Auto woes

I couldn't help but think of The Reckoning, David Halberstam's brilliant account of how Nissan helped break open the American car market to Japanese producers, when I read this news:

Nissan Motor Co. Monday announced plans to slash more than 20,000 jobs world-wide, shift production out of Japan and seek government assistance from Japan, the U.S. and elsewhere, part of a broad new effort by the Japanese car maker to weather the economic downturn.

Japan's third-largest car maker by sales also is suspending its goal of 5% annual revenue growth until 2012, which had been a key commitment of its current management plan.

Nissan's broad, new recovery program comes as the car maker -- reeling from falling demand world-wide, a global credit crunch and a soaring yen -- swung to a net loss of ¥83.2 billion ($904.2 million) in its fiscal third quarter ended Dec. 31, sharply down from ¥132.22 billion in profit in the same period a year earlier.

For this fiscal year, the car maker forecast a net loss of ¥265 billion -- its first net loss since President and Chief Executive Carlos Ghosn took the helm in 1999 and led Nissan's revival from the brink of collapse.

Openly moving production from Japan to save money is a pretty astonishing move in a highly nationalistic business and political culture. GM's supporters had a shred of a point when they noted that the entire worldwide auto industry was in a downturn--no carmaker is immune from the need for credit to finance auto purchases. Though only a shred of a point, because the Big Three's legacy of management and labor screw-ups have left it in little shape to survive the downturn, and unless excess capacity goes somewhere, the global auto industry will continue to suffer for the indefinite future.

 Perhaps suspecting this, the government is considering putting GM and Chrysler into bankruptcy.  That's because Debtor-in-Possession financing (DIP) is the first thing that gets paid back as the company emerges from bankruptcy.  The US government is making sure it doesn't get stiffed to pay other creditors.

I expect that this is just a threat to get banks like JP Morgan and Goldman Sachs to let the government cut in line for whatever cash the automakers generate.  The government doesn't really want to hand over the automakers to a bankruptcy judge, who will, among other things, void the company's contracts with the unions and start over from a baseline of zero.  Since this is exactly what the $18 billion was supposed to prevent, it's hard to see them turning around and making it happen themselves.

The real question is what the banks do.  Even if the judge did make government debt senior to theirs, it's possible they'd be better off in a bankruptcy.  Unless things turn around soon, continuing operations just mean burning cash.  As long as they're fairly senior, they might be better off taking the money and running.