Auto Manufacturing: An Industry Whose Time is Up

(Original article appeared on my seekingalpha blog)

It looks like GM has tentatively agreed to sell its Saturn brand, only days after agreeing to sell its Hummer brand to a Chinese company. Finally it seems GM is taking steps in the right direction, shedding non-core assets and brands and closing dealerships. I’m sure that the current economic crisis and the heavy hand of government played no small part in helping encourage these transactions. The question of the day is, “Why didn’t they do this sooner?”. I’m by no means an expert on the subject but it seems obvious that the auto industry has been in trouble for years. Anecdotal stories of unsold cars piling up in parking lots, 0% financing, cash back incentives, free OnStar/satellite radio, years of free warranty coverage, etc, have been used for some time now to move cars from the factory floor into the hands of consumers. These do not seem to be signs of a healthy industry, poised to relive the glory days at any moment.

Of course it’s easy to judge managers with the benefit of hindsight, but it does beg the question of what was the fallback plan? Did management really think that sunny days for the industry were just ahead? Why didn’t management pay down debt during the “good times” to put this company in a better position? We don’t know what GM is getting for the sale of the Hummer and Saturn brands, but odds are it is near fire-sale prices. Why GM didn’t take action sooner to reduce debt (by selling assets at far higher prices), restructure the business and re-steer this Titanic in a new direction is worthy of question. Maybe the unions are to blame? Or maybe a version of the Greenspan/Bernanke put was just too tempting to resist for highly paid managers that didn’t want to “rock the boat”? Sadly I think Tom Velk of McGill University said it best:

“The auto industry today is like the textile industry in the UK in the 19^th century. It’s bound to go to the emerging nations: India, China. India has a $4,000 car. […] It’s an industry whose time is up.”

(See video here)

The government has made it clear that it wants to see auto manufacturing stay in North America, and in the end, a solution likely will be found. But bailouts and rescue packages are merely prolonging the inevitable in my opinion (as much as it saddens me to say it).

Disclosure: no positions.