In today’s crisis news we are faced with the prospect that General Motors, Ford and Chrysler are on the brink of failure. One indicator of the speed at which these companies are about to fail is the cash burn rate. The cash burn rate is the speed the company is using its available cash or credit to stay alive. It has been estimated that General Motors is burning through $6.9 billion a month. It now appears that the government is about to grant another $25 billion bailout package to the auto industry. This would be in addition to the $25 billion granted to the auto industry on September 25, 2008.
The discussion of a company’s burn rate reminds me of the beginning of the end of the dot-com bubble with the cover article in Barron’s titled “Burning Up” published on March 20, 2000. It was this article that pointed out the cash burn rate of many internet companies. After the article came out the dot-com bubble burst and it is reflected in the chart of the NASDAQ Index below. The NASDAQ fell 75.40% from the high in March 2000 to the low in September 2002. The NASDAQ has not fully recovered from the previous decline and is currently only 32% above the September 2002 low.
The discussion of a company’s burn rate reminds me of the beginning of the end of the dot-com bubble with the cover article in Barron’s titled “Burning Up” published on March 20, 2000. It was this article that pointed out the cash burn rate of many internet companies. After the article came out the dot-com bubble burst and it is reflected in the chart of the NASDAQ Index below. The NASDAQ fell 75.40% from the high in March 2000 to the low in September 2002. The NASDAQ has not fully recovered from the previous decline and is currently only 32% above the September 2002 low.
Are we headed down the same road as the dot-coms with the American auto industry? Is it true that “what is good for GM is good for the nation?” In my previous articles I have pointed out the fact that the government was setting up to bailout Cerberus Capital Management and that all forms of bailouts will eventually fail. Now with the news of General Motors’ burn rate of cash exceeding prior estimates we can only expect that the auto industry will first get bailed out (again) then collapse of it’s own weight. Touc.
Click on the link to learn more about Dividend Inc.
2 comments:
Bail Out 2.0, AIG is getting new deal. They get to refinance just like that. Ever wonder who will bail out the US government?
I often observe the news and am uncertain of the arguments for bailing out the "BIG 3". What is often cited is that there will be several jobs lost if capital is not injected into these firms.
My problem with that argument is that it assumes that the fundamental business model will somehow change, consumers will both have the desire, disposable income, and available credit in the financial markets to purchase these vehicles to such a degree that the company will be able to create profits to sustain the business.
I could be wrong, but many of these assumptions are not true, and so additional funds will only delay the process of any projected job losses. This does not even account for the huge legacy costs that are associated with GM, Ford, and Chrysler (ie. wages and retirements that employee's receive), and this does not include the cost of changing the product line so that the sales of the vehicles are less sensitive to increases in fuel costs relative to their Asian competitors.
I say let the BIG 3 downsize through bankruptcy. Why?
-Because then they would be able to negotiate workable wages that can be sustain in all business cycles.
-Employees who make it through the bankruptcy will be able to keep their jobs.
-The auto maker will have a better opportunity to change their product diversification.
And finally, in the least desirable scenario (depending on your stake in the outcome) some foreign company will buy what is left in capital and use it to build a sustainable business model.
I am ignorant on the topic, but based on what I understand so far, it is better to let these and any other companies fail, than to keep their carcasses on life support to buy more time.
Post a Comment