Chrysler’s bankruptcy marks dawn of new reality

Car off cliff.jpg

The International eChem team are very experienced in turnarounds and restructurings. We have undertaken these both as employees within our former companies, and then as advisers. This has taught us to be alert for the ‘tipping point’, when a situation begins to change, for better or worse.

The blog believes the Chrysler bankruptcy is one such ‘tipping point’. Before it happened, one could still hope that pre-2008 US demand levels might return one day. Now, it is clear we are on a different path. Two factors lead to this conclusion:

Auto plant closures. Chrysler will shut most of its plants for the duration of the bankruptcy. GM have also announced major closures. Both companies have massive inventory (Chrysler 86 days, GM 122 days). Closing so many plants, so abruptly, risks bankrupting many suppliers. But the Obama administration seems to have now decided that there is little alternative. Average auto sales incentives in April increased by 29%, or $680 per vehicle, as companies fought for survival.

Future market size. US autos/housing are core to chemical demand:
• Each new auto consumes $2.7k of chemicals, according to the American Chemistry Council. US auto sales averaged 15m – 17m from 1995 – 2007, worth $41-46bn of chemical sales. Today they are running at a 9m rate, worth only $24bn. And GM’s new business plan forecasts the future US market will be just 10m vehicles a year.
• Each new home consumes $16k of chemicals, according to the ACC. In 2006, starts were running at a peak rate of 2.2m, worth $35bn of chemical sales. Today they are running at a 500k rate, worth just $8bn. Even in 1975, 1981 and 1991, starts only fell to 800k.

Why, then, is this a ‘tipping point’? The blog has long argued, here and in the Financial Times, that recent housing market growth (in the US and elsewhere) was based on the “illusion that house prices would always rise”. And rising prices also allowed home owners to extract mortgage equity – supporting a whole range of consumer markets, particularly autos. Now this illusion is well and truly shattered. Banks are no longer able to make the loans that made the dream appear possible.

Chrysler’s bankruptcy therefore marks the ‘tipping point’, when the first major company is finally forced to adjust to a permanently lower level of demand. A similarly brutal restructuring is probable in US housing markets, where new home inventories are 11 months of demand.

Chemical company CEOs will need to carefully consider the implications of the Chrysler bankruptcy for future levels of global demand.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

, , ,

One Response to Chrysler’s bankruptcy marks dawn of new reality

  1. Napoli's Desk 5 May, 2009 at 3:04 am #

    With Chrysler now in bankruptcy, our attention will turn to whether Obama’s promise of a short and surgical bankruptcy, coupled with an alliance agreement with Fiat, will ultimately be realized. http://pfx.me/lK

Leave a Reply