Running on Empty

Back in April, I wrote about the downward spiral of the US economy. At that point, I commented on how our collective national feeling was leaning against the railing over-looking the recession valley. The course of our country over the last 6 months has been amazingly tragic. Since then, we have seen a domino effect that has not been experienced for 70 years on the descent into the red. Furthermore, we have seen the US Government become the baby-sitter to Capitalism. Never before have such efforts been made to privatize private profits while socializing their losses. And sadly, it is the bad guys in this story who are going to reap all the fruits of taxpayer charity.

This economic crisis drove one presidential candidate to suspend his campaign to return to Washington to ‘get back to work’. It created a national conversation about dollar amounts that the average American cannot even begin to comprehend. It showed that poor fiscal responsibility, multiple companies’ aggressive means to achieve profit margin goals and little to no accountability for Wall Street can even leave financial wizards in a muted state. It revealed the cause and effect disconnect on Capitol Hill between lobbying efforts/limited oversight and the ultimate impact these actions have on their constituencies’ lives. The standard capitalist defense mechanism has been to “let the markets work its way out.” But, when the market is no longer bearing down on the competitors bottom-lines, and the vicious trend is now devouring their business’s sustainability- the white flag is raised and the government is called in.

For better or worse, all of this has taken place on the watch of George W. Bush. President Bush, the Texan Governor who campaigned on the Republican virtues of fiscal responsibility and limited government, has seemingly strayed quite far from the Elephant ranch. My intention is not to simply conclude that the financial monsoon that we are now in is the direct result of one man’s actions. However, it is under Bush 43 and a Republican party that has enjoyed the power seat for 6 of the last 8 years that have had the best seat for viewing the Bankruptcy of our nation. Through launching multiple wars, easing tax obligations of the richest 1 percent, and trying to privatize the sacred institution of Social Security, they have been grossly negligent in their respective roles as representatives. Shame on them.

And now, in the wave of bailout support to our major banking systems, another industry is screaming for their share of the Treasury piggy bank.

For years, the Auto Industry was a major player in growing the US economy. From the days of the Model T through the latest offering from Chevrolet, people have shown consistent infatuation for their vehicles. There was the deep seated pride in “Made in America,” and Michigan grew up around the manufacturing plants and assembly lines. But, over the past few years, as the credit crunch has set in, consumer confidence tumbling, and lending reserved for those with nose-bleed credit ratings, the Big 3 automakers in the US have seen record drops in their balance sheets.

What can these massive losses be attributed to? Surely there is an array of explanations that would satisfy some while igniting indignation in others. However, some novice observations can point to 3 key contributors. The first is the easiest: INDUSTRY GREED.

For years, the auto industry reaped the profit margins gained through the sale of SUV’s. These suburban cruisers not only clogged roads across America, they also provided amazing profitability margins for manufactures. Industry leaders perfected the building and selling of these gas guzzlers to the tune of $10-$15 thousand per assembly line roll off. So, the executives that were high fiving over 5 digit bonuses have now turned their palms over into the form of a donation cup.

A second contributor to industry woes is OPTIONS.

Manufactures lost their collective focus on making sensible options on vehicles. The new millennium has seen the number of options per model go from 2-3 upwards of 7 or 8. It seems that market research and sensibility was abandoned on the hope that “if we build it, they will buy it.” For example, the 2009 GM Sierra 1500 series has 6 different options alone. If the focus could return to limiting options, research and development funding, additional manufacturing costs, and time to market could all help the bottom line. I am not recommending returning the Henry Ford philosophy of “you can have any color…as long as it’s black,” however; dropping options by 50% could have a significant impact to company financials.

The last observation that is contributing to poor financials is TECHNOLOGY.

This is the scapegoat for a lot of the industry’s wounds as of late. With the historic rise in oil prices and the cost of a gallon of gas rising at an alarming rate until recently, people have been hesitant if not resistant to driving their fuel inefficient vehicles. As was mentioned a moment ago, industry greed saw the explosion of SUV’s on the American Market. Though these beasts of the road provide all the off-roading capabilities that the Suburbs demand, the 9 mile/gallon is grossly inadequate for the family budget. Consumers now want fuel efficiency, they want a car that emits less harmful toxins into the air, and they want dependability. Prior to 2000, the concept of hybrids vehicles came with the “future” label. Auto makers were hesitant to invest in the technology because the profit margins were low.

However, the demand and the technology have spiked tremendously over the past 5 years. Expectations have changed. People are viewing hybrid options less through the eyes of an expense, but rather an investment. But, with the repeated quarterly losses posted, American manufactures have lost the necessary capital to invest in technology. Therefore, if any bailout resources are allocated, I believe that the bailout benchmarks need to be outlined in the contractual obligations to invest, develop, and manufacture efficiency. No more excuses.

Even if the 3 contributors above are addressed tomorrow, the situation would still be in dire straits. This past Friday GM announced that it might not have enough cash to make it to the New Year. Losses that preformed worse to industry analyst expectations in addition to the hemorrhaging of cash have created a slippery slope for GM towards the Bankruptcy fall. The losses amount to a reported $4.2 billion (equivalent to $7.35/share) drop in sales along with cash expenditures of 6.9 billion. The announcement of 3rd Quarter performance saw GM shares drop to a 60 year low.

GM's principal rival Ford also performed below Q3 projections. Though Ford’s losses were not as devastating as GM’s the industry pillar said that current liquidity is safe until 2010. But, if operating costs continue to chip away at the reserves, Ford’s predicament could rival that of GM. To stem the tide of debilitating losses Ford announced that it would cut an additional 10 percent from salaried employment, eliminating bonuses, amongst other efforts. Plans are also in the works to offer an additional 2,600 buyout packages to its union workers.

Though the chief officers at GM and Ford have scuttled the ‘B’ talks thus far, many observers to feel that the auto industry cannot sustain itself back into stable performance without government intervention. If the industry watches the key companies fall into the void and cease all operations, as many as 3 million jobs will be lost in the first year alone. Another key category to focus on is the drop in personal income. An estimated 275.7 billion could be lost due to employment loss related to the industry. Michigan, a state already decimated by the dismal economy and massive job loss in the car sector would slip further away from the path. In 2008 alone, over 110,000 jobs have been lost, 15,000 alone in the month of October. Unfortunately, it will not be a merry Christmas for many families whose livelihoods have been crushed by layoffs.

Therefore, what is the next step? Where does the market go from here? What is needed to stop the bleeding? What is needed to restore confidence? Hopefully you didn’t come to this article for those answers. These are the challenges of the industry and the federal government who are currently working on securing an exit strategy. Let it be noted that if the American taxpayer has to provide any amount of donations to the industry that the government needs to reciprocate some of that generosity back the masses. Possible Government action to help the average American would be to slow down home foreclosures, bankruptcy claims, lower credit card interest payments, suspend student loan payments and the like.

During the long course of the political campaign season, politicians on all sides of the spectrum spoke to the character of the American people. That regardless of our differences, our collective will power will see us through any challenge presented. That being the said, the government should help out the American people and not just big industry. While Wall Street leaders wait in line for their taxpayer donations, countless people see their houses taken away, their small businesses close their doors and their savings depleted. So, at the end of the day, make sure that the ‘little guy’ gets his ticket to the bailout tent event. For if this bailout only address businesses needs and not the people, then the Preamble of the Declaration of Independence needs to be amended to read:

“We hold these truths to be self-evident, that all big businesses are created equal, that they are endowed by the Government with certain unalienable Rights, that among these are Profit, Privatization, and the pursuit of bailout resources when needed…”