KEY POINTS:
I sat in the window of a cafe this month in Annapolis, Maryland, a sailing town near Washington, counting parked cars. Honda, Honda, Nissan, Toyota, Honda, Lexus (made by Toyota), Mazda, and a battered 1970s Cadillac.
No wonder the US carmakers are in meltdown and begging to be
plugged in to the Treasury's life-support machines. Don't be misled, though - the something that is rotten in the industry has nothing to do with the credit crunch, and everything to do with years of mismanagement, shoddy products and bad choices.
Consider the credit-rating histories of General Motors and Ford. The rot started in August 2001, when Standard & Poors put the A grades they had enjoyed for a decade on review for downgrade. In October that year, they each suffered a two-level cut to BBB+ that left them just three moves away from junk status.
So seven years ago, the car companies were already on the slide after years of their Japanese rivals stealing market share. That was well before the words credit crunch had become as ubiquitous as "would you like large fries with that?"
Further cuts followed, with S&P finally putting investors out of their misery by dropping Ford and General Motors to junk in May 2005. By then, GM's US$3 billion ($5.5 billion) of 8.375 per cent bonds sold two years earlier and repayable in 2033 had already declined by 26 per cent. Bondholders now are staring at a loss of more than 80 per cent of their initial investment.
So when GM chief executive officer Rick Wagoner said that allowing US carmakers to fail would trigger a catastrophic collapse in the economy, he really should be typing his own resignation letter.
Calls for investment bankers to forgo their bonuses are understandable and justifiable in the current climate; what about the US$14.4 million Wagoner pocketed in total compensation for last year, according to Bloomberg figures?
And the dire warnings used to persuade US politicians that they should give the auto industry a blank cheque similar to the one Treasury Secretary Henry Paulson has signed for the finance guys smack of extortion.
"Such a level of economic devastation would far exceed the Government support that our industry needs," said Wagoner. "This is about much more than just Detroit. It's about saving the US economy."
In other words, give us what we want or suffer the consequences. That sure sounds like blackmail to my ears, except even Somali oil-tanker pirates have so far stopped short of trying to pilfer US$25 billion from their victims.
So, what to do? Nobody, least of all President-elect Barack Obama, wants to see the 250,000 people who work directly for the big three US automakers tossed on the scrapheap, or the other 4 million workers whose job security is at risk somewhere along the supply chain.
A groundswell of support seems to be building for the concept of retraining and retooling auto workers away from churning out four-wheeled gas guzzlers to put them at the vanguard of the fight against climate change.
"Wouldn't the benefits be greater if the US Government spent US$25 billion to US$75 billion - the current dollars proposed to bail out the auto industry - to train engineers, support infrastructure and work in the much-neglected alternative energy space?" wrote Tom Sowanick, who helps manage US$20 billion as chief investment officer of Clearbrook Financial in New Jersey.
New York Times columnist Thomas Friedman suggested earlier this month that Apple chief executive Steve Jobs should be persuaded to sign up for national service and run a car company for a year, long enough to invent the iCar.
I think Friedman is on to something. Sure, the iCar would be available in any colour as long as it's white (with a black model to be introduced as soon as all the early adopters have a pearlescent model in the driveway), and the windshield would be scratched to opacity within weeks. It would probably run on fresh air, though, and the packaging would be to die for.
First, the Government would need to absorb those legacy pension and health-care costs the automakers have used as an excuse for years to dodge getting their collective act together. Splitting the welfare issue from the business travails would deliver some much-needed clarity to the true financial position of the carmakers.
Then, turn the industry over to people who might make a difference. Give GM to Jobs, let Microsoft Corp founder Bill Gates run Ford and allow billionaire Warren Buffett to try his hand at Chrysler.
In five years, I bet that car counting in Annapolis would deliver a different result.
- BLOOMBERG