May 5, 2005


S&P Cuts GM, Ford Credit Ratings to 'Junk' (John Porretto, 5/05/05, AP)

Standard & Poor's Ratings Services cut its corporate credit ratings to junk status for both General Motors Corp. and Ford Motor Co., a significant blow that will increase borrowing costs and limit fund-raising options for the nation's two biggest automakers.

Shares of both companies fell 5 percent or more after Thursday's downgrades, and the news sent the overall market lower.

The decision by one of the nation's most respected ratings agencies comes as the two iconic American automakers are losing market share at home to Asian automakers, seeing sales soften for their most profitable models and are facing enormous health care and post-retirement liabilities.

The credit ratings agency said its downgrade of GM's long-term rating below investment-grade status reflects its conclusion that management's current strategies may not be effective in dealing with the automaker's competitive disadvantages.

Such industries have held on long past their expiration date, thanks mostly to political imperatives, not economic reality.

MORE (via Bruce Cleaver):
Troubles at GM, Ford may reflect cost of Chrysler bailout (Thomas Bray, 5/01/05, The Detroit News)

A quarter century later, it's not easy to argue that the bailout of Chrysler Corp. in the dying days of the Carter administration wasn't a success.

Chrysler is still in business, -- as a unit of a German firm, Daimler. It has chalked up a long string of design successes, starting with the K cars in the 1980s that helped resurrect the company. And the federal government long ago sold at a substantial profit the warrants it received in return for its $1.5 billion loan guarantee.

But sometimes the down side of industrial policy is difficult to see and a long time manifesting itself. One of the biggest down sides may have been the perverse legacy that the bailout left to the rest of the American auto industry. If the market had been allowed to work in the case of Chrysler, it seems fair to argue, General Motors and Ford might not be flirting with junk bond status today.
To be sure, there are many reasons for the problems at GM and Ford, starting with their own ineptitude at producing cars that people want to buy. But if Chrysler hadn't been artificially propped up, at least some of the over-capacity in the worldwide auto market -- 20 million vehicles a year in terms of production capabilities -- might not exist.

Equally important, allowing Chrysler to go belly up would have sent a strong signal to the auto unions -- and management itself -- to get real about the threats they were facing from Japan and elsewhere.

Yes, Chrysler workers had to make concessions -- equal to about $2 an hour -- to get the bailout package. But only a few years later GM was signing contracts guaranteeing lifetime wages and benefits for its hugely overstaffed factories.

Posted by Orrin Judd at May 5, 2005 3:13 PM

Name one that doesn't.

Posted by: David Cohen at May 5, 2005 5:31 PM

Are we looking at intentional bankruptcies/start over here?

Posted by: Peter B at May 5, 2005 6:27 PM

Detroit's automakers do not operate in a free market. They operate in a meticulously choreographed market in which the National Labor Relations Act gives arbitrary pricing power to an arbitrary group of people: those who assemble and happen to call themselves a "union."

Until the NLRA is abolished, and the United Auto Workers has to sink or swim on its own without the empowerment of a government mandate, GM and Ford will continue to come upon these sorts of crises. Because as it stands, they are paying far, far more for labor than the real market would bear. That sort of price distortion inevitably leads to fiscal disaster.

It's impossible to sustain a facade, which is precisely what the NLRA creates.

Posted by: SP at May 5, 2005 7:59 PM


Posted by: oj at May 5, 2005 8:38 PM

oj, what you don't (maybe pretend to not) know about the big ole world could almost fit into dodger stadium :)

the u.s. is a huge manufacturing economy. ultimatley everything depends on manufacturing (except lawyers). computer chips don't grow on trees, oil isn't drawn out of the ground using buckets and donkeys, information doesn't flow through candy cane pipes. and where do you think all of our glorious weapons come from ? i know a lot of what you say here is to stimulate a discussion but come on.

Posted by: cjm at May 5, 2005 11:16 PM

We'll keep weapons manufacture here for security reasons and because it's so high tech, but merely putting car parts together can be done anywhere and much more cheaply there than here.

We, of course, import chips and oil.

Posted by: oj at May 5, 2005 11:32 PM

SP is correct.

Foreign car manufacturers have no problem establishing profitable factories in the US.

They just don't do it where the UAW holds sway.

Posted by: Jeff Guinn at May 6, 2005 7:23 AM

Robots and cheap labor, there's a manufacturing policy America can rally behind.

Posted by: oj at May 6, 2005 8:26 AM

The fault does not lie with the unions, but with the management of GM and Ford. They made atrocious mistakes in the 70's, 80's, and 90's. It was not the unions who served as senior executives, it was managment. If they had the quality of managment Toyota or Hyundai has, the Big 3 would be smelling like roses even with the UAW. Likewise, you put the mangament of GM in charge of Toyota, it'd become just as bad.

Posted by: Chris Durnell at May 6, 2005 1:42 PM

Are the Toyota, Honda etc, employees who work in the US factories members of the UAW or a similar union?

Posted by: jefferson park at May 6, 2005 2:26 PM

Jefferson: Some are, most aren't. The ones in the South are, generally, nonunion -- as would be expected from the part of the country that still upholds liberty more than any other.

Chris: Regarding the management thing -- give me a break. Have the Big 3's executives screwed up? Sure. Are they at fault for the crappy reliability and cost of American cars? Of course not. The only "managers" to blame are the black-suited extortionists who run the UAW and take advantage of a special government license to rob.

We'd all pay a lot less for our vehicles in a market where companies were not forced to "bargain" with unions under government dictat. I don't see how the NLRA can be supported by anyone who first supports freedom and the rights of association and property. It's a fundamental violation of the American ethos.

Posted by: SP at May 6, 2005 3:13 PM