Watching the US Government decide what to do with the US automakers is like watching two dogs fight over a dead chicken. No grown- up has arrived to gently inform the two dogs that the chicken isn’t worth the effort.
It’s not surprising the major industries feeling the greatest pain are those which provide infrastructure for sprawl. The market speaks: the reality is marginal costs exceed any possible marginal return on the trillions already expended. The market participants who matter – the consumers – have stopped throwing good money after bad. The government doesn’t get this. They are trying desperately to put the enterprise back on its feet before consensus delivers a feathery post- mortem.
I am living an episode of Monty Python; or rather, the Monetary Python:
“The chicken is dead!”
“No, just resting … “
On Sunday, the White House pushed out the chairman of General Motors, Rick Wagoner, and instructed Chrysler to form a partnership with the Italian automaker Fiat within 30 days as conditions for receiving another much-needed round of government aid. The administration signaled that it did not have confidence in restructuring plans put forth by the struggling automakers.
The moves came just hours after the board of the French automaker PSA Peugeot Citroën said it had fired its chief executive.
I’m surprised Wagoner et al weren’t taken away and shot! Where are the bankers, BTW?
The auto industry sucks around the world; the paradigm that had any life form able to reach the pedals is discovered to be founded upon wishful thinking. People love to drive, people also love to smoke crack. Why one and not the other? Leaving out the petroleum supply concerns, and the two- million dead per year there is the simple issue of having less and less space in crowded, increasingly urbanized countries for increased millions of cars. Where there is noplace to go, why the metalized sturm and drang? Cars are expensive, in some places it takes less time to walk than to drive.
The up to now concealed fact is starting to dawn that auto ownership and other ‘middle class amenities’ are nothing other than a collection of hidden and not- so- hidden liabilities. With a poorer world, something has to be jettisoned, the fun and games fantasy of open- road freewheeling in cars being one of the first. It’s safe to say no person has bought a car to make the world a better place.
A problem within that larger problem is the auto industry is a truly scale reliant model, there is little chance that a smaller auto industry would be able to exist as the current cost structure expands relative to declining output. There is a reason Ferraris are expensive, sunk capital costs. Sunk costs catch up to all businesses over time and the embedded facility, labor, retirement and benefit costs have caught up with Detroit. Even when labor costs fall off the table, the other embedded costs – many of which thought to have been successfully pushed off into the far distant future are coming due now. New costs will have to be paid for up front from this point forward. A new auto factory requires a lot of money and the likelihood that a municipality or a state will finance one as was done in Mississippi for Daimler- Benz is becoming less and less possible.
Instead, the capital pie gets sliced more finely. A forced merger of Chrysler with Fiat is a pronouncement that something is rotten in both companies. Reslicing the pie amounts to kicking the cliche can down the cliche road. The outcome will be a bankruptcy disguised as something else. When the Big Three finally collapse, the support structures will disgorge their millions of workers onto the rolls of unemployed.
It is not simply the manufacturers who will be shuttered, the dealers, suppliers, transport companies, car rental agencies and much of the state and local governments which depend on auto sales. There will be less property tax collected, less sales taxes collected, more demands for support for unemployed workers, many of whom are middle aged and marginally employable in other fields. The industry is insolvent for a reason; people are driving less! Less driving means less gas tax collections and less revenue to support expansion of the already Too Big To Repair road/freeway/parking lot auto habitat. While less driving keeps a lid on gas prices, at some point less money to the oil industry means less investment in new production. The irony of lower prices leading to a shortage isn’t lost on oil industry insiders.
The collapse in oil prices could end up cutting the growth in future oil supply in half from what would have been anticipated during the high price period, according to a new study from Cambridge Energy Research Associates (CERA), an IHS Inc. company. The Long Aftershock concludes that about 7.6 million barrels per day (mbd) out of total potential future net growth of 14.5 mbd from 2009 to 2014 are “at risk.”
“The inventory of potential new oilfield developments, including fields that could be developed and brought online during the next five years, remains adequate to meet likely demand in the medium- to long-term,” says CERA Senior Director Peter M. Jackson, an author of the report. “This, however, depends on sufficient and timely investment.”
At the same time, price increases above the current $2 per gallon will likely cause even less driving. People who are out of work aren’t likely to drive back and forth to work. The six millions unemployed – and the other drivers in their households – are millions fewer gasoline and automobile consumers.
At the same time, the industry is faced with massive overcapacity. This deflationary overcapacity weighs on the markets driving prices lower:
Global auto makers have a combined capacity of 92 million vehicles next year, according to CSM Worldwide, but only 60 million cars will be sold next year, a decline not all companies will be able to survive. CSM forecasts that capacity utilization won’t return to the 2007 rate of 80% — the level necessary for a factory to be profitable — until 2014.
That year may as well be on the Mayan calendar since a credit break – a US default or currency panic – is almost inevitable as the government- like substances that squish though the corridors of powerlessness in Washington and elsewhere pretend to solve the crises the same way the crises were caused in the first place.