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Saturday, September 11, 2010

The Pentagon’s Role in the Auto Industry Bailout.....

and other interesting tidbits

Recently I was privileged to listen to an address given by John McElroy at the American Fleet and Leasing Association conference in Las Vegas. Mr. McElroy is President of Blue Sky productions, the company that brings us Auto Line Daily TV, chronicling auto industry events and news. He addressed an audience of fleet and leasing professionals and I was fortunate to be present. A student of the industry for over 30 years living in the Detroit area, McElroy is accomplished in the art of gleaning inside auto industry information and applying his own particular insight, especially as it regards the Detroit 3. While I share many opinions with him, he told me some things I either did not know or hadn’t thought of. Of course, that is why I attended in the first place.

According to Mr. McElroy:

First: “International exchange rates and dramatically lowered costs have put the Detroit 3 in a position they haven’t been in for years. They can export to other countries profitable. In fact, the White House goal is to double U.S. automotive exports in 5 years.” And we know the White House is “driving this bus.” Export business would mean adding shifts and reopening plants. All of this spells “JOBS!” Let’s hope they are successful.

Second: “Ford is way out in front of everyone in the area of in cabin electronics. Ford’s SYNC system, developed in conjunction with Microsoft, is 3 years ahead of anyone else. Ford will introduce their next generation before other automakers offer their first. In addition, Ford is poised to be wildly profitable in the coming years, especially if the economy rebounds. It is a given that they will be the UAW’s next target for union contract negotiations.”

Ford has recently repaid 7 billion in debt while making a 2.6 billion dollar profit in the last quarter. It boosted market share to 16.9% from 16.4% and seems to have a lot of positive momentum going for it. It’s credit rating is on the rise. Ford recently raised 1.4 billion dollars through a public stock offering, using part to fund their Voluntary Employee Beneficiary Association with cash instead of stock, and to pay down debt.

I have been convinced, with no actual confirmation, that the Ford family, who largely live off the dividends of their preferred shares, were well aware of what would happen to their position if the company was forced into Chapter 11 bankruptcy. I suspect that was the motivating factor behind Ford’s “mortgaging the farm” in advance of an impending crisis as a means of “insurance.” Or perhaps they were merely clairvoyant. McElroy agrees. Perhaps someone will write a book that will bear out this theory, or not.

In the interest of full disclosure I do have a substantial portion of the Ruggles family fortune, meager that it is, invested in Ford stock.

Third: “The Pentagon was a strong influence in the decision to bail out the auto industry.” Their lobbying for an auto industry bailout began during the Bush administration, who finally bridged GM and Chrysler over to the Obama administration with 16 billion dollars in unused TARP funds. This after Congress had turned them down in a request for a bailout package. I have written for months about the interconnection between the automotive suppliers, the auto manufacturers both foreign and domestic, and aerospace and defense. My opinion has been based on research done by fellow Auto Finance News contributor Dr. Michael Smitka, Phd., Professor of Economics at Washington and Lee University, who is an expert in these matters. According to Professor Smitka, the supplier base employs 5 times as many workers as the auto manufacturers.

Without naming sources, Mr. McElroy comfirmed what we have suspected all along. Losing only Chrysler would have triggered a chain reaction collapse through the supplier base. These same suppliers also supply military procurement. Many of the major suppliers were already in Chapter 11 bankruptcy or on “death row.” Just Chrysler alone going into liquidation would have shut down all North American auto production, sending a ripple effect across both oceans. Considering the condition of the banks, long on paper assets and short on cash, it could have taken years to put things back together in some semblance of order. Try building a car OR HUMVEE without an ignition switch, a steering column, or a single suspension component. Banks were more interested in returning TARP money, to keep the Feds out of their executive compensation, transportation, and entertainment habits, than in loaning money for perceived risky endeavors. This situation also had a lot to do with why the government had to be the debtor in possession financier of the two automaker’s Chapter 11 bankruptcies.

Shutting down North American auto production is one thing. Shutting down military procurement is another.

A hot topic among attendees of this fleet and leasing conference was the issue of extending fleet intervals and it’s impact on resale values. Chrysler seems to be overly relying on fleet sales but the good news is that it can actually make profit at fleet prices.

Mr. McElroy predicts that transaction prices on new vehicles will rise as incentives decrease. On the surface, this will be good news for the OEMs and bad news for consumers. But if lower incentives mean higher pre-owned prices, residuals and resale values, it should somewhat offset the higher transactions prices on new vehicles.

It could also mean we are in for a new wave of leasing!