Suppliers await word on GM fate
Independent auto industry analyst Erich Merkle of Grand Rapids offered some hope to a small gathering of the industry's suppliers last week — but his hope hinges on what happens today to General Motors.
"I do not believe (bankruptcy) is the best course of action," said Merkle. He said the federal government should loan GM another $20 billion to $25 billion rather than let one of America's largest and most famous corporations slip into bankruptcy.
At press time, there were reports that a new deal had been reached with holders of $27.2 billion of GM bonds, and that GM now plans to file for bankruptcy reorganization today. The U.S. Treasury also was reportedly planning to give GM another $30 billion in loans.
Merkle, whose research and analysis firm is called Autoconomy, spoke at Davenport University at "From the Rubble: Mapping a Way through the New Automotive Landscape." The forum for auto suppliers was hosted by BDO Seidman and Simplicity Tactics, along with Autoconomy.
"If you guys can make it through the next three or four months, you're going to be in pretty good shape," Merkle told the suppliers. "A lot of your competition will be gone."
But if GM goes under, the future could be much more difficult for the U.S. in general, according to Merkle. He said that if GM was one-fourth the size it is, bankruptcy might not matter. He noted the recent major bankruptcies in the airline and retail industries, but added that the demise of GM would have a much bigger impact.
GM is "not United (Airlines) or Circuit City," he said, because for every job provided by GM, there is an economic ripple effect supporting an additional eight jobs.
There are signs consumer confidence is returning and the stock market is beginning to regain strength, but to get the stalled economy back in motion "will take recovery in the labor markets, and right now that is not the case," said Merkle, noting that the "velocity" of job losses in America over the last several months is "incredible."
The recession of 1981-1984 was a terrible time for the labor market, he said, but "we've beat that," as far as job losses go.
If GM goes into bankruptcy and there is "a fumble," said Merkle, "it will reverberate through the supply chain."
He noted that factories currently producing parts for the auto industry are operating at between 40 percent and 50 percent of capacity, and that percentage is still dropping. It has not been this low in his memory, and "50 (percent capacity) is bad," he added.
Merkle sketched a connection between the auto industry and the hoped-for economic recovery.
"I don't see the recovery coming on soon, with a GM bankruptcy," he said.
When consumers no longer fear losing their jobs, consumer confidence will return. Since housing prices are "very affordable" now in the aftermath of the housing market crash last year, new home construction will recover. There is a direct connection between the health of the home construction industry and new pickup sales, noted Merkle, so sales of pickups will improve when housing does, even with gasoline at $2.50 a gallon.
Light vehicle sales in the U.S. are predicted to be extremely low this year, at 9 million to 9.5 million units. Merkle said only about 5 percent of Americans will buy a new vehicle in 2009, the lowest rate he has ever heard. But that also means there will be pent-up demand, and he predicts U.S. auto sales will total up to 12 million in 2010.
Merkle, who professes to be an auto enthusiast as well as an auto industry analyst, talked about the Big Three and their brands, and consumers' choices.
The Big Three now has about half of the automobile market but may be headed down to "a third or less," with the troubles experienced by Chrysler and GM, said Merkle. Chrysler may emerge from bankruptcy, he said, but added, "I don't know they will be healthier." He indicated there is a chance the courts may prevent the sale of assets to Fiat that Chrysler would need to stay alive.
Later in his presentation, Merkle said that "Chrysler is cooked, in my opinion. They aren't coming back" to a position of major leadership in the auto industry. He blasted Chrysler's latest new cars, such as the Sebring, Avenger and Caliber, saying they are never going to succeed.
He predicted it will soon be announced that Chrysler's May sales were an improvement, but that is misleading, because "there's a fire sale going on" of Chrysler products. In July, Chrysler sales will collapse further, he said.
Some company will certainly buy the world-famous Jeep brand name, said Merkle, most likely a foreign automaker, perhaps in China or India.
Chrysler is launching "zero" new vehicles for 2010. At this point, GM’s launch of new products in 2010 appears to be "fairly light."
Bankruptcy has a serious impact on that company's brands, even to the point of lowering the value of the car parked in a consumer’s driveway, said Merkle. Being in bankruptcy also tends to destroy the company's ability to plan new product introductions, he said, noting that "Chrysler has been decimated" in its plans.
Merkle knocked the Fiat 500 that some analysts are guessing will be sold here, made jointly by Chrysler and Fiat. Merkle said it will not satisfy the American consumer and looks more like Le Car, a tiny car once sold here by Renault.
He had praise for Ford, which did not take a government bailout loan and has its launch of new products on schedule. He noted that Ford's CEO is the highest paid of the Big Three but that's because he is getting results. Ford "will be better off than GM and Chrysler, and they won't have the government telling them what they can or cannot make," he said.
If consumer confidence returns and new home construction accelerates, there will be a market for new pickups, and Ford's F-150 "will fill the void" left by GM and Chrysler's lack of pickups, said Merkle.
He was critical of the Obama administration's auto task force, "which I call the non-auto task force," Merkle said, because he does not believe there are any auto industry experts on it. Merkle chastised the government again when a member of the audience asked what he thought of the new CAFE (Corporate Average Fuel Economy) standards, regarding fuel economy of vehicles made in the U.S.
"They won't work," said Merkle, but they will restrict the supply of vehicles to American consumers. He said he does not think automobile exhaust is a significant contributor to the green house effect, adding that "automobiles are becoming the cigarette of this decade."
A government mandate for better mileage will provide some opportunities for auto suppliers who can find ways to reduce the weight of their parts, noted Merkle.
Merkle joked about "Government Motors — cars the government believes people should drive, as opposed to cars people want to drive."
Another question dealt with the impact on the stock market if GM files for bankruptcy. Merkle replied that it may be "a non-event," and that if there is a reaction, it wouldn't be felt in the market for a month or two.
"I don't think we'll see some big tank in the market on Monday," he said.