Focus on Autos
Whiskey & Gunpowder
October 14, 2005
by Mike "Mish" Shedlock
MarketWatch is reporting "Ford's
SUV Sales Halved in September":
"Ford Motor Co. reported
Monday that sales of its traditional SUVs plunged 51% in September,
as consumers continued their mass exodus from the thirstiest
vehicles on the road amid record gasoline prices.
"Overall, Ford turned
in a 19% decline in U.S. sales last month, to 228,157 cars and
trucks. Crossover and passenger car sales actually improved,
but not nearly enough to make up for the steep decline of its
"Sales of the Ford
Explorer and Expedition were both off about 60% from a year ago
while the much smaller Escape, which is available with a hybrid
engine, shed only 4%.
"And the trend doesn't
appear to be going away anytime soon, according to Steve Lyons,
head of Ford North America sales.
will continue to face headwinds in the coming months,' he said,
adding that customers did most of their buying in the summer
months when employee discounting sparked an industry-wide sales
"Sales of the top-selling
F-Series truck fell 30%, to 69,643."
Ford was not alone with SUV
woes. General Motors SUV and pickup truck sales were down by
one-third. Now that sounds pretty bad to me. I would assume it
would sound pretty bad to everyone, but that is not the case.
GM sales analyst Paul Ballew described sales as "pretty
"'I would describe
final industry results as actually pretty comforting,' said GM
sales analyst Paul Ballew. 'We're still waiting for a portion
of the industry to report, but from the estimates we have, as
well as what's been released to date, the industry right now
is at or above our expectations heading into the month.'
"General Motors posted
a 24% decline, to 349,202 vehicles. Car sales fell 14.5% while
truck sales plunged 29.5%.
"Some of the biggest
decliners included the Cadillac Escalade ESV, down 39.5% and
the Chevy Suburban, off 56.6%.
"The world's top automaker
blamed a tough comparison to last year when it was promoting
zero-percent financing. The diminishing effect of its employee
pricing plan was also a factor, GM said.
"GM is looking for
its new GMT900 lineup, due out next year, to boost sales in the
sluggish SUV segment."
It does not take much to get
these guys excited, does it? Since when is a 33% decline in sales
anything to take comfort in? While GM is ramping up production
of SUVs, Toyota and others are ramping up production of hybrids
like the Prius.
"Toyota Q1 Profits Jump
This is what Toyota is doing:
"Starting in the April-October 2005 period, Toyota plans
to increase its production capacity of its popular hybrid Prius
vehicles by 50% to 15,000 units a month from the current 10,000."
Yes those are Q1 profits, but
I am looking for forward strategy and leadership. Toyota seems
to have it. GM and Ford do not. This is just a hunch, but with
soaring gasoline prices I bet those hybrids do very well.
Mish, is that the extent of
GM's problems? Hardly. Let's summarize all of the problems I
can think of off the top of my head:
1. Falling sales
2. Enormous debt
3. Union strife
4. Delphi and supplier problems
5. Cost disadvantages versus Toyota to the tune of several thousand
dollars per car
6. Piss-poor management
7. Poor quality versus foreign competition
8. Lack of industry vision
9. Medical benefit problems
10. Pension woes
Those were the problems that
came to mind in about 15 seconds flat. There are probably more.
Mish, didn't GM say its pension
funding problems were solved and it is fully funded? Yes it did.
Unfortunately, "GM and
a U.S. Agency See Pensions in Different Lights":
"The federal government
contends that General Motors' pension fund is $31 billion short
of what it owes its work force, according to closely held government
data, a figure in stark contrast to GM's assurances that its
pension plans are 'fully funded.'
"The government's finding
of a huge imbalance suggests that the pension fund may have much
larger claims on the company than GM's financial filings have
indicated. It was calculated by the Pension Benefit Guaranty
Corporation, the federal agency whose job it is to insure employee
pensions if a company fails to meet its obligations.
"Both the government
agency's and GM's methods of tracking pensions are legally acceptable,
and their ability to produce such widely varying results shows
the difficulty that employees or shareholders have in trying
to ascertain the true condition of a corporate pension fund.
But the disparity in such estimates has grown increasingly important
as some large companies like United Airlines have gone bankrupt,
leaving the agency, which took over United's pension plan, with
far greater unfunded obligations than previously thought.
"The discrepancy between
the government's and the company's figures is the result of different
assumptions made about how long GM would keep operating the pension
fund. The federal guarantor made its estimate on what is called
a termination basis -- it measured the amount that GM would owe
its workers if it were to terminate its pension plans immediately.
GM's calculation that its pension plan is fully funded assumes
that the fund will keep going, rather than being ended.
"Since 1994, companies
with weak pension funds have been required by law to calculate
the value of their pension funds on a termination basis and to
send the information to the pension guaranty agency. But Congress
also enacted a measure keeping the information secret, in response
to the stated concerns of companies, who argued that the information
could be misconstrued if shared with the public.
"The pension agency
did not release GM's own estimate of its pensions on a termination
basis, which continues to be secret. GM said it sent its most
recent calculation to the agency about a year ago. The agency
made its own calculation at the end of June and released the
figure in response to a request under the Freedom of Information
"In response to questions
about the federal agency's calculation, GM released a statement
saying it considered it 'unrealistic and not indicative of GM's
ability to provide future retirement benefits.'
"'GM takes its pension
obligations very seriously,' the statement continued. 'The corporation
has contributed more than $56 billion over the last 12 years
to fund our pension plans and meet our obligations to our current
and future retirees.'"
Now I don't know about you,
but I have a problem taking seriously a company that is comforted
when sales decline a mere 33% while banking on selling more SUVs
with soaring gas prices. The article continues in explaining
the discrepancy. Let's tune back in:
"GM's pension fund
is actually made up of two big plans, one for salaried employees
and one for hourly workers. At the end of 2004, GM reported that
the two plans had total assets of $91 billion, and total benefits
owed of $89 billion, for a surplus of $2 billion.
"The government's calculation
involves a variety of different assumptions about the future
value of benefits the company owes. Terminating the fund means
workers would no longer build up any new benefits, and GM would
no longer provide cash from its continuing operations. But someone
-- either the government or an insurance company -- would still
have the obligation to pay all retirees the benefits they had
earned, on schedule, in the future.
"(Companies with plenty
of money can also terminate their pension plans by paying an
insurance company to take over the obligations. In GM's case,
the government estimated that an insurer would charge $31 billion
in addition to the money in the fund.)
"The government says
its figure gives the more truthful picture of the plan's condition.
The current pension accounting standard specifically cites the
Pension Benefit Guaranty Corporation's method as 'appropriate.'
"But most companies
have resisted using the termination method, both because it can
make their pension plans look very weak, and because they say
they do not intend to end their plans. Business groups say that
reporting pension values on a termination basis would needlessly
alarm and confuse employees.
"But as big corporate
bankruptcies and pension plan failures accelerated in the last
few years, weakening the entire pension system, a small but growing
number of economists, accountants, and government officials began
to take the position that companies with low credit ratings --
like GM -- should be required to disclose the termination values
of their pension plans.
"Labor Secretary Elaine
L. Chao called for such disclosure in a speech in January. Access
to the termination data, now secret, would 'empower workers,
investors, regulators, and the public,' Ms. Chao said.
"'The goal is to ensure
that the assumptions that go into measuring a plan's liability
better reflect whether or not it will be terminated.'
"United Airlines, for
example, kept reporting its pension values on the usual, continuing
basis, even in its third year of bankruptcy, when it was no longer
making the minimum contributions required by law and it was clear
that termination was inevitable. On this basis, United, a unit
of the UAL Corporation, reported a $6 billion shortfall as of
the end of 2004.
"But when the government
agency finally took over the plans this year, it recalculated
them on a termination basis and found a total shortage of $10.2
billion. United's work force and the Pension Benefit Guaranty
Corporation will bear that shortage."
The article said that the PBGC
will bear any shortages. That, unfortunately, is not entirely
accurate. The PBGC is just an arm of the Federal Government.
Pension shortages when a company goes under will be covered in
one of two ways:
1. Reduced benefits
2. Taxpayer bailouts
When it comes to GM, I expect
both to happen. An existing law due to expire in December let
companies get away with murder on their pension assumptions.
Presumably, it was enacted to help companies tide themselves
over while the "recovery" was gaining traction. Well,
here we are with a recovery that seems all but dead just as we
are about to head into the recession of 2006. By postponing the
problem, all we did was make things worse. I guess we will now
see if Congress has the guts to mandate full funding of pension
plans on a conservative basis, as well as change the rules for
pension accounting as applied to corporate quarterly earnings
statements, or if it will kowtow once again to industry lobbyists.
In the meantime, anyone working
for GM that has a chance at an early retirement and a lump sum
pension payout might wish to talk to a financial advisor about
taking it. I remain convinced that GM is headed towards bankruptcy
unless and until it confronts that mammoth list of problems head-on.
I see no reason to believe it can or it will.
Whiskey & Gunpowder is a free, twice-per-week, e-mail service
brought to you by a team of rebellious brigands.
Oct 11, 2005
Mike Shedlock "Mish"
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