You knew it, I knew it… my hairless cat new it.   China was going to make major headway into the automotive industry by picking through the bones of Chrysler and GM.  The 1st bit to go is the Hummer line.

General Motors Corp. has struck a deal to sell its Hummer truck unit to a Chinese industrial business, the two companies confirmed Tuesday.

Privately owned Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in China, will acquire the truck brand, which has been part of GM since 1999. Tengzhong said it plans to keep Hummer’s management team.

“We plan to … allow Humer to innovate and grow in exciting new ways under the leadership and continuity of its current management team,” said Yang Yi, chief executive of Tengzhong.

Yang said the deal “will allow Hummer to better meet demand for new products such as more fuel-efficient vehicles in the U.S.”

The companies said the deal would likely close by the end of September.

This leaves other brands like – Pontiac, Saturn and Saab to be sold off or left to die.  One could easily see how a Eurpoean company could pick up Saab, but what values does Pontiac and Saturn hold for potential buyers?  Saturn has never turned a profit and Pontiac as a razor thing margin… The value – specifically for Saturn – is the dealer network.

If a Chinese company wanted to have a pre-establish dealer network this is the chance – buy Saturn and exploit the dealer network. As I believe Chinese manufactures have the ultimate aim to tap the U.S. market, such a development wouldn’t be a surprise to me.

As pointed out yesterday, the Presidential BS train for General Motors is on a roll. Let’s break it down:

WASHINGTON -(Dow Jones)- President Barack Obama said Monday that General Motors Corp.’s (GM) restructuring plan provides it an opportunity to emerge quickly from bankruptcy as a stronger company, but warned that fixing the troubled auto maker will take a “painful toll” on many Americans.

Me: What about the idea of capitalism? Why should the company even survive?

“Working with my auto task force, GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again,” Obama said in remarks at the White House.

Me: But what about the fact that this is due to years of mismanagement? How is screwing the debt holders, the investors, going to do anything to help? What about the fact that GM makes products that no one wants?

“I will not pretend the hard times are over,” he added. “Difficult days lie ahead. More jobs will be lost. More plants will close. More dealerships will shut their doors, and so will many parts suppliers.“

Me: Hey, suppliers – get ready for bankruptcy and liquidation as you are not getting a bailout.

The government will inject another $30 billion into GM to help it get through the bankruptcy process, an investment that will pump the government’s ownership position in the company to 60%. Obama repeated that the government is a ” reluctant shareholder” with no interest in running the company’s day-to-day operations.

Me: So the public will have pumped 50 billion into the company for what? If they have no interest in running the day to day why are the dictating what dealerships stay open, what models should survive and talking about price caps?

Obama defended government loans to GM and Chrysler as necessary to stave off a collapse that would have been “devastating” for the U.S. economy.

Me: Bull! The stock market knew GM was bankrupt months ago and reacted in kind. The economy seems to have already factored in the collapse (cause that is what this is). The suppliers are going to get screwed and the initial impact has already been felt.

“Understand we’re making these investments not because I want to spend the American people’s tax dollars, but because I want to protect them,” Obama said.

Me: Protect the tax dollar by not SPENDING the tax dollar, let business sort the problems out on its own.

U.S. Chamber of Commerce President Thomas Donohue said his group is concerned that GM’s new owners in Washington could put politics ahead of sound business decisions.

Me: This is about Union votes, plain and simple.

In addition to the U.S. government’s 60% stake, Canada and Ontario will own a 12% position in GM. The remaining shares will go to the United Auto Workers and bondholders.

Me: And current debt holders get nothing except about 1/10 of what they should be getting (with the option to BUY more of the new company) If the U.S. owns 60%, when will I be getting my dividend check? Where do I sign up to attend the shareholder meetings?

Obama said none of GM’s stakeholders are receiving special treatment, saying that the United Auto Workers is making “painful sacrifices, on top of all that they’ve already done.”

Me: You are joking, right?

He said unsecured bondholders, who agreed to swap $27 billion in debt for up to 25% of GM’s equity, will recover “substantially more” than they would have without government help or if the company had been liquidated.

Me: Pure speculation with no evidence to support said claim.

“I instructed my auto task force to treat all of GM’s stakeholders fairly and to ensure that this restructuring was carried out in a way that was consistent with past precedent. And it was,” Obama said.

If he means “creating a liability for tax payers” then “carried out in a way that was consistent with past precedent” is correct. Oh, and what is that “Viable” plan for GM’s success?  Is it to give every taxpayer 40K to run out and buy a GM car?  You cannot force people to buy something they don’t want.

Seriously – the government should have no role in this.

Manufacturing has slowly moved from the U.S. too all parts of the world.  Slowly Mexico, Asia and Europe began to pick up the production slack while the United States built the ultimate collection of intellectual property. As production left the country, it seems that major manufacturers started to make business decisions that maximized short term profits while ignoring long term stability and demand.

Welcome to GM.

General Motors, the worlds largest automaker, ignored consumer demand, production trends and economic realities for decades on end. Instead of providing products the consumer wanted, the company tried to tell people what to buy.  Forget cutting production cost by outsourcing, allow your labor cost to climb.  Ignore the realities of costs related to health care, borrow from the pension funds and short change the workers.

As the company was one of the largest in the world, it could do what it wanted and get away with it… as long as economic conditions were favorable. Who was going to stop them?  They had money, they had influence, and they had means. Who was going to stop them?

After the SUV craze of the 2000s came and went, GM started to lose money – and lose it fast. In 2008 General Motors last 31 Billion dollars.   As economic conditions continued to deteriorate throughout the year, pressure on the company began to grow.  Suddenly, the well ran dry and the debt overtook the company.  The giant automaker was on a lifeline when it turned to the government late in 2008 for financial assistance.  They claimed the loans would provide them with the necessary flexibility to weather the storm while rightsizing the company.

That didn’t happen.

So, as we sit here talking about trends in manufacturing, poor management and a product line that doesn’t meet consumer demands, we need to note GM is roughly 12 hours away from declaring bankruptcy.

Plans are being put in place to make the process “quick”, all the while giving the United States government upwards of 70% of control in the post-bankruptcy company.

Tomorrow the world will see President Barack Obama stating how this is an unfortunate day for the United States and the auto industry.  He’ll note how he and the administration do not wish to take over a company but wish to do what is best for the country.  Politicians will say how this will give the company the flexibility to compete in a new world economy…

Bunk.

What the world is witnessing is the failure the American auto industry.  Frankly, if the government were to stay out of the process, we would be witnessing Capitalism at work but we are not.  Instead, the world will watch the United States government reward a company for years of failure.

GM will have the the debt on the balance sheet removed, screwing the bond holders and debtors, and it will create a “lean” company putting all other automakers at a disadvantage.  Oh, yea, and the U.S. (and Canadian) taxpayers will have lost billions because the “loans” from last year will be wiped away.

Not only is tomorrow the death of the U.S. auto industry, it is truly the end of what was once considered free market capitalism.

Well, the GM mandated bond restructuring has arrived, and the bondholders are telling GM… NOPE.  Not gonna do it.

The largest U.S. automaker had so far failed to gain anywhere near the 90 percent of bondholder support desired to stave off bankruptcy, two sources familiar with the discussions told Reuters on Tuesday. Bondholders have until midnight to make their final decision on the tender.

As of midday Tuesday, the source said the company had only “low-single-digit” interest from bondholders.

Reuters’ sources said GM will likely file for bankruptcy some time after midnight Tuesday, but before June 1.

The bondholders made the right choice as they were getting screwed with the other deal.  This all but guarantees GM is going into bankruptcy.  The next question will be this – will the government screw the bondholders during that process?

The June 1st, government imposed, deadline for a General Motors restructuring or bankruptcy filing is less than a week away and the situation is looking grim. While the company was able to work out agreements with the United Auto Workers and the Canadian Auto Workers unions that would allow cuts to wages and health care cost, the big unknown at this point are the bond holders.

GM set an internal deadline of 5/26/09 to reach an agreement on debt restructuring.  No news has yet hit the wires of this effort, but can one take the “no news is good news” approach in this situation?  I don’t know. Based on the details floating around the press, the bond holders would give up a lot in order to keep GM out of bankruptcy. Their stake would be reduced to 10% of the company – from their current 40%.  That is a massive loss.  Furthermore, if the proposed deal does gain approval the government would be a 50% owner in the new company.

But what if a restructuring deal cannot be reached, then what?

A number of groups would be hit if the company slides into bankruptcy.  One has to figure that all shareholder equity would be wiped out.  You know that stock that is virtually worthless now?  It will be completely worthless if bankruptcy takes place.

Employees and dealerships may be placed in difficult position where they have no options – they could be out of jobs, the locations closed down – where as before bankruptcy they may have options to be bought out or able to have some flexibility in retaining their position(s).

Suppliers would not only face the process of filing claims against the bankrupt company, they may face bankruptcy themselves.  Companies such as Lear, American Axle, TWR, and Dana all may face difficulty due to the loss of revenue and outstanding debt.

General Motors themselves may also fall victim to bankruptcy.  Will customers start moving away from purchasing their products (well, more than they have) if bankruptcy takes place?  Fiat is concerned about Chrysler’s financial deterioration since the company went belly up, would the same thing happen to GM? Would the business fundamentals fall off yet another cliff?

Ironically, bankruptcy may be the best option for the bond holders as they stand to obtain more money and potentially more ownership in a new company, assuming a new company is organized, than simply letting the government come in and have their way with the company.

I’ve argued for some time that General Motors and GMAC need to be left to their own devices or simply die.  Years and years of poor management decisions will come to a head, one way or another, in the next two weeks. While it would send a very poor signal if the Government simply allowed the company to restructure while screwing the bond holders, I fear this will be the patch chosen – even if General Motors goes into bankruptcy.

I’m shocked.  I’m not sure why, exactly, but I am.

GM to sell healthy assets to a Government run company, bad assets will go into bankruptcy.

General Motors Corp’s (GM.N) plan for a bankruptcy filing involves a quick sale of the company’s healthy assets to a new company initially owned by the U.S. government, a source familiar with the situation said on Tuesday.

The government’s plans include giving stakes in the new company to GM’s union and bondholders, although the ownership structure of the company is still being negotiated, said the source who is familiar with the company’s plans.

In addition, the government would extend a credit line to the new company and forgive the bulk of the $15.4 billion in emergency loans that the U.S. has already provided to GM, the source said.

This is – for me – this is exactly what everyone was saying would happen to the banks: nationalization.  I believe this is a poor move and sets the standard for everything moving forward.

Just simply let them go under!

The outsourcing of all things manufacturing from the United States to China is now, virtually, complete. All things from clothing to electronics have been produced in China and shipped to the mighty consumer, the U.S., for years now. Wasn’t it a matter of time before the same was true for automobiles?

Both General Motors and Chrysler are looking to cut cost in just about every way possible. The major focus in the press has been labor. You know, the whole “how can an American car manufacturer stay competitive if it costs $123 per hour to build a car in the US, but a German manufacturer can assemble a car for $4.35 per our in Mexico” thing… (yea, numbers are pulled right from my armpit, thank you.)

While having no specific information to cite, I would make the assumption this has not happened in the past due to a number of factors, the biggest being Union Contracts and trade agreements. The economic chaos experienced by the United States in the fall of 2008 and Early 2009 seems to have changed all of that.

General Motors plans to sell cars in the United States that it makes in China, starting in 2011. That could make GM the first major automaker to import Chinese cars to the US market.

The carmaker expects to sell about 17,335 of the China-made vehicles in the US in 2011, and triple that number to 51,546 in 2014, a planning document circulated by GM among US lawmakers showed.

The gains would come, the document says, as GM’s total US sales surge 50 per cent in the next five years.

The plans are subject to change pending the outcome of negotiations with United Auto Workers (UAW).

Put aside any anti-China business emotions for a moment. To me, this very concept seems to make business sense. If the company had the ability to manufacturer a quality product at a lower cost, why wouldn’t GM or Chrysler make such a move? Isn’t such flexibility the key to survival in business?

One can make the argument that such a move will place American workers on the unemployment line, and they very well may be correct in saying so, but where does the responsibility of the company sit? Is it to the line worker or is it to the survival of the company?

I would also look at the importing of American branded, Chinese manufacture cars, as a test balloon for Chinese manufactures. If the U.S. consumer is willing to purchase a U.S car produced in China, why wouldn’t the U.S. consumer be willing to purchase a Chinese car produced in China?

I think this whole situation is opening up a wide rage possibilities for the Chinese manufacturing sector. Even more than may have existed today…

Being out of it for the last 24 hours (or there about) means that I’ve missed a few things in the world of business.  Well, in the world in general as well.  

Anyway, there are a number of things that caught my eye as I went over the headlines for the last day.

Chrysler Dealers: ‘They Turned Their Back On Us’ 

You knew it was just a matter of time before the dealers/dealerships that fell victim to the Chrysler cuts started to speak up.  It didn’t take long, actually.  Something along the lines of 12 hours…

“I had to notify just around 50 people today that our business has been terminated, that they no longer have a job,” said Kevin Ormes, owner of the dealership. 

Ormes got a courtesy call on Thursday morning delivering the news, and he’s angry. 

“Over the past months, they’ve begged us to buy vehicles, they’ve begged us to do everything for them and when it came time to do something for the dealers that basically invested everything that they have, they’ve turned their back on us,” he told CBS 2. 

I actually feel quite sorry for Ormes.  The dealers who stuck with Chrysler, who ended up buying stock when Chrysler needed – but their dealership may not have – are not left in the dark.

Too bad for the dealerships that Chrysler went into bankruptcy. That move allows the company to void contracts (with the approval of a judge), leaving the dealer network virtually hostage to whatever decisions Chrysler made in the name of rightsizing.

G.M. Notifying 1,100 Dealers That They Will Be Dropped

And just as expected, General Motors did the same – the notified and additional 1,100 dealerships they were no longer needed in the GM family.

What I find interesting about the latest news is the input provided by the National Automobile Dealers Association.

The National Automobile Dealers Association estimated that the G.M dealerships being dropped employ 63,000 people, and that 40,000 work at the Chrysler stores being closed. Thousands more jobs are at stake in the later phases of G.M.’s dealer cutbacks.

There are another 100K jobs that will be looking for employment.

Empire State Manufacturing Survey: Conditions worsened modestly in May

The much watched Empire State Manufacturing Survey data was released on Friday, and wouldn’t you know it, conditions continued to decline.  

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened only modestly in May. Although negative, the general business conditions index rose 10 points to -4.6, its highest level since August of last year. The new orders index fell several points and remained below zero, while the shipments index inched into positive territory. The inventories index remained negative, but rose from last month’s record low. Price indexes also continued to be negative, with the prices received index falling 10 points to a record low. Employment indexes indicated further contraction in employment levels and in the average workweek. Future indexes improved substantially for a second consecutive month; the future general business conditions index rose 11 points to its highest level since September.

Business news is now reaching what I would call the “good bad news” cycle. People are now taking bad news and are trying to make it look good by saying “it wasn’t as bad as the last report”.  

Contraction is contraction.  Wake me up when growth actually starts.

Signs that the consumer is hurting, Credit Card Defaults Reach Record Highs in April

For most of this recession cycle, the news has focused on the business community.  How banks are not making a profit, how retailers are overstocked with inventory, how homebuilders are unable to sell.  

Well, the signs that the consumer is actually hurting can now be seen.

Take a look:

Default rates (per credit card issuing bank)

• Citibank – 10.21
• Wells Fargo – 10.03
• JP Morgan – 8.07
• Discover – 8.26

As unemployment continues to rise, it would be safe to expect the above numbers to continue climbing.

Chrysler came out today and said they are closing down roughly 25% of their dealerships as a condition of their recent Bankruptcy filing, and they want to do this by June 9th. The obvious reason given – the identified dealership are under performing.

Chrysler said its dealer network “needs to be reduced and reconfigured in a targeted manner to strengthen the network and dealer profitability and to achieve optimal results for the dealers and consumers.”

Here is the interesting, seemingly little know, fact that the press seems to be overlooking with this news. Dealerships do NOT cost Chrysler anything. Each individual dealership is an independently owned and operated franchise. So, while it may be underperforming, there is no negative cash impact to the parent company (Chrysler).

If I owned a dealership – regardless if my location was being closed down – I would take this as a sign of distrust by the parent company. Why? Only three months ago Chrysler urged their entire dealership network to buy more cars, specifically 15,000 more cars.

Chrysler executives in the US are making their second sales plea to dealers in two weeks, urging them today to order 15,000 more cars by Monday to keep the company viable.

“You have two choices,” said Chrysler co-President Jim Press. “You can either help us or burn us all down.”

Just imagine what it would feel like to be one of the dealers who went out, purchased more cars than they could sell (yes, it is a stupid business choice) but did so out of loyalty and belief in the company. I’m guessing these individuals feel betrayed, and I would be looking for the lawsuits to start shortly.

This news won’t only be limited to Chrysler. No, no. Expect General Motors to shut roughly a third of their deal network by the end of 2010.

GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, is expected to send termination notices to up to 2,000 dealers — a third of its roughly 6,000 U.S. dealers, the sources told Reuters.

All this doom and gloom aside, it is about time GM and Chrysler shut down their under performers. Both companies overextended and over saturated the market place, which lead to customer cannibalism. That said, it is rather sad that they are doing this as a cost cutting measure when, in the end, it will not help their short of mid-term bottom lines.

Alcoa, the aluminum giant, kicked off earnings season in style…by posting a massive $497 million dollar loss.  While the company had indicated they observed signs of market stabilization, they expect a 7% global decline in aluminum demand to 34 Billion tons. 

This is only an indicator of what is to come from corporations over the next 5 weeks.  

Commodity demand is down (hence Alcoa’s result), this means the homebuilders will be showing weak results, this means automotive companies will be weak, this means shipping firms will be reporting weak results, and this means energy companies (oil and natural gas) will be reporting weak results.

The reality of what the global economy is facing will be seen in a really short period of time.

GM sees the writing on the wall, speeds up readiness for bankruptcy

Maybe the message the Obama administration was sending finally got to someone at GM.  It looks as if the company is rushing to prep for a bankruptcy filing, focusing on taking GM’s “best” assets, forming a new company, all while slashing the company debt by more than 50%.

If GM is serious about creating a sustainable organization, why is the company teaming up with Segway to develop a vehicle that looks like this? While I applaud the companies attempt to “innovate” this only goes to show they do not understand the marketplace, and if this is what the company expects their “best” assets to be in the future… their survival is truly bleak.