The auto bailout could cost $100 billion
General Motors Corp. (GM) and Chrysler have received $17.4 billion in U.S. funds (so far), which they received only after much congressional teeth gnashing. Meanwhile, American International Group(AIG) snaps its fingers and over the weekend and some Treasury officials give it another $30 billion -- bringing its total to $180 billion. But thanks to the worst February in 27 years, the auto industry will likely catch up fast.
February's plunge in auto sales is a result of the realization by many Americans that they can keep their current cars running longer -- and even if their cars are broken, they can't get the financing to buy a new one and they certainly can't pay cash for a car. It's just too expensive. GM's sales fell 53%, Ford Motor Co.'s (F) sales declined 43% and Chrysler suffered a 44% drop. Incentives are not working -- the average incentive per vehicle sold is up 8% to $2,914. Only Hyundai, which lets buyers give back their car if they lose their jobs- bucked the trend; its sales fell only 2%.
When you consider that GM recently gave the U.S. a demand forecast of 11.23 million vehicles for the industry in 2009, you realize that it's worth analyzing whether that number is too optimistic. And if so -- last month GM's figure looked to be 17% higher than January's 43% plunge indicated, it's likely that the amount of money GM will request is much lower than it will actually need when the reality of an ongoing 50% or more plunge in demand continues to sink in.
Then GM's demand for $30 billion could double to $60 billion; Chrysler will ask for $12 billion more instead of $5 billion and Ford will finally be forced to put its hand out and beg for government aid.
These costly bailouts prove that the surest route to success in America is to fail massively. It's a lesson for the kids out there.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG and shares and has no financial interest in the other securities mentioned.