Owing to the NAFTA agreement, the auto industries of Canada, Mexico, and the USA are configured to function in an integrated single market. Due to the absence of tariffs or other border frictions, for example, the big auto OEMs have been free to optimize their North American assembly-plant footprints based on costs, vehicle specialization, and other purely production factors. Ford
(F) is no exception.
Thus, Ford can produce upward of 300,000 mid-sized sedans (e.g. the Ford Fusion) at its world-class manufacturing complex in Hermosillo, Mexico, for sale on dealer lots throughout North America. Likewise, its range of crossover vehicles, such as the Ford Edge, are made at its big facility in Oakville, Canada, for retail distribution in Canada, the USA, and Mexico. Finally, its slate of pick-ups, SUVs, and compact cars are made at specialized plants in Michigan, Ohio, Illinois, Kansas, and Kentucky, for sale in all three markets. The broad contour of Ford’s logistical flow within the NAFTA single market, then, is that family-size sedans flow north, crossover vehicles flow south, and trucks and compacts go in both directions.
So with Mr. Market functioning at his efficient best, President Obama showed up last week at Ford’s South Side plant in Chicago in what amounted to an exercise in carrying coal to Newcastle. Specifically, he announced that Uncle Sam would be favoring Ford with a $250 million loan guaranteed by the Export-Import Bank. In the words of the latter’s press release, “The loan facility will finance….export sales for over 200,000 vehicles being sold to buyers in Canada and Mexico."
Say again! Every one of said 200,000 pickups, SUVs, and compact cars made in Ford’s US plants would be sold in Canada and Mexico anyway because that’s how Ford’s integrated North American production and marketing system is set up. Since there's virtually no possibility of even a single incremental export sale to Canada and Mexico under this scheme, the below-market interest subsidy on the loan will go straight to Ford’s bottom line. Indeed, some fancy economist would doubtless judge that this subsidy amounts to a pure dead-weight social loss. Another description would be that it’s pointless, wasteful and, well, dumb.
Moreover, while the President was in town to collect $2.5 million from several fund-raising events, he used the occasion to brag that the South Side plant had also been the recipient of a $400 million loan to encourage more fuel-efficient vehicles .Here’s where it gets dumber. The new Ford Explorer to be made at the Chicago plant will average less than 25 mpg in combined city and highway driving. This means that it would actually flunk the Obama Administration’s new fuel economy standard (CAFÉ) for lights trucks which will reach 29 mpg when fully effective!
But then the real reason for the $400 million of taxpayer largess wasn't to help Ford make the grade on the counter-productive Federal CAFÉ standard, but to bail out its commercial chestnuts. Both the Explorer and the South Side plant were completely flunking the test that actually counts -- that of the marketplace. Prior to the taxpayer-funded retooling of the South Side plant, it manufactured the lumbering last generation Ford 500/Taurus -- the company’s biggest bomb since the Edsel. And as for the Ford Explorer, the previous model had gotten so long in the tooth and out of step with the current marketplace that sales had fallen from the traditional level of 400,000 per year to a mere 50,000 in 2009. So Ford was drowning in red ink from both the plant and vehicle line, but when the Feds came to the rescue, they gussied up their corporate welfare in pure green. In addition to the hollow claim that the wholly unremarkable fuel economy of the new Explorer was a blow against global warming, Ford and its government minders trumpet the fact that the vehicle is made from 85% recycled material. Let’s see. The metal stampings are made from scrap steel -- just like more than 50% of all the steel made in America because the electric arc furnace mini-mills that manufacture it can’t even use virgin ores. Likewise, the floor carpets, seat cushions, acoustics barriers, and such are made from “shoddy” -- industry lingo for the recycled rags that have been used for these purposes for decades. In short, Uncle Sam’s $400 million went to bailing out a dying auto factory and product line, not to purifying the planet.
In making his brief campaign stop at the Ford South Side plant, the President highlighted that $650 million of corporate welfare is being showered on Ford for no discernible public purpose whatsoever. This puts the lie to the repeated claim of Ford’s boy-scout-in-chief, Alan Mulally, that Ford never took a stinking dime from the taxpayers. But Mulally’s blatant hypocrisy isn't the real point of the story. What this episode actually spotlights is the incorrigible, destructive grip of crony capitalism on the nation’s economic and fiscal policies, and the preposterous propaganda campaign now in full swing claiming that Washington has successfully rescued the auto industry.
First, consider how this incident underscores the extent to which the CEOs of America’s big companies have been intellectually corrupted by corporate welfare. Apparently, Mulally thought there was marketing mileage to be made by Ford’s refusal to take a TARP bailout. Good for him. But in his years at the ultimate corporate ward of the state -- Boeing Company
(BA) -- Mulally was so thoroughly trained in the art of passing the tin cup in Washington that he doesn't seem to have the common sense to see that a few million dollars of Ex-Im Bank interest subsidy is both irrelevant to Ford’s results and an embarrassment to Ford’s noisy claim that it's “subsidy free."
In fact, like Mulally, most of the big company CEOs have an organized strategy to milk the Federal cow. When General Electric’s
(GE) CEO, Jeff Immelt, was publicly shilling for the Obama Administration’s $800 billion stimulus boondoggle, he was also lashing his troops internally to capture a modest $90 billion share of this lucre for GE! Indeed, much of the US economy is now propped up by direct subsidies, tax-breaks, cheap credit, and regulatory preferences. In addition to the traditional wards of the state in banking, the medical industry, housing, defense-aerospace, and agriculture, we now have the auto industry and a growing part of the energy business, too.
The point isn't merely that the hundreds of billions spent annually on corporate welfare are inherently inconsistent with free enterprise, economically wasteful, and fiscally unaffordable. The larger point is that there's no conceivable way to stop the Mulally’s, Immelt’s and all the rest of the corporate raiders from plundering the public treasury because the Washington playing field is inherently not level. When corporations gear up their lobbyists, campaign contributions, canned communications campaigns, and hired expert witnesses, the public interest is readily lost in the stampede, and silliness like subsidized loans to retool car plants and to export vehicles to the very markets for which they were produced in the first place goes unchecked.
Yet, if corporate welfare cannot be stopped, how is spending for presumptively more legitimate purposes like the safety net, social security, or education going to be curtailed? The answer is obviously that it won't be, and that our current trillion-plus deficits are so thoroughly baked into the cake, that the eventual result will be national insolvency and default.
In this respect, consider the role of President Obama in last week’s spectacle at Ford’s Chicago plant. Notwithstanding his statute as the most left-wing President we've ever had (and hopefully ever will have), he not only embraced what is on its face a pure Export-Import Bank boondoggle for Ford, but gave his imprimatur to a program which for decades has been a poster child for rank corporate welfare and which has provided most of its $20 billion in annual funding to the truly needy like Boeing, General Electric, and now the big car companies, too. So a question might be fairly asked. We previously had it from Barack Obama himself that 98% of the American people are to be shielded from tax increases, and that entitlements and domestic social programs are sacrosanct. Now we learn that even corporate welfare like Ex-Im loans and the $100 billion that's been spent on the auto industry via TARP and the phony fuel-efficiency subsidies are also high priority and integral to economic recovery. So it's virtually certain that in the decade ahead, another $10 trillion in Federal bonds will be issued on top of the equivalent amount which will be outstanding at the end of fiscal year 2010. The question is, who's going to buy them and at what rate of interest will the market clear -- once it becomes apparent that these massive debt emissions can’t ever be repaid.
Finally, the South Side plant episode underscores the Orwellian propaganda that's come to substitute for truth in our Bailout Nation. The US auto industry is a disaster waiting to erupt once again in the not-too-distant future owing to the inexorable laws of supply and demand. For decades the US auto industry feasted on a diet of cheap consumer credit. This resulted in the sale of about 17 million vehicles annually between 1999 and 2007 -- a figure that was millions in excess of what the American public could actually afford or sustain. Consequently, the “park” in American garages and driveways is now swollen with nearly 250 million vehicles or more than one vehicle for every driving age person. So it will take years of sales at levels below the 14 million annual scrap rate to shrink the fleet down to an economically sustainable size.
At the same time, $100 billion of Federal bailouts has prevented any material shrinkage of North American production capacity -- to say nothing of 3 million existing vehicle imports plus potentially a further wave from China’s burgeoning small car and electric/hybrid vehicle industry. In round numbers, the American car market faces upwards of 20 million units of visible supply and is still struggling to reach even 12 million of annual sales. Accordingly, price competition will be fierce and profits punk for a long time to come.
To be sure, GM just went through the Chapter 11 accounting car wash, meaning that it now has billions in hidden reserves to absorb cash operating costs -- at least for a few quarters. It's not that hard to make a billion per quarter when you can report essentially “expense-free” revenues.
Likewise, using taxpayer money, GM has recently acquired a sub-prime auto lender. So now it can resume stuffing the garages of lower-income households with new cars they can’t afford, paving the way for a “twofer” when both loans default. And as long as the Fed’s free short-term money lasts, fleet operators may continue to inventory more vehicles too, creating the illusion of sales gains. In fact, GM’s YTD sales through July to actual retail customers are down 1% from last year -- which in turn reported the lowest sales rate since Beaver Cleaver got his driver’s license back in the 1960s.
So the American auto industry is “back” alright -- back to the accounting games and sales gimmicks that led to its most recent near-death experience. And yet so thoroughly entrenched is the propaganda machine of present day crony capitalism that it will soon trot out our President to pronounce the auto bailout a success, and to suggest that the taxpayers who were fleeced two years ago will soon get their money back -- that is, they'll get repaid as soon as enough prospective GM shareholders can be fleeced for the $50 billion still owed to Uncle Sam.Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.