Analytical Wealth

To give you an idea of how tough things are for the Auto Industry right now, Toyota is projecting a loss for the present fiscal year:

(From The NY Times): "TOKYO — Toyota Motor , the Japanese auto giant, said Monday that it expected its first operating loss in 70 years, underscoring how the economic crisis was spreading across the global auto industry.

On Monday, Toyota said it expected an operating loss in its auto operations of 150 billion yen, or $1.7 billion, for the fiscal year ending March 31. That would be the company’s first annual operating loss since 1938, a year after the company was founded, and a huge reversal from the 2.3 trillion yen, or $28 billion, in operating profit earned last year.

Analysts said Toyota’s downward revision, its second in two months, showed that the worst financial crisis since the Depression was threatening not just the Big Three but also even relatively healthy automakers in Japan, South Korea and Europe. Many other companies will also soon be reporting losses.

Worse, analysts said that they expected next year to be even more painful, amid forecasts that the global economy would continue to slide until at least the summer. This could cause a significant shakeout, driving smaller and weaker companies into the arms of a smaller number of bigger, richer players.

“It is just a matter of time before all major automakers are losing money,” an auto analyst in Tokyo for Credit Suisse Securities, Koji Endo, said. “And things will just get worse next"

For the record I'm not posting this to say that things are so bad that we should go easy on Detroit, OR to support the idea that giving them enough cash to buy time will allow them to recover when the market recovers. Instead I post this in order to provide some perspective on the auto industry overall:

Detroit was losing money/struggling to turn a profit during the height of the credit boom, an era when companies like Toyota were reporting record profits.  Now that market conditions are abysmal, well run companies with no debts (or the myriad liabilities of Detroit) are losing money, losses they may or may not be able to mitigate with various cost cutting initiatives/adjusting the scale of their operations to fit the market.

Chances are the multi-year downturn in  auto sales will force some of the healthy manufacturers to make some severe changes in the form of cutbacks, merging with competitors, etc, etc.

I.e. if companies like Toyota are facing a multi-year period where they'll lose money, imagine how bad it's going to be for Detroit.

Considering the above it's practically a given that Detroit is going to continue to lose money (and/or need Government support) for all of 2009 if not 2010, even if they're able to magically fix all of their efficiency issues within the next quarter or two. This means that they're probably going to require government of support of some kind well into the foreseeable future.

As a result if the government is going to help Detroit they need to not only force feed a bankruptcy (or a similar form of restructuring), but also force some business changes around shedding brands, ending product overlap (sell 1-2 versions of each car as opposed to eight), etc, etc. If they're going to wind up supporting these companies no matter what, they might as well attempt to limit the resources needed to get Detroit healthy again.

IF sometime down the road it makes sense for companies like GM to bring back various brands that they shut down, restore old strategies around replicating the same car across multiple brands, etc, then fine.  But for the immediate future they need think in terms of a "bare bones, lean and mean" strategy, that's more aimed at helping them survive as if an outright collapse and failure is imminent, because even with government help that's exactly the situation they're in right now. 

You can read more here.

Sources:

The NY Times: "Toyota Expects Its First Loss in 70 Years" -- Martin Fackler, December 22, 2008.  

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.