Questions and answers

This will probably be my last post about the auto industry for a while.  I’m sure that you’re tired of reading these long winded posts with me begging for your understanding.  Unfortunately, the Senate failed to act on the bill, largely due to resistance from Republican Senators.  Fortunately, it looks as if the Administration will tap the TARP funds to provide short term relief until the next Congress is sworn in.  
One of my friends saw my previous post about the bridge loans and asked me some questions, which I think are fairly common.   I spent a good bit of time responding, and felt like the results were good enough to share.  With her permission, I’ve attached her unedited questions and my unedited responses.  I am by no means an expert, but I feel fairly confident in my understanding of the issues.  

2008 Ford Focus Washington State Drive

I promise to post something not auto industry related shortly.  Maybe a recipe or something.  We haven’t had one of those in a long time.
Questions and Answers:

Ok, if I am wrong or you see a different take on things, maybe you can explain them.  But here’s my problem with giving Ford and the other motor companies a loan…
 
Why do they need a loan in the first place?  If Ford made a profit in their first quarter and made some cost reductions, well, gas prices are down and while the credit crisis is still very serious, I think that it might be getting better.  So why do they have to have this loan to survive?
Here’s the long and the short of it.  Last year, the US auto sales were something like 17 million new vehicles (This is industry sales, all cars sold in the US).  During the first quarter, the sales rate was trending around 15-16 million cars for the full year, not great, but not shabby either.  By the time the second quarter got here, it had fallen a little more, primarily due to gas prices.  At the same time, the price of steel doubled, from about $500 / ton to $1000 / ton.  Over the summer, the credit crisis starts really fouling things up.  By October, industry sales are trending at 10 million units on an annual basis.  By November, the Year over year (That is, Nov-07 to Nov-08) sales dropped by about 35-40%.  Simply put, the # of cars sold in the US has fallen dramatically to levels that are unsustainable for the industry.  We have a fixed cost base that requires we sell a certain # of cars to pay the bills (bills that we will have to pay regardless of how many vehicles we produce.  Think health care benefits to our retirees, or energy costs to keep the assembly plants heated, things like that).  The American consumer simply isn’t buying right now, not from Ford, nor from anyone else.  
In normal times, the companies would just go to the credit or equity markets and get the funds to cover it.  Unfortunately, no one is lending to anyone.  People can’t get loans for their houses, the auto companies can’t get loans for their fixed costs.  
Ford is fortunately in the best situation of the Detroit.  GM and Chrysler are on the verge of running out of cash.  Ford obtained credit and lines of credit back in 2006, before the credit markets froze up, and so isn’t facing the same liquidity problems.  In fact, we aren’t asking for loans right now, but rather a line of credit (think a credit card, available when you need it, but the cash isn’t in your pocket right now.) in case of a failure of one of our competitors or in case the recession doesn’t end as quickly as people are projecting.  
Ford’s biggest fear right now is that the failure of one or both of the other two Detroit companies would cause a large scale disruption within the supply chain. Basically, as an industry, we have something like 75% overlapping suppliers.  We buy our parts from the same people that build parts for GM and Chrysler.  Now, imagine if one of those suppliers suddenly lost a third of their business.  It’s not an easy obstacle, but you might be able to get past it, maybe.  If 700 or 1000 suppliers and sub-suppliers suddenly lost 1/3 or more of their business, not all of them would stay in business.  Suddenly, Ford wouldn’t be able to build cars, simply because they can’t get nuts or seats or steering wheels.  Obviously, it would take time to find someone to make the new widget, test it to make sure it is safe, and get that new part to the assembly plants.  If Ford couldn’t sell cars for all of that time, it would put us in a very dire position.  That’s why we are asking for the loans to be given to the other two companies. 
 
What is Ford going to do once they get this loan to make things better for the American citizen?  Are they going to lower the cost of all their vehicles?  Make it easier to get a car loan?  Maybe build even more factories and create more jobs? 
I’ll answer this one in general, because Ford isn’t asking for the loan right now.  The other two need the money simply to survive a few more months to restructure their costs.  They will probably use the money to continue development of new cars, including the Chevy Volt, and other new green technologies.  They will use it to retool plants to make these new cars.  But with the legislation as it stands right now, basically they are buying themselves some time.  According to the bill that the House passed, they have until March 31 to develop and implement cost reductions.  This will probably  include wage cuts and other concessions, a restructuring of debt (i.e. reworking the terms of loans, swapping GM stock for debt, other things like that).  I haven’t read the GM or Chrysler plans, so I don’t really know what they are planning.
I do know that Ford has dramatically shifted development of its product line up to focus on smaller cars and more fuel efficient cross-overs.  We are doing that independent of the government financing, but that requires that we retool plants that once produced trucks and SUVs to be able to produce Focuses and Fusions, etc.  Not inexpensive.
I doubt that the companies would lower the prices of the cars, because the cost of material and assembly hasn’t fallen off that much.  Selling at a loss, especially when you have a big government loan to repay, probably isn’t a great idea.  Hopefully, they would be able to make car loans more available, but that has more to do with the ability of the financing companies to raise capital.  Ford Credit is still making loans and leases, although I’ve heard that isn’t true for many of the other car credit companies.
 
Who is to say that this loan will be put to good use and not wasted?  Is there any guarantee that jobs will not be lost and things will get better even if it is made?
It’s hard to say how you would be able to tell if it is put to good use.  The current legislation would have the President appoint a “Car Czar” who would monitor the progress of the restructuring, report back to Congress on a regular basis, and would have some say in the decision making process, especially large expenditures.  During the Chrysler bailout in the early 1980s, this kind of watchdog was put in place, and it seemed to be effective.
There is of course never any guarantee.  From my point of view, I’d rather take the risk that it might not work than the certainty of failure.  
 
 
Why should a company get a loan when we, the average American family, cannot even get a loan to consolidate our debts and make it a little easier to get by each month?  Is that really fair?
We can’t get a loan from anyone either.  However, if we don’t get the loans, and the industry fails, by some estimates between 3 and 5 million people will lose their jobs.   I don’t think that’s a good solution, by any stretch of the imagination.  I, like many others, thought that the other bailout was supposed to make it easier for the average American family to get loans.  Somehow, that hasn’t happened yet.  The government has serious questions to answer about that, but I digress.
 
I love ya and want you to keep your job, but if not giving this loan helps to make things just a little bit more fair, if that money could go somewhere else to help more people, then why shouldn’t it?  (And I’m not talking welfare and food stamps either)  Why can’t this loan money be put directly into the hands of those who have high amounts of debt and are trying to pay it off instead?
Again, I don’t have a really good answer here.  The government previously approved $700 Billion for just that purpose.  The amount of loans that are being requested by the auto companies isn’t chump change, by any stretch, but it also isn’t (relatively speaking) a huge amount of money.  The principal difference that I see between large scale debt relief and a bridge loan to the auto industry is where that money will be going.  Debt relief is basically paying back money that has already been spent, (an investment in the past), while the bridge loans will be investments for the future, investments that will pay back by creating value in the economy.  Both would add liquidity to the larger economy, but only one creates ongoing value. 
 
I’m not trying to be mean or cruel.  I just want to understand why this will make such a difference and why it is so needed.
I understand that many people don’t understand the gravity of this.  Some people don’t understand the complexity of the auto business, or the long lead times, or the costs.  Thanks for giving me the chance to explain some of it.  If you’ve got any more questions, I’m willing to answer any and all of them.