Big Three Auto Woes

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	The situation of the Big Three has become more tenuous as long-time Michigan democratic Congressman, John Dingell, was replaced as chairman of the House Energy and Commerce Committee by Californian Henry Waxman. What does this mean for the Big Three? As a long-time champion of America's automakers in the House of Representatives since 1955, Dingell used his chairmanship to protect the interests of Detroit automakers against Federal Government regulation, especially fuel economy standards.<ref>[http://www.freep.com/article/20081121/NEWS07/811210325/1009 Freep: Dingell's ouster as committee chair a sea change in Michigan's clout]</ref> Conversely, Henry Waxman has aggressively and openly called for ever more stringent fuel economy regulations and less generous help for automakers.<ref>[http://www.freep.com/article/20081121/NEWS07/811210325/1009 Freep: Dingell's ouster as committee chair a sea change in Michigan's clout]</ref> This change and the broad regulatory scope of the Energy and Commerce Committee will likely make any long-term Federal Government assistance for the Big Three both less forthcoming and less generous.		The situation of the Big Three has become more tenuous as long-time Michigan democratic Congressman, John Dingell, was replaced as chairman of the House Energy and Commerce Committee by Californian Henry Waxman. What does this mean for the Big Three? As a long-time champion of America's automakers in the House of Representatives since 1955, Dingell used his chairmanship to protect the interests of Detroit automakers against Federal Government regulation, especially fuel economy standards.<ref>[http://www.freep.com/article/20081121/NEWS07/811210325/1009 Freep: Dingell's ouster as committee chair a sea change in Michigan's clout]</ref> Conversely, Henry Waxman has aggressively and openly called for ever more stringent fuel economy regulations and less generous help for automakers.<ref>[http://www.freep.com/article/20081121/NEWS07/811210325/1009 Freep: Dingell's ouster as committee chair a sea change in Michigan's clout]</ref> This change and the broad regulatory scope of the Energy and Commerce Committee will likely make any long-term Federal Government assistance for the Big Three both less forthcoming and less generous.
-	[[Image: Auto3mktshr.jpg]]	+	Despite a propensity to lump the Big Three together, it is important to understand the different strategic positions of each automaker. The best way to do this is by looking at the loan requests submitted to Congress during December 2008. GM reported that it will have to cease operations unless it gets $4 billion immediately, and $18 billion in longer term financing.<ref>[http://www.usatoday.com/money/autos/2008-12-02-ford-chrysler-cover-side_N.htm USA Today: Ford says it's OK, but GM and Chrysler could go broke]</ref> Chrysler is in a similarly dire state, claiming to need $7 billion before year end. Ford appears to be in a relatively better position, claiming that it will not need to draw on government support unless business conditions deteriorate rapidly.<ref>[http://www.usatoday.com/money/autos/2008-12-02-ford-chrysler-cover-side_N.htm USA Today: Ford says it's OK, but GM and Chrysler could go broke]</ref> Nevertheless, Ford is still requesting $9 billion in loan guarantees as a hedge.<ref>[http://www.usatoday.com/money/autos/2008-12-02-ford-chrysler-cover-side_N.htm USA Today: Ford says it's OK, but GM and Chrysler could go broke]</ref>
		+	[[Image: Auto3mktshr.jpg]]
	[[Image:prius.jpg|thumb|300px|Toyota's eco-friendly offerings, including the [[Hybrid and Fuel Cell Vehicles|hybrid electric]] Prius, are making it difficult for the Big 3 to compete.]]		[[Image:prius.jpg|thumb|300px|Toyota's eco-friendly offerings, including the [[Hybrid and Fuel Cell Vehicles|hybrid electric]] Prius, are making it difficult for the Big 3 to compete.]]

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Revision as of 19:12, December 7, 2008

In recent years, the recurring troubles of the American Big 3 automakers have been coming to a head. General Motors (GM), Ford, and Daimler face a host of problems. Legacy costs inherited from past manufacturing heydays in the form of costly pension and health care plans for retired employees add up to hundreds of billions of dollars. Unappealing gas-guzzler product lines that are a step behind current auto buying trends aren't driving strong earnings, either; instead, the Big 3 are trying to pad flagging normal sales rates with price incentives. Finally, continuing tussles with the United Auto Workers make it hard to cut costs and downsize to profitability. Meanwhile, Asian and European competitors are rapidly outstripping these traditional auto manufacturing powerhouses.

Asian and European brands captured 54.2% of overall vehicle sales in June, edging out the 45.8% of sales that went to the U.S. brands, according to Autodata (see chart above), placing the Big Three in their weakest competitive position ever compared to their overseas rival. Until last year, there had never been a month that American car buyers preferred the combined offerings of Asian and European automakers to those of the Big Three.

The situation of the Big Three has become more tenuous as long-time Michigan democratic Congressman, John Dingell, was replaced as chairman of the House Energy and Commerce Committee by Californian Henry Waxman. What does this mean for the Big Three? As a long-time champion of America's automakers in the House of Representatives since 1955, Dingell used his chairmanship to protect the interests of Detroit automakers against Federal Government regulation, especially fuel economy standards.^[1] Conversely, Henry Waxman has aggressively and openly called for ever more stringent fuel economy regulations and less generous help for automakers.^[2] This change and the broad regulatory scope of the Energy and Commerce Committee will likely make any long-term Federal Government assistance for the Big Three both less forthcoming and less generous.

Despite a propensity to lump the Big Three together, it is important to understand the different strategic positions of each automaker. The best way to do this is by looking at the loan requests submitted to Congress during December 2008. GM reported that it will have to cease operations unless it gets $4 billion immediately, and $18 billion in longer term financing.^[3] Chrysler is in a similarly dire state, claiming to need $7 billion before year end. Ford appears to be in a relatively better position, claiming that it will not need to draw on government support unless business conditions deteriorate rapidly.^[4] Nevertheless, Ford is still requesting $9 billion in loan guarantees as a hedge.^[5]

Who wins from Big 3 woes?

• The Japanese's own Big 3- Toyota, Nissan, Honda, and other prominent foreign car manufacturers are ready and waiting to fill the production capacity and demand vacuum left by the Big 3's failure to continue dominating the North American market.

Who loses?

The Big 3 auto woes strike North American auto components manufacturers particularly hard, and hit in more than one way. Reductions in production volume and capacity will obviously decrease sales for the parts suppliers, but spending cuts within the Big 3 infrastructure also translate into decreased earnings for suppliers.

• American Axle & Manufacturing Holdings (AXL), Dana Corporation (DCNAQ), Lear (LEA), ArvinMeritor (ARM), TRW Automotive Holdings (TRW), Cummins (CMI), and BorgWarner (BWA) are all auto driveline/other components suppliers who derive about 40% or more of their profits from North American sales, and most of these North American sales from the Big 3. Although many of these suppliers are trying to branch out into European/Asian markets, pricing pressures mean that it won't be easy to immediately replace lost volume from the Big 3.
• General Motors (GM) spinoff auto parts makers Delphi Corporation (DPHIQ) and Visteon (VC) still rely heavily on a Big-3-market, especially on Ford.
• Magna International (MGA) and Johnson Controls (JCI) both depend on the Big 3 for a large portion (almost 40-50%) of auto interior component sales.
• Cooper Tire & Rubber Company (CTB) and Goodyear Tire & Rubber Company (GT) are examples of tire companies who are also affected by the Big 3's decline. CTB is particularly hard hit, since nearly all of its business comes from North America and the Big 3.
• Auto-retailers like AutoNation (AN), who derive a substantial portion of their revenue from sales of Big Three autos.
• Car rental companies like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) who depend on the big three for their supply of rental vehicles.
• The domestic steel industry that produces much of its steel for the domestic auto industry: AK Steel Holding (AKS), Commercial Metals Company (CMC), Nucor (NUE), US Steel (X), Arcelor Mittal (MT)

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