Japanese carmaker Honda has literally just announced it will reduce total output worldwide by 50,000 new cars, 29,000 of which from North American plants. By the end of the fiscal year, Honda total output is expected to be down 12% year over year to 1.26 million vehicles worldwide. Honda already announced it would cut production by 119,000 cars on Dec. 12, 2008, on top of the 71,000 decrease announced in Nov 2008. Honda cites the newest output cut can be attributed to the economic downturn resulting in further falling demand in its cars. The company has also announced about 4,300 job cuts in Japan that will take place by the end of April 2009. More recently, Honda has made other cost cutting moves, including pulling out of F1 racing sponsorships as the company tries to focus on its core competency, making and selling consumer oriented vehicles. In related news, Hyundai is now letting consumers who purchase 2009 models return the car within one year if the buyer loses his or her job full-time job. In other auto industry news, GM has also announced it will cut an additional 2,000 jobs.

We’ve experienced a lot in the past year with the economy including record job losses across diversified industries, record foreclosures, record lows in demand especially in expensive goods such as cars, the near collapse of the world credit financial systems, bankruptcies, you name it…we saw it.

It was certainly a historical, yet very interesting year. One of the most interesting and controversial industries we all watched was without a doubt the auto-sector, with the near collapse of GM, Chrysler, and Ford which would have caused irreparable economic dislocation, I know, tuff words, but it’s the truth.

A lot has happened, so in this article, I chronologically highlight significant events related to GM in 2008. I also provide some insight into other significant events that occurred in 2008 and a bit of 2007 in the financial world. You can also read my thoughts on bailing GM out here. I also provide my thoughts as to why the financial crisis started at the end of the post, my complete article can be found here.

Significant Financial Events in 2008—————————————-

December 22 2008
GM CAW Boss said today the union might have to take wages and benefit cuts

December 19 2008
Russia Unveils Plan to Help Its Automakers Read the full story

Russian PM Putin today in Naberezhniye announced Russia’s plan to encourage sales of Russian made vehicles to help its domestic troubled car makers. Under the proposed plan, the Russian government wants its people to only purchase domestic cars, and would fully cover the costs to ship domestic cars across Russia to make them readily accessible. Under the plan, the government would also subsidize loans on cars less than USD $13,000. The plan has been criticized as the plan is too expensive and it simply doesn’t make economic sense to move vehicles across all of Russia. There are also concerns about the heavy government involvement in people’s lives. According to a recent report by Pricewaterhouse Coopers, less than 50% of cars sold in Russia were domestically made. Recently, the Russian government also introduced prohibitive tariffs on imported cars which have resulted in many protests. Aggregately, car sales in Russia are expected to drop by as much as almost 50% in 2009 because of the economic crisis and high unemployment.

Ottawa has announced it will pledge up to $2.8 billion in aid to the auto-sector in Canada, a proportional amount in terms of Canada’s 20% North American auto sector share. However, there is one big catch. Washington must budge first for those funds to become available. Canadian Industry Minister, Tony Clement, said at a conference the other day “we expect the American administration to announce something very soon,” and he also said that he believes a US bailout is imminent. Most recently, yesterday, the US Congress failed to pass $14 billion bailout, and GM subsequently announced massive production cuts that saw the temporary layoff of 3,000 people. I do believe a US bailout will come very soon, but the question remains, can GM, Chrysler, and Ford remain competitive and cut costs, or is this bailout going to lead to a cyclical pattern of more bailouts? The question remains, but I know one thing for sure, the people and the economy will suffer a great pain if they go under, and that’s why there will be a bailout.

Japanese carmaker Honda has just announced it will reduce production by an additional 119,000 vehicles due to lowering demand for vehicles as a result of the financial crisis. Honda already announced in November it would reduce production by 71,000 cars. The Honda November 08 report can be found here. The new production cuts will be reduced evenly across 5 plants until March 31 09 across North America. Honda continues to struggle with all other carmakers. Honda sales were down 32% alone in November 08; aggregately sales are down 5% so far in 2008 for Honda. However, Honda Pilot sales are up 4.5% The Honda stock opened about 5% down overnight from yesterday because of the production cut news. No further job cuts or any other cost reduction measures have been announced, but it wouldn’t be surprising to see yet more job cuts as a result of the scaled back production.

Auto parts manufacturer Magna International Inc. has announced it will be ceasing production at two if its plants in Ontario, Canada. The two plants are located in Aurora and Newmarket and both employee over 850 people. The closure comes as a direct result of the financial crisis, decreased product demand, and trouble in the auto industry. The good thing is that Magna will help employees by moving jobs to other operations and help employees find employment in related companies. People who will be laid off will be given a severance package. In Q3 ended Sept 30, the company announced sales of $5.5 billion (9% decline year over year) and reported a net operating loss of $112 million and a net loss of $215 million from the Ontario plants. Magna also stated reported complete vehicle assembly volumes in Q3 have declined by 40% to 25,231 units. The complete report can be found here in PDF format.

US Congress is set to vote on the $25 billion bailout for the top three automakers that is aimed to help stabilize the American auto industry later today starting at 10am. It is believed the movement doesn’t have enough support for the bill to be approved. The automakers have warned that if they don’t get help soon and if they all were to fail, the government would lose more than $150 billion in annual tax revenue and aggregately, more than 3 million people would lose their jobs.

Not everyone is on board with the bailout. People argue that these companies made bad business decisions; therefore they should be allowed to fail. Wyoming Republican Mr. Enzi doesn’t believe the big three should be bailed out and was quoted as saying that the bail out would be “another check issued by the taxpayer to solve a long-term problem with a short-term solution.” The Bush Administration supports helping the big three with the previously approved $25 billion fund, but not with new funding. Out of the big three, GM desperately needs cash now the most as it’s about to become insolvent by about March 09 which will have a profound impact on everyone if it goes under. GM also recently sold all of its stake in Suzuki to get much needed cash back. Chrysler is likely the best suited as it actually has about $11 billion cash on hand.

US House Speaker Nancy Pelosi has announced today that the big three Detroit automakers will be getting part of the $700 billion government bail out. Pelosi did not confirm how much money the companies will get but they are asking a combined $25 billion in loans. The amount of money that will be given to GM should be sufficient to bailout GM, which desperately needs a cash infusion or it will run out of money entirely by early March 2009. Pelosi said that the big three would need to develop better, more fuel efficient vehicles and restructure “to ensure their long-term economic viability” as a condition part of the deal.

United Auto Workers President Gettelfinger told reporters that automakers are struggling because of problems beyond their control, including the credit crisis. He also said that union labor costs are not the main problem and they only account for up to 10% of any vehicles cost made by the big three (GM, Chrysler, Ford). I personally believe the union is cutting into their bottom and line and making them less competitive because the other foreign automakers don’t pay nearly as much in total labor cost per vehicle.

I said it before that GM will be bailed and that we should bail GM out because if it fails, a catastrpohic chain reaction will hit the economy hard that could eliminate 1 million jobs alone. The Center for Automotive Research has also warned that the collapse of the Big Three could eliminate up to 3 million jobs and more than $150 billion in tax revenue for the US Fed over the next three years. However, all 3 wouldn’t fail, but even GM alone would hit everyone hard, especially the people of Detriot, which could result in more foreclosures. Scary stuff.

Since 2007, GM has lost 90% of its total value and it dropped by 25% alone just yesterday (Nov 10 08) and it is now trading at its lowest price ever and edging closer to $0. As part of GM’s aggregate cost savings plan to try stay in business, it has terminated 3,600 jobs effective immediately and has halted R&D expenditure completely. In addition, it has also stopped contributions to pension funds. Implicit costs at GM are now also skyrocketing. GM is inefficiently utilizing resources to maintain the company, including by paying fees to attorneys and lobbyists, instead of using resources towards the effort of further developing the company.  GM is continuing to burn cash, it can’t get credit as a direct result of the credit crisis, and I would expect it to run out of cash completely by March 09 assuming it doesn’t get bailed out.

GM needs to cut costs and move vehicles, but the question now is: why would you consider buying a GM vehicle? No rational buyer should buy a GM car right now. The company is too volatile and it is no longer an innovator because it has discontinued R&D expenditure therefore quality will further diminish. Also, how will a company that goes under service your vehicle?

However, the problem is GM is too big to fail. It can’t fail. People argue that if companies make bad investment decisions, they should be held accountable (and I agree), but people don’t realize GM is just too big to fail. If it does, everyone will suffer. If GM now goes under completely, the consequences will be profound as it employees close to 266,000 people and about 1,000,000 people would be directly affected with their jobs. And lets not forget the ripple effects where suppliers and other stakeholders would also lose business and also layoff yet more people. Where will all these people find work, what about pension beneficiaries? The costs are just too great for GM to fail.

The government needs to bail GM out, and I think it’s going to happen. The Obama camp hinted it would give GM money during the campaign, though there is no other indication as of yet. If GM acquired Chrysler about a week ago, at least, it would have gave GM more time (about a year) to reorganize as Chrysler has $11 billion in cash. Some would argue that would just be avoiding the inevitable because GM still wouldn’t produce quality vehicles and cut costs. However, a GM/Chrysler merger just isn’t likely anymore and the truth is that GM needs $11 billion in new working capital now otherwise it will run out of cash completely by March 09 and it will go under where we would all be adversely affected. If GM gets this money, I hope it learns its lesson and restructures management, cuts costs, and produces quality vehicles, than maybe, it can get out of this mess.

So, what do you think? If GM was bailed out, could it survive? Will it change? Is it too late, or do they simply not desrve to be bailed out? Do you think its just too big to fail?

Costco Wholesale Corp sales have dropped by 1% in October, citing unfavorable exchange rates, while analysts were expecting about a 3.5% increase. Coscto has 546 warehouses, including 400 in the US, and 46 in Canada. Rationally, we can also expect that sales have decreased because consumers have curbed descrietionary spending because of global economic concerns. This is also evident in higher priced goods such as cars. Toyota has seen its lowest profits since 1990 where profits dropped by 70% last quarter. Toyota’s net profit during the July-September quarter had plunged by 69%. In addition, Isuzu, another Japanese car maker, also declined its profit forecast to ¥40 billion, down from ¥85 billion. All other car makers have also experienced significant. It is clear that people are not spending their money amid global economic concerns. In the next few days, I will write do a write up on what caused the global financial crisis as people are still not very sure how it all happened.