Behind The Scenes Of The Auto Industry

The news just hit the wires! GM is in talks with Delphi to purchase some of their manufacturing plants. Most people are not aware that Delphi was part of GM until it was spun off as a separate company in 1999.

GM obtained a bridge loan in December to help it survive thru March! Cash is very tight! Why would they be talking about purchasing assets of another company? The answer is that any interruption by their part suppliers could bring the assembly lines to a complete stop. That would have drastic implications to sales that are already down by substantial margins.

GM is trying to hedge their bets! They want insurance that they will have the critical parts for the vehicles that they manufacture. There are thousands of parts in each vehicle that they manufacture. Most plants are set up on a Just In Time system where the parts arrive just as they need to be assembled into the car.

The bottom line is that the car business is a complex web of manufacturers not just the major auto companies. Suppliers supply most of the parts that are used in today's cars. So, any interruptions to the parts supplied would bring the auto makers to their knees!

Many of the companies that supply the auto industry have been burned by the recession and the substantial decrease in the sales of cars. Some of those companies are in just as bad a shape financially as the big three auto manufacturers.

State of the Automobile Industry

Currently, the automobile industry is in serious jeopardy. The worldwide economic slump is the worst since the great depression. When a company has substantial sales declines inevitably large losses will follow. My experience as a CFO tells me that the red ink is going to flow for a minimum of two to three years. They are making drastic cuts but they cannot cut expenses as quickly as the sales have declined.

The US based companies GM, Ford and Chrysler have had some red ink for the last several year based upon overcapacity. But now Toyota has joined the club with their first loss ever in their corporate history.

I am of the opinion that we are going to see all companies world wide cut down on the number of models and brands that they produce. The automobile market in the US is very crowded with a high number of models and makes. They will cut the models that are least profitable. The US companies also will cut divisions. Using GM as an example, they are indicating that they will sell or close the following divisions Saturn, Saab and Hummer. Ford has already sold Jaguar, Aston Martin, and Land Rover. In addition, they now have Volvo up for sale.

The bottom line is that within three years we will have a substantial fewer number of brands and models to choose from. Currently, the US manufacturers with the exception of Ford have received a bridge loan from the government to continue operations. But, it will take hundreds of billion dollars to save them. So, in the end result the auto industry is going thru the most tumultuous time since the great depression. In the end, there will be a number of bankruptcies in the industry and consumer choices will be substantially reduced.