A year ago we discussed a broken automotive industry, rising costs in China and protection through trade barriers.  This issue analyzes recent developments in all three of these areas.

General Motors and Delphi are Joined at the Hip, One in Bankruptcy and One Trying to Avoid It

Delphi’s move into bankruptcy last October may have been the first domino to fall. Since then Dana Corp has filed bankruptcy and recent actions by General Motors show them fighting to avoid bankruptcy. With hundreds of millions of relays and switches, as well as other electronic components, sold to this market each year it needs to be watched carefully.

GM Losses - $10.6 Billion in 2005

For the full year of 2005 GM lost $10.6 billion, but the books are still open for 2005. If a company had revenue equivalent to this loss it would place around 210 on the 2005 Fortune 500 list. Its revenue would also be about same as Avnet’s or Arrow’s.

GM and Delphi Offer Buyouts to Over 100,000 UAW Workers

GM and Delphi have offered early retirement to all UAW workers, 113,000 of them. This number is about equal to the population of Berkley or Santa Clara, Calif. or Wichita Falls, Texas or Green Bay, Wis. or Clearwater, Fla. or Manchester, N.H. To leave their jobs, UAW workers are being offered $35,000 to $140,000 and no benefits to full benefits, based on length of service. GM hopes to reduce its work force by 30,000 and Delphi would like to see 18,000 leave. So let’s say they get the 48,000 takers and the average buyout is the $80,000, the midpoint of the offer range, this will cost an estimated $3.8 billion.

This deal was worked out between GM, Delphi and the UAW and further signals sweeping labor changes for the U.S. industry. At its peak the UAW represented 1.5 million workers and this has dropped to just under 0.6 million, before this offer was made. For the workers that remain, wage and benefit concessions surely will be the next shoe to drop. As with steelworkers, pilots, flight attendants and other unions serving industries with severe financial problems it is a question of losing something and hopefully not everything.

GM Sells a Stake in GMAC

In another recent announcement GM reports the sale of a majority share of the commercial mortgage segment of GMAC. This sale to a group of three investment companies will generate $9 billion in cash. An amount not quite covering last year’s losses, but should be enough to pay for the employee buyout. GM is also trying to sell the balance of GMAC. From a profit standpoint, GMAC is the crown jewel of GM as it generated $2.8 billion in earnings last year. Selling part or all of this profit machine may have dug their hole just a bit deeper.

Foreign Auto Makers Keep Expanding U.S. Operations

Business for Toyota, Kia, and Hyundai is growing. Toyota plans to take over 100,000 units of production capacity in an Indiana Subaru plant. Both Kia and Hyundai will open new plants in Georgia and Alabama. So growing an automotive business in the United States is possible, given the right products to sell along with the correct facilities and work force to build them.

What Can a Supplier Do?

Continue to be watchful of your receivables with Delphi, Ford, GM, and Visteon. The tier suppliers to these companies may also come under financial pressure, particularly if they have a high percentage of their business with one these four companies.

Follow the growth. The Chicago Tribune carried the following quote from David Speer of Illinois Tool Works (ITW). "Our expectation is that we'll be in the high teens to low 20 percent growth rate from foreign carmakers with plants in North America,” Speer said. Foreign automakers, excluding DaimlerChrysler AG, operate about 15 plants in the U.S. and are scheduled to open at least nine more in the next five years. "The Asian carmakers are tough negotiators, but they also understand the role the supplier plays in their business."

China Will Increase Taxes on Exported Copper

China’s supplies of copper, particularly electrolytic copper, have become strained. Currently about 60% of these supplies come from Chinese ore and the balance is imported. Market prices for copper are lower in China than outside of the country. This drives a profitable export trade in this commodity that increases China’s need to import higher priced copper. Beginning on April 10th the government will increase and impose new taxes on the export of copper. The goal of this increase is to slow the export of copper and help guarantee the supply for domestic use.

This tax may or may not have a direct effect on the cost of Chinese made switches and relays that contain copper components. However, it does show that the Chinese government recognizes that commodities in China are underpriced compared to global markets and they are working to equalize this. It also demonstrates their desire not to starve local needs, such as the production of copper wire and cable for electrification, in favor of profits from exports.

 
Protection Through Protectionism

Some members of congress are not going to let certain foreign countries own certain assets in the United States or let foreign countries set their own monetary policy without our approval. Both of these are actions have the potential of slowing down our economy.

The flap over the sale of British owned ports on the east coast to a Dubai company, DP World, sent fears of bomb-laden container ships through the minds of members of congress. After all Dubai is an Arab country. Perhaps this is profiling run amuck. In the end, DP World decided not to complete the deal for the east coast ports.

So, how can this have a negative effect on our economy? This action shows the world that our government may or may not step in and control foreign assets. Keep in mind these east coast ports were the assets of a British company. Many foreign countries, particularly oil rich Middle Eastern ones, invest in U.S. government bonds. If they decide it is too risky and stop buying these, the demand could drop significantly forcing the interest rates higher and lowering the government’s ability to cover its deficit spending.

For many years China pegged its currency directly to the U.S. dollar and the exchange rate remained fixed. Last July the Chinese Government changed its policy to begin to slowly let the renminbi float. Since then the renminbi has risen 3% against the dollar. For some members of congress this is not good enough and they feel it should rise much more, making Chinese imports more expensive and hopefully U.S.-made products more competitive. To help persuade the Chinese, they are ready to impose a 27% tariff on all Chinese imports to the United States. Maybe this will help the deficit, but it will also have a huge effect on the cost living. One of the reasons inflation has been in check for so many years is the influx of lower cost Chinese goods. If the prices for these goods rise 27% the cost of living will soar causing inflation and higher interest rates.

Fair and free trade is the best trade. Making American industry competitive in a global market is the best way to ensure prosperity. The actions GM is taking are trying to do this and hopefully it is not too late. Shielding companies and allowing them to be non-competitive does them and their employees no good.