How The Big Three Will Come Roaring Back
Way back in 1979 when Chrysler needed government help, there was a political cartoon that perfectly captured the situation. If featured an old Plymouth Fury with giant tail fins teetering halfway over a cliff, with a tow truck parked nearby. A bystander wearing a shirt labeled U.S. Taxpayer was staring at the car on the cliff. The tow truck driver was nonchalantly picking his teeth and telling the taxpayer, "I can tow it out, or push it over the cliff, but either way it's going to cost you."
And so here we are again, only this time it's not just Chrysler. Now GM and Ford need to get towed back onto solid ground, too. And while there are plenty of people saying, "Let them die," the reality is that it'll be cheaper to bail them out.
While it's frustrating to see that Chrysler needs help again, it's important to remember what happened after the government bailout of 30 years ago. Not only did Chrysler come roaring back and pay off the loans seven years early, Uncle Sam made a $350 million profit on the whole deal. Investors who stuck with the company made a fortune, too. Chrysler stock shot from $3 a share to over $30, a 1,000% return in just a few years time.
Most people seem to miss the fact that they are on the verge of a massive turnaround.
If the Big Three get a government bailout this time, I see history repeating itself. Most people seem to miss the fact that they are on the verge of a massive turnaround. I'm not trying to be a rah-rah cheerleader here. I'm persuaded simply by the facts.
Last year's UAW contract was truly historic in that it will completely remove the health care cost burden off the Big Three. Though they have to give the union the money to assume this burden, they're paying 40% less than it would otherwise cost them. After 2010 they stop paying billions in health care every year and start dropping that money to the bottom line.
Moreover, there will no longer be any pensions for new hires. They'll get 401k's instead. Again, massive cost savings going forward.
On top of that the UAW workforce takes big pay cuts, and new hires come in at a wage rate that is roughly the same that Toyota, Honda, Nissan, et al, are paying their American workers. In other words, the Big Three can finally compete with the transplants from a labor cost standpoint. That means they can now make small cars in America without losing money on every one they make.
The Big Three can finally compete with the transplants from a labor cost standpoint.
Another benefit of that new labor contract is that the Big Three are no longer pressured to keep building cars and trucks in the face of weak demand. Under the old labor contract it was cheaper to build cars and slap big incentives on them than it was to not build them in the first place. Now, they can build to actual demand, and they're running on much tighter inventory.
That means they'll be able to slash their incentives. Every $1,000 that General Motors cuts from incentives will drop roughly $4 billion to the bottom line. And GM has an average of $3,500 in incentives!
Plus, the Big Three are taking out a huge amount of overcapacity, roughly two million units. To fulfill demand in the future their plants will have to run at full capacity, and that's when car companies literally become cash machines.
What this means is that when the economy finally starts to recover and the car market begins to grow again, GM, Ford and Chrysler will be in an extremely competitive position, one they haven't been in for more than 40 years.
And that's why those who say giving them a bailout is just throwing good money after bad are dead wrong. The Big Three are not only on the verge of a roaring comeback, I predict that in the next decade they'll go on to hit record profits.