The “Big Three” Sinking Fast – Along with America’s Economy

  1. Pete,

    Certainly the news that GM could find bankruptcy as an option should shake the timbers of all Americans, but it doesn’t. Most Americans don’t work at GM and could care less, after all, it’s GMs fault that they are in this mess and we can buy Toyota’s from the same folks that brought us Pearl Harbor.

    I see government as being such a horrible example in every aspect of our lives, that our citizens have grown to be like our leaders, displaying the characteristics of hard, uncaring, unscrupulous, self centered, common criminals.

    Just for clarification, GMs Hummer is not connected to AM Generals Military Humvee. AM General goes all the way back to John North Willys and the original Willys Overland Company. GM marketed a civilian knock off of the Humvee and eventually purchased the civilian business from AM General. Lucky for AMG huh?

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