The Financial Times reports that France is poised to bail out Peugeot; meanwhile Ford will close its Belgian plant. This will impact suppliers, particularly Lear, which has a seating plant in Belgium dedicated to producing for Ford. [To my knowledge, no car company makes its own seats, which are the single most expensive item they purchase — at one company I’ve visited where the engine is purchased, the seats cost more than the engine.]
More generally, with sales in the EU at a 17 year low, it’s not just the OEMs [original equipment manufacturers, aka car companies] that are hurting but also suppliers, who account for 3/4ths of employment. In Europe (as in Japan) suppliers use contract and temporary workers; Lear has already given 300 the axe, and Federal Mogul and JCI [Johnson Controls, in this case its seating division] have also announced cuts.
An Automotive News story [Ford’s Belgium plant closing could impact U.S. suppliers] reports that 20-25% of BorgWarner’s European workforce is comprised of such contingent workers. [It and Honeywell dominate the market for turbochargers.] But in contrast to 2009, they now have $189.5 million in free cash flow [2012Q2]. In general, suppliers are not in crisis mode.
This is important. In 2009, it was not just GM that teetered on the edge of the abyss, it was also its core suppliers. But those same firms supply Toyota, Honda, Ford and BMW — in other words, everyone in the industry. If one of those large suppliers had collapsed, all auto manufacturing in the US would have ceased, and most suppliers would have shut their doors. Of course without new cars (or replacement parts) dealerships would have also closed their doors. While they might have been able to sell a few used cars, they would have lost the warranty work business (and in fact been unable to get parts, not just get payment). Most would also have gone straight into bankruptcy, because their loans would have become due, cross-bankruptcy clauses in their agreements.
Now Mitt Romney has quietly changed his stance on the bankruptcy of General Motors and Chrysler (it was not a “bailout” since everyone lost). He initially maintained — the primaries — that GM should have been allowed to fail. That would have set off the chain reaction noted above, which my calculations suggest would have led to 3 million job losses, half in the first 2 weeks. That would have turned our current Great Recession into a second, full-fledged Second Great Depression.
His new stance is that we should have merely guaranteed loans to GM and Chrysler. This fails on several grounds. First, as he should well know, in a big restructuring (we’re talking $30 billion-plus) you have to rely on big firms such as Lehman Bros and Bank of America. Whoops! — in 2009 Lehman was gone, Bank of America was itself being rescued, no large financial institution was lending, all had capital impaired [banks are required to maintain a specific capital/asset ratio, if you have bad loans that eat into your capital, you have to shrink your loan portfolio]. In short, even coming up $1 billion would have been a real feat of arm-twisting by the Treasury, government guarantees or no. So there would have been bankruptcy, but it would have been Chapter 7 liquidation (close everything down and hold a fire sale) not a Chapter 11 restructuring, which is what government loans enabled.
There’s another problem with guarantees: there’s no upside for the taxpayer, only downside. If the restructuring didn’t work, we’d be out a lot of money. If it worked, investment banks would make a killing, in the way that Romney did with Delphi through his investments (which, claims to the contrary, are not in a blind trust as defined under US law). Instead, by allowing loans to be turned into equity, we have a potential upside. However much he may be worthy of derision for other things, Paulson [a Bush appointee, continued under Obama] used his Wall Street savvy to restructure deals in the taxpayer’s favor. Romney hasn’t shed his mindset that deals should be structured to let him make money.
Romney may have been born into a car industry family (his father was CEO of American Motors, which Chrysler purchased to get its Jeep brand, made in Toledo Ohio then and now). But he doesn’t actually seem to know anything about the industry, or if so he doesn’t let that affect what he says. He has legitimate claim to understanding finance. He’s still willing to twist things to match what his audience wants to hear — a normal Chapter 11 was possible in 2009?! — when he surely knows that was not the case. Finally, he has been unable to reorient his mindset to think in terms of the welfare of the American people, rather than Wall Street, despite spending 7 years on the campaign trail. That does not bode well for the nation if he should become president.