Monday, December 15, 2008

Why Toyota wants GM to be saved

A GM failure would cause production problems, crush already weak demand and potentially open the door to low-cost competitors.
NEW YORK ( -- Detroit's Big Three aren't the only automotive companies that want to see the government step in with some much needed financial help.

Overseas automakers, most notably Toyota Motor, all endorse some form of federal aid to keep General Motors (GM, Fortune 500), Chrysler LLC and possibly Ford Motor (F, Fortune 500) out of bankruptcy.

The Senate killed an effort to get the automakers a stopgap loan last week and now the Bush administration has said it is looking at providing the automakers help from the $700 billion approved to bailout banks and Wall Street firms.

"We support measures to help the industry," said Toyota Motor (TM) spokeswoman Mira Sleilati. "We just want a strong, competitive healthy industry."

This may seem surprising at first, especially when you consider that much of the opposition to the auto bailout was from senators from Southern states home to auto plants operated by Asian auto companies, such as Alabama and South Carolina. But the Asian automakers insist they never lobbied against such help for the Big Three.

And this makes sense once you take a closer look at the dynamics of the auto industry and how intertwined the fates of all the companies are.

Here's why Toyota, Honda Motor (HMC) and other Asian auto manufacturers clearly believe they are all better off with GM and Chrysler surviving than if they go out of business.

Collateral damage
The overseas automakers, who between them produce more than 3 million vehicles a year at U.S. plants, all worry their production would be hurt if one of the U.S. automakers went under. That's because a Big Three failure would likely lead to widespread bankruptcies in the auto parts supplier industry.

Erich Merkle, lead auto analyst with the consulting firm Crowe Horwath LLP, said there is much overlap between the automakers' suppliers. Since most parts in an automobile have only a single supplier producing them, the disruptions in production will be severe and prolonged.

"It could take months for a Toyota to work through that and resume normal production," he said.

Merkle said the current network of auto suppliers, manufacturers and dealerships have worked well for the overseas automakers, who have posted steady gains in their U.S. market share during the past few years.

Besides sharing suppliers, many dealers sell both U.S. and overseas brands. So the failure of a U.S. automaker could hurt the overseas manufacturers' dealer network and their sales as well, Merkle said.

"There would be a severe disturbance in the force," he quipped.

Economic shockwaves
A collapse of one of the Big Three would also probably cause an even more severe hit to the U.S. economy. That would further eat into demand for U.S. auto sales, which hit a 26-year low in November.

"The U.S. economy would be in shambles," Merkle said. "The robust U.S. economy that Toyota and the others depend on would suddenly not be as lucrative."

The overseas automakers agree that the last thing they need is for the U.S. economy to slow further. The U.S. is the largest market for Toyota, Honda and Nissan (NSANY). All are expected to report lower U.S. sales this year for the first time ever.

"We want to get the economy back," said Michael Stanton, CEO of the Association of International Automobile Manufacturers, which represents most of the Asian automakers with plants in the U.S. "Everyone is hurting at this level of sales. Everybody is either cutting back or shutting down."

The latest cutbacks came Monday when Toyota announced it was putting plans to open a new plant in Mississippi on hold indefinitely, even though it is about 90% complete. The plant was set to start building the first domestically produced Prius in 2011.

While the overseas automakers would be certain to eventually pick up more U.S. market share if a U.S. automaker stopped doing business, Merkle said the need to sell off the inventory of the failed automaker at fire sale prices would depress all prices in the industry in the short-term....More

1 comment:

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