How Will the Auto Industry Weather the Fiscal Cliff?
Now that the election is out of the way, the talk of the town is the fiscal cliff. Every sector is pointing at the uncertainty caused by grid lock in Washington, and companies are forced to sit on their hands while they wait to find out whether America falls and breaks its financial hip bone, or continues to lumber on.
In an interview on CNBC, AutoNation (NYSE:AN) CEO Mike Jackson made clear that while the magnitude of the situation is ridiculous, the consequences are very real and very frustrating for America’s businesses. Companies are forced to operate under the assumption that there will a “grand bargain,” a solution that prevents the worse with both sides conceding something in the name of getting anything done. If we go over the fiscal cliff, “there’s no question in my mind that we’ll have a recession,” says Jackson.
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Despite operating smartly, shares of AutoNation have come down about 13 percent over the last month. Issues regarding the fiscal cliff were raised when the company’s stock slid as much as 6 percent in the morning session after solid third-quarter results. Good performance was seemingly overshadowed by concerns about the position of both the company and the economy come January.
Speaking about what his company would do if the nation tripped over the cliff, Jackson said, “we will immediately reduce our forward orders to all the manufacturers, immediately begin to reduce inventory, be thankful we have an investment-grade balance sheet, and stop hiring.”
Jackson’s concerns echo those of businesses across the country, but there is no alternative except to hope for the best and prepare for the worst. Compounding domestic concerns is the depressing condition of the European auto market. Automakers have been slowly gaining on a hard economic fight in North America, and have been making aggressive plays overseas to stabilize their positions.
Notably, Ford (NYSE:F) will be closing three plants and laying off thousands of works, pursuing a strategy similar to its American turn-around. The company plans to scale down production to meet the actual demand of the current European market — European new passenger car registrations are at their lowest in a year. If the cliff comes, it will be critical that those costs have been cut.
Presumably in order to stabilize credit lines in its struggling markets, General Motors (NYSE:GM) will be buying financing operations from Ally Financial in Europe and South America. Offering cheap financing to customers could help drive sales in markets facing high unemployment. GM has pursued a parts-buying relationship with French car manufacturer Peugeot, which recently had the French government underwrite $9.1 billion in bonds so that it could continue to offer credit to its customers and dealerships.
Hoping to meet success in Europe where others have found trouble, Tesla (NASDAQ:TSLA) wants to bring the Model S to Europe and Asia by 2013. “Our goal has always been to build the best car in the world and set new standards for safety, range, design and performance. We have achieved this with Model S in North America and now it’s time to introduce the extraordinary Model S driving experience to Europe, said CEO Elon Musk in a statement.
Following reports that it may be interested in buying Aston Martin, Toyota (NYSE:TM) is showing us what could be coming to the auto industry if the economy does manage to avoid collapse. The Japanese automaker launched the Intelligent Transport System test site to test cars that can communicate with each other, the road, and pedestrians. An system that has intelligence both in the car and in the infrastructure would create a transportation environment that was both safer and more efficient.