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Did U.S. Wrongly Close Auto Dealers?

Automakers still waiting for auto sales to rebound


A report is out today from officials stating that the government hurt American workers by forcing the closure of auto dealerships at GM and Chrysler as part of their 2009 bankruptcies and bailouts. “The fact that Treasury was acting in part as an investor in GM and Chrysler does not insulate Treasury from its responsibility to the broader economy,” said the Special Inspector General for TARP funds — a kind of watchdog for the bailouts of 2008 and 2009.

But the Treasury and White House were quick to counter, pointing out that the loss of dealership jobs were offset by the fact that thousands if not millions of manufacturing jobs in the auto industry were saved. The move was likened to layoffs at a company that hurt individual workers who are fired but preserve the jobs of many more who remain on the payroll.

So what’s the real impact on the auto industry? Did the government’s move really look out for automakers and give workers the short end of the stick?

First off, it’s hard to play devil’s advocate either way on this since neither Chrysler nor GM are publicly traded companies. While there is speculation of a General Motors IPO as early as August, there is no way to easily track the “value” of the companies over the past several months without stock pricing.

But a look at auto sales is as good a proxy as any, and these numbers tell an interesting story for the industry. Overall June sales were down compared to May numbers but up over the previous year. Specifically, in June Chrysler saw a stunning +35% year-over-year increase though it lost around -12% compared with May. The story was the same for GM – an +11% year-over-year increase, but a drop of -13% over the previous month.

June 2009 was a relatively weak month for automakers, with GM headed into bankruptcy protection and the industry in the midst of its worst annual sales in 30 years. So it’s natural to see year-over-year strength. More telling is the month-to-month drop which was fairly steep – over -10% in sales for Toyota (TM), GM, Chrysler, Ford (F) and Nissan (NSANY). That drop shows that we’re certainly not out of the woods yet when it comes to auto sales.

The upcoming second quarter earnings from automakers will also reflect this year-over-year strength but sideways movement in the shorter term. Toyota and Ford will report earnings on August 4 and July 23, respectively, and both are projected to post significant profits over a steep loss for Q2 in 2009. But both companies are also to expect to report smaller profits than in each of the last two quarters (that’s Q1 2010 and Q4 2009).

So in a nutshell, things are better for automakers but vehicle sales have not yet returned to pre-recession levels. More significantly, auto sales show no sign of breaking out anytime soon.  That means that in the short term, bailed out auto companies GM and Chrysler must stay lean and competitive just like Toyota, Ford and others.

With an outlook like that, it’s hard to argue that the government cut too much from the balance sheets of Chrysler and GM. If GM and Chrysler were seeing record sales that may be a legitimate argument – and until we know for sure that the auto market is firing on all cylinders, a healthy dose of caution seems wise.

Perhaps its fair criticism of the Tarp Czar to say the government was “acting as an investor” in GM and Chrysler when it made the cuts. For better or worse, when these companies took the bailout from Uncle Sam, that is exactly what the government became. So accusing the government of acting like an investor doesn’t really prove malice.

Of course, whether or not the government should ever be in that position to begin with is a separate (and much more complicated) argument.

As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

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