Emac's Stock Watch | Fox Business
  • November 19, 2008 03:27 PM EST by Elizabeth MacDonald

    The Car Makers' Excuses

    The Big Three automakers' chief executives testified before Congress today, blaming the credit crisis for their downfall. 

    But Richard Wagoner, CEO of General Motors (GM) did not use the credit crisis as an excuse for the company's poor profits when he wrote an editorial for the Wall Street Journal in December 2005. 

    In his opinion piece, which came amidst record sales, he blamed not the credit crisis, but a kaleidoscope of other reasons, including "intense" foreign competition, soaring gas prices in the aftermath of Hurricane Katrina, and high benefit costs for the automakers' downfall.

    And in his 2005 editorial Wagoner makes this stunning admission.

    Wagoner confesses in his opinion piece that GM has "a weaker sales mix--essentially, we've sold fewer high-profit SUVs and more lower-profit cars." You can click on this link to read it here.  

    There you have it. The automakers can't blame the credit crisis for their problems, their problems didn't just arise this year, despite what the CEOs will tell you.

    Detroit pumped out way too many gas-hog pickup trucks and SUVs -- meaning, Escalades, Excursions, Suburbans -- and did little to retool their plants toward what consumers wanted. That's because Detroit earns much, much more money off of these cars versus smaller cars such as hybrids and fuel-efficient vehicles.

    It's been estimated that US car makers can earn profit margins of $10,000 for SUVs, depending on the model, while they just break even on smaller cars unless the consumer buys options, due to the automakers' huge cost overhang.

    Oil prices rocketing to $147 a barrel this summer took its toll, causing sales to plunge. Nearly 90 cents out of every dollar in gas consumers put in cars, particularly SUVS, goes towards moving the car, not the passengers, according to a recent analysis. When consumers started turning up their noses at the gas guzzlers, the automakers dumped them on rental fleets, slamming their resale values.

    Notably, resale values on SUVs, too, plummeted and Chrysler, overly dependent on SUVS (as GM is on pickups), saw its leasing operations dry up, causing it to pull the plug on this business.

    The carmakers' problems have been decades in the making, they've had problems even during strong economic times and when consumers were buying cars at record rates.

    Just like Wall Street, there was zero risk management at the car companies, given their powerful friends in Congress. It's not news that only about 8% to 10% of the entire US fleet now on the country's roads turn over every year, as consumers tend to hold onto their cars for long periods of time. Never mind that inconvenient fact, the automakers pounded out gas guzzlers because they can make more money off of them.

    But what the heck, sotto voce, the US taxpayer is a compliant capital cushion for any shoddily run business these days. Keep this in mind as Congress moves to give the automakers a blank check with no strings attached.

    Wagoner does point out in his piece that foreign auto makers don't carry the abalone around their necks of health costs, because foreign governments "fund a much greater portion of employee and retiree health-care costs." Duly noted.

    So where do we go from here.

    For the quarter ended September, GM had a negative net worth (assets minus liabilities) of $59.9 bn. It had assets of $110 bn, but those assets backstop a whopping $169.4 bn in debt owed to suppliers, for payroll, to banks, bondholders, to retirees, you name it.

    That's a huge $59 bn swing just to right size GM's damaged balance sheet. GM spilled $9.7 bn in negative operating cash flow for the first nine months. It only has $15.9 bn in cash and equivalents right now. It is bleeding at least $1 bn in cash per month.

    GM is effectively insolvent. It needs more than its slug of the potential $50 bn bailout.

    Can taxpayers trust the car makers to make a profit on any bailout money the government gives them, which could amount to a total of $50 bn? Should taxpayers be asked to bail out a privately owned automaker, Chysler, run by the private equity fund Cerberus, headed by former Bush Treasury secretary John Snow?

    Should Congress put at least this contingency on any bailout money--that in exchange for getting tax funds, the top executives who drove these companies into a ditch should step down?

TOM

I'd like to see someone take a tally on the types of cars our elected officials drive. While I am not defending the top of the food chain at the auto companies, it does strike me as somewhat bein hypocritical for the congress to criticize them for their flying habits. The congress spends and wastes a hell of a lot more of our money than all of the car companies combined and they don't think twice about it.

November 24, 2008 at 5:38 pm

Kent Aabye

My new bail out plan....ok so these are loans (that's what we were told by the folks on tv) so here is the new plan: The goverment i.e. the tax payers i.e you and me will loan 1000x's the amount the workers loan the auto makers, 100x's the amount the ceo's lend the company, and 10x's the amount the union pension funds loan the auto companies. I think it's only fair that if you want our money to save your job,company,labor union you (the people who work for the company and directly financailly benifit from it) should put up your money first. Look at it this way they are putting a cash"down payment" on the loan ( we won't be giving them a version of a sup prime mortgage ). If we (the tax payers loose) than you (the employees, ceos, unions) loose. I bet they figure a way out real quick to get cost and contract under control then.

November 21, 2008 at 4:09 pm

Pat

Make the BIG THREE ACCOUNTABLE for every cent they receive from a bailout. Also, the unions should be made to re-negotiate their contract. Where as, the the big three payroll will decline a little.

November 21, 2008 at 11:15 am

Rusty H

This is a good article, but keep in mind a whole lot of the trucks that Detroit makes helps build America. One definite wrong that the US carmakers face is the cafe standards. They have to factor in the mileage of their trucks when, for all intents and purposes, the foreign carmakers don't make trucks!! Toyota does make a truck, but sell very few and definitely not for work trucks!! This forces auto makers to discount small cars to basically cost, just to maintain the average. Ford especially has some very good products on the horizon, as their current fleet's quality is on par with any manufacturer, foreign or domestic. However, to be competitive, they will have to remove the UAW contracts and bankruptcy may be the only way to achieve that. That is why the bailout will go through at some point, because the Democrats will not let the union go down and lose probably their largest contributors!!

November 20, 2008 at 7:02 pm

Ginger

Let them figure out. The first way they can save some money during the reorganization is to cancel health care benefits. It's my understanding the "The One" is going to grant free health care to the masses. That should save a big chunk of change! (no pun intended)

November 20, 2008 at 4:48 pm

Orion

The Big Three have been "loyal to their workers" because otherwise said loyal workers would pour ball bearings into the gas tanks on the assembly line. Don't kid yourselves: Detroit has been held hostage by the UAW for decades and simply passed the cost along to the suckers who buy their cars. Now the blood bank is dry and they're scrambling for another revenue stream, ie. the rest of us who chose not to fund their blackmailers. I haven't bought a GM product in decades and I don't see why I should be forced to now by Congress. Worse, I won't even get to drive the lemon I'm buying off the showroom lot. It stinks.

November 20, 2008 at 4:37 pm

Larry

THE UAW IS NOT AT FAULT FOR THE FAILURE OF THE AUTOMAKERS. THE MANAGEMENT IS TO BLAME FOR WHERE THEY ARE. THE UAW JUST MAKES THE CARS THAT THE MANAGEMENT AND MARKETING THINK WILL MEET THE DEMAND. MANAGEMENT WENT AFTER THE HIGH MARGIN MARKET ..... AND FAILED MISERABLY. ONCE AGAIN THE PEOPLE WHO PRODUCE THE PRODUCT ARE EXPECTED TO TAKE THE FALL FOR THOSE WHO MADE POOR DECISIONS.

November 20, 2008 at 4:35 pm

Marian Payant

I think that Congress should turn their backs of the BIG 3 just like they turned their backs on the American people treating us like a bib bag of money that will never run out. We need our taxes to go to worthy causes. Are they a worthy cause? Well, that needs to be debated. If the BIG 3 listened with their brains and not their wallets, we would all be away from dependance on foreign oil, and driving around in small electric cars that are great for the environment. We could be leaders in the world and help global warming. Hell no.......don;t give them a thing. Let some new auto company come in and do it right. They have had their chances and they blew it!

November 20, 2008 at 4:15 pm

john

No bailout period unless the UAW makes a 30% concession of reductions effective immediately, or the firing of the entire board and ceo's from the big 3, including the termination of the president of the uaw. Time to come up with a plan that the South has figured out and the unions and Michigan have not.

November 20, 2008 at 4:12 pm

Dano

Making any type of bail out available to this group is only prolonging a correction that must take place. I work in the printing industry and we have been hammered with declining Ad revenues to the publishers, paper, ink and energy increases for years now. What this has done is make the smart printers get out in front by cutting costs, improving efficiencies in the plants and utilizing technology and Lean Manufacturing principles to stay competitive. The domestic auto industry has gone on and on about retooling and updating their production to stay competitive. Enough is enough. Let them go into bankruptcy, retool and a new company that can be competitive should emerge......

November 20, 2008 at 3:44 pm

william

What is all the fuss about, some time after 1-20-09 the great one obama will shower gifts to the UAW and buy up (bailout) the majority of ownership of the big 3. And like the baiout of today tax money will be thrown down a very black hole never to be seen again. What are you going to do about it America (?)call your democrat senator, maybe email your democrat house member?

November 20, 2008 at 3:40 pm

Miskky

What is really pathetic is the Democratic controlled congress in league with the news media in an effort to regain control of the White House has been bad mouthing the economy for 2 years, long before the economy was truly failing. If they had paid as much attention to the real problems in the economy ie: forced lending to unqualified buyers in housing, speculation driving up oil prices, dependency on foreign oil and exotic financial instuments to fill the pocketbooks of the already rich. Gaming the system, rather it be political or finacial or labor, has been the name of the game and the American people are too ill informed to realize this 'fleecing' of American. So the very group that has caused this mess is now in charge of cleaning it up. Guess whose pockets will be filled with the 700 billion TARP and anything they give the Car makers. Just more of the SOSDD... same old stuff, different day...!!!

November 20, 2008 at 3:34 pm

mike

From just outside Detroit, I still firmly believe that at least 2 out of the 3 CEOs aren't blithering idiots, but are as subtly as possible arguing for DC to say NO. What CEO can manage a biz where s/he can't control - has no say in production volume?!!! They can't cut shifts, production, or plants, so stuck with far too many cars parked in inventory, soaking up limited reserves, they're running out of wiggle room. They already have too many dealers - where else are you gonna put over production? Frankly it's all about the unions... These aren't the nice guys you see in suit & tie before Congress, but think more along the lines of the Sopranos. Past strikes forced a retirement package including health care benefits you couldn't buy if you had Cavuto's salary! Think having & using someone else's credit card. Asking the nation to pay for health coverage for a relative few, that we couldn't have no matter what, is flat out wrong! And it's not about any suppliers either... Before giving any of the doomsday figures ANY cred, check out just who supplies the big 3, and what country are they in?...

November 20, 2008 at 3:34 pm

mike Z

For all those, including the members of Congress, that have a problem with the arrivals in Corporate jets, you must understand that there is in fact a valid and obvious reason that the big 3 are here asking for help. Corporate jets asside, they are not asking for a hand out, but low interest loans that will be repaid. Having owned and operated my own dealerships in 21% interest of the Carter administration days, the big 3 will modernize re-tool and continue to support millions of hard working Americans. They may even sell those darn jets too! In any event Congress and the entire group of pandering bandits in our government need to take resposibility for what they have done to this economy, housing banking and autos, and admit they have a larger than not part of where "WE THE PEOPLE" are at now!

November 20, 2008 at 3:20 pm

Larry

Response to Senator Levins request for support of the Bail Out Dear Senator Levin: I response to your request for support of the Automotive bail out bill. You sent this to wrong person. See below. Considering that I m a life long Republican what you and Obama would be for I would probably be against. I am a retired GM salaried employee but I did start out hourly at GM a long time ago. One of the main reasons I took a promotion to salary was my absolute detest for what the UAW represented. You, Granholm and all the rest of the democratic representatives have driven the State of Michigan into the ground, and now that the democrats have the Presidency and a majority in the house and the senate, I have no doubt you will be able to duplicate the failed policies in Michigan 50 times (least I forget there are not 57 states). We can only pray that Senator Coleman, and Senator Chambliss win despite the voter fraud attempts by the democrats. Have fun running the rest of the country into ground, I think that in 2010, and 2012 even the dumbest of the dumb will realize they voted wrong. You should retire, our founding fathers never meant for your job to last for length of your lifetime. Below is a message that I sent to Fox News, the only thing that I forgot to add was that Wagoner should have left the UAW and the jet in Detroit and drove the new Volt to Congress. You don’t care about what happens to the American car manufactures you just want those Union votes. America will clean house in 2010. Message to Fox News: I retired from GM as a 7th level quality engineer; simply put I was one level higher than a supervisor and two levels from being upper management. I worked thirty years at AC Spark Plug in Flint Michigan. As much as I would like to see GM succeed, the only way that they should be given a loan is to dump the UAW and replace most of the upper management. GM has never said no to the UAW. As long as upper management continued to get their large share of the pie they were more than willing to give the UAW anything they wanted in order to prevent any work stoppage. In this day in age no one needs the union, except a democrat running for office. When I was a supervisor the UAW representatives would tell me that I gave some my employees a hard time for minor infractions, like not showing up for work, late for work, not working, being out of the plant at the local bar without permission, drinking on the job, doing drugs, threaten other employees and me. I would respond to my poor treatment to the UAW representative that 85% of the people that worked at GM didn't need a supervisor or the UAW, most of the people that I knew at the time only wanted a job and were good workers, they didn't need the UAW. It was very seldom that you could fire a really bad employee. America car manufactures will never be able compete as long as the UAW is part of the equation. The only thing different than GM, UAW and the Titanic it only took the Titanic a couple of hours and it has taken GM and UAW at least fifty years. And it is really too bad because I think that GM is starting to produce some very good cars that match or surpass the foreign car manufactures. Larry Ray

November 20, 2008 at 3:01 pm

Jeff

I heard long ago about a modified diesel engine that got 100 mi/gal. Rumors say the design was bought then hidden to prevent economic problems. Now's the time to release this plan, if it exists at all. We make high dollar and low quality vehicles while foreign nations make low cost and high quality vehicles. Didn't we think this would eventually bite us in the A$$.

November 20, 2008 at 2:35 pm

Bob Newman

Given the attitudes displayed by General Motors, Chrysler, Ford and the UAW; I believe that the theme song for the automaker bailout should be Amy Winehouse's song "Rehab"! All four of these groups refuse to admit that they have a problem.

November 20, 2008 at 2:23 pm

Had Enough!

If UAW made concessions that will be effective in 2010, why not move that ahead and make them effective now? The fact of the matter is that ever since the government made the statement "too big to fail", they are coming out of the woodwork wanting cash. I have watched as defiant unions put Eastern Airlines and TWA out of business. Having been employed at the latter, I hate to see good money go to these attitudes. I find it rather disturbing that an employee on an assembly line makes more money than trained technicians keeping our skies safe for these CEO to fly their corporate jets around. (one of how many GM owns?) The fact is that our economy is extremely overinflated from our policies of SPEND SPEND SPEND. Everyone needs to take a class on economics and see that this is not sustainable, and these markets must correct. The more money we pump into this failing economy is only making it last longer and hurt more. It will correct, there is no doubt. The only question is when and how much...

November 20, 2008 at 1:34 pm

Thomas M.

I agree with one person here, the automakers need to file banruptcy and restructure without the UAW. The unions when formed years ago, were a worker protection orginization, protection from poor conditions, being over worked, under aged workers, and to fight for a FAIR wage. But, the unions have been over-stepping those bounds for way to long. While there has been plenty of mismanagment, STUPID decisions, and other outside dilemas arise, the union is largely responsible for the problems currently facing the automakers. Folks it will be a sad day in American history when we can no longer choose to park a Ford, Chevy, or Dodge in our driveways. I do not know what we need to do about it, but we will regret it if one or all fail.

November 20, 2008 at 12:26 pm

Dave

Why don't the car companies go to the oil companies for the bailout. I figure the oil companies have more to gain from a bailout than the tax payers do. After all the car companies made the oil companies very rich. Just have them hand over 1 quarter in profits. Until the big 3 change no one can help.

November 20, 2008 at 11:41 am

Barry

I think it was very fiting that auto execs chose to take expensive corporate jets to a their pass the hat meeting with Washington politicians. You have two groups of arrogant ego maniacs and big spenders going toe to toe,they should relate well with each other Barry

November 20, 2008 at 11:08 am

Eva

I don't think we should throw money to to the big 3. I didn't think the bailout for the banks was a good idea. These are all short term fixes. It will buy them months at best. Then what? I worked for Ford for many yrs. And I don't think the news channels have the story right. And when it comes to Toyota, they will soon be facing some of the same problems the big 3 are. They will soon be facing a retiring work force and having to pay on pensions just like the big 3. Oh, by the way, assembly line workers aren't getting paid $75 and hr. I don't know who came up with that one. It's not even half of that. And for all the assembly line workers out there, that have suffered injuries because of repetitive work........they aren't getting paid enough. They sacrifice alot for the benefits they have. And some of these injuries are lifelong, and restrict you where your personal life is concerned. So the next time someone says workers at these factories are paid too much, walk in there shoes, live with these injuries, put up with the crappy bosses that they have to put up with.

November 20, 2008 at 10:53 am

Mo Voter

Sorry Tony but you are WRONG WRONG WRONG. I've had union made vehicles. They were all total junk. I now drive a non-union made vehicle. Three years and not one trip to the repair shop, only ordinary maintenance. The last union made vehicle I had averaged a minimum of one trip to the repair shop every two months, and it was brand new when I got it. NO BAIL OUT

November 20, 2008 at 8:31 am

Larry

Hey Ben, Did you read the article? It wasn't the union's contracts that got the big 3 into this mess, IT WAS THEIR FAILURE TO MEET THE MARKET DEMAND FOR SMALLER CARS. BTW, how much are the managers and CEOs getting paid for driving (pun intended) their companies to failure??!!!! They were going after the high margin SUV/Pickup sales and not the volume lower margin sales. That said, it is time to let the big 3 go Chapter 11 and restructure to a more efficient company. Lot's of people are going to get hurt and it should start at the top. Under new bankruptcy laws the salaries for the top managers are capped. That is why the CEOs want the bailout money SOOOO badly. Larry

November 20, 2008 at 8:10 am

DB

Just doesn't make sense. A simple analysis of the way this country has been going in the past several years by big 3's top management should have painted a pretty clear picture. Whether or not you even believe in global warming, environmental awareness, or dependence on foreign oil, all the signs were there. Where were the big 3? I have no idea, but no one should be paid that much money for lack of foresight and such poor management. No vision means no future. Even if new union contracts are supposed to kick in in 2010, why in the world did they agree to pay unskilled labor this much in the first place? This was welfare from the get-go. Now I'm supposed to pick up the tab? Absolutely ludicrist.

November 20, 2008 at 6:38 am

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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