Last week it finally became officially - the Chrysler Corporation filed for bankruptcy. I say finally because it was a long time coming...for much longer than this recession has gone on for. But don't think I'm pessimistic about the state of the US auto industry. On the contrary, I'm more on the optimistic side. Nonetheless, I think it's worth discussing how the US auto industry came to this point.
Cars That People Want...Not as Simple As It Sounds?
The current state of the US auto industry really has its roots in the 90's. During that time, the US carmakers were rolling in profits through the newest fad in autos - SUV's. The 90's gave birth to the biggest growth in the SUV market and made the heavy, gas guzzling, yet very suitable for families vehicles a mainstay in driveways around the world. Gas was well under $2 a gallon (sometimes below even $1) and people were willing to pay a premium for big cars that did not carry a stigma of 'family haulers'. Detroit automakers understood this demand and took full advantage of it - perhaps too much. Soon enough they began relying on these high profit margin cars to support their bottom line.
But when gas prices began their steady but uninterrupted rise over the last 5 years, sales of those big SUV's fell dramatically. US automakers realized that they were overly dependent on the SUV's. They were slow to realize the shift their customers were making from big expensive vehicles to smaller more efficient ones. Other carmakers - particularly the Japanese ones - did see this shift and came out with cars that they understood very well - efficient, high quality, and respectable cars with less frills and more practicality.
Since this time, the big 3 (Ford, GM, Chrysler) have steadily lost market share in the US - to the point where Toyota is now in contention with Ford as the 2nd leading automaker in the US in terms of sales.
Straw The Broke the Camel's Back
Although the US automakers were incredibly slow in reacting to the change in the marketplace for cars in the US and lost more market share than in any other point in their history, they were still able to survive. Why? Because the economy was so good and credit was easily available. Yes they were losing market share, but they were still able to sell enough cars to stay afloat until the cars they made aligned with the market demand.
Unfortunately, with the credit crisis, the time frame for this return to prosperity was drastically cut short. And soon GM and Chrysler found themselves in a precarious situation where their options became very limited. Even the billions the American government injected to the automakers was not enough to stave of the event that was 10 years in the making - a major automaker declaring bankruptcy.
Leading Up To Bankruptcy
Out of the 3 automakers, Chrysler has been in the most dire situation for a while now. In my opinion, their cars are by far the worst quality and least appealing out of all the automakers. Furthermore, after Daimler sold Chrysler (the Mercedes carmaker owned Chrysler for about 10 years) to private equity firm Cerberus, much of the management was retained at Daimler, leaving Chrysler weaker than even.
It's no surprise then that Chrysler was the first to go under. For weeks they tried to restructure over $6 billion in debt with the help of the Obama administration. They also tried to forge an alliance with Italian automaker Fiat as a restructuring effort. Unfortunately, an agreement could not be reached and Chrysler was forced into bankruptcy. Although Chrysler as a company will still be around, it will be in a much different form than it is now.
In my next post, I will discuss what this new structure may look like and the bumpy road Chrysler has in store. I will also discuss how the Obama administration has tried to twist the bankruptcy and unfairly blame the debt holders for the bankruptcy. So, stay tuned!
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
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