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 bulkier SUVs.

"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.

"'Traditional SUVs 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 boom.

"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 comforting":

"'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 28.8%."

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 Act.

"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.

Oct 11, 2005
Mike Shedlock "Mish"
email: Mish

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