Friday, November 14, 2008

Chapter 11 Solution for USA Auto Industry

A question now needs to be asked about the current state of the global economy. The banking system has been stabilized because it had to be. The magic of reserve banking is that if your reserves expand you are allowed to expand your loan portfolio by the appropriate multiple. This all works because the banks have a monopoly on deposit management and it is all tightly regulated or at least used to be in order to prevent the type of crisis we just got hit with. It is the natural nature of competition that forces the imposition of regulation on this particular business. After all if you lend recklessly for a short while, your earning performance will give you bragging rights among your peers.

Unfortunately the reverse magic happens when confidence fails. The limited cash evaporates and the loan contracts can never be sold for immediate liquidity. In these circumstances, governments must step in and provide liquidity. Once confidence returns, the multiples will reexpand and the banks will repay the bail out loans. And everyone will wonder what it was all about.

The best assurance that an investor can have is to hear bankers complaining about their rules.

That begs the next question. What about the auto industry? Their lease portfolio is good and likely needs a mere assist there to get access to cheap money. After all they are not deposit taking institutions.

The manufacturing situation is a vastly different story. This industry has moved heaven and earth to accommodate the cost structures imposed by their employee unions and the grossly distorted medical insurance system. They have shifted as much manufacturing off site as possible and they demanned as much as possible. The bottom line is that they are premium prices for labor in a market were their competitors are not and that includes their newly built North American competitors. It must be fixed and fixed now.

The simplest solution is not to write large governments checks unless it is to provide bridge financing while the industry passes through chapter 11. That puts all union contracts and debt obligations and other such contracts into the proverbial cocked hat for a complete restructuring and puts all stakeholders on the same side working together to stave of sudden death.
And done properly, there is no reason to destroy the shareholders or the debt holders since the industry will be immediately profitable, though needing time to rebuild reserves and reduce debt.

The point that I am making is that the woes of the auto industry stem from its structural problems, not visibly shared by their competitors. Re structuring now will end the charade that they can compete against competitors on the world stage where their cost structures do not apply.

Starting immediately, the US auto industry needs to manufacture small electric auto carts as fast as possible. Their range may be only forty miles, but everywhere except the USA and Europe, this will not matter much, and we will get over it.

The real emergency is that the USA must begin reducing oil consumption very aggressively and our personal transportation is essentially obsolete. Very likely you will receive a fuel ration that will let you drive the old SUV 5,000 miles per year. And second cars will become hanger queens. An electric auto cart solves the problem by providing urban transportation. And surprise, surprise, you will discover that occasional long haul travel will generally not exceed that 5000 miles for the majority.

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