Whenever I talk about the future of legacy autos, and the fact there is a good chance
that their ICE businesses could all go bankrupt, well I am always left with multiple comments
about how they will just get bailed out.
Alright, I am not necessarily disagreeing with you, but I don't think it will be a similar
bailout as last time.
In fact I actually think that legacy autos are already pre-planning their bailout.
You see these legacy companies don't care about moral hazard.
They will just run hot, and redline the company to get the most profits, without worrying
about tomorrow.
Why?
Because tomorrow, the government has got their back.
This was what confused investors before the GFC.
The banks had all these toxic assets, but didn't care, because they knew the government
had to bail them out.
This is the cronyism side of government.
An average senator spends 30 hours a week fundraising, because there is a 98% correlation
between having a bigger campaign budget and winning.
Well these donors aren't donating to charity, they want something in return.
And we witnessed this last year, with the UAW.
The UAW is a large supporter of Biden's campaign, and as a result Biden tried to return the
favor by hooking them up a sweet EV rebate, just because they have unionized labor.
I think it was Franklin D Rosevelt who actually made contributions from unions illegal, as
it was so corrupt.
And I believe the unions circumvented that law by having individual union members donating
personally instead.
I am not necessarily 100% against unions, there are argued benefits.
It's the corruption that unions create that's the problem.
And it worked, GM got their bailout, and Chrysler's been bankrupt in the past too.
The question is this time, how can they be bailed out?
Well it's simple the government lends them
lots of money or buys into the company and provides capital to keep you going through
the recession to come out the other side, and then the bridge loan is repaid.
Except what is waiting for them on the other side?
An ICE business still intact?
What are the government even going to be bailing out here?
I mean sure, legacy will downsize during the recession due to plummeting sales, make layoffs,
close facilities, but are still losing too much money, they need some assistance to help
with the cash flow, until they get back on to their feet and the economy returns.
But what happens when the economy returns, and those ICE sales, well, they are still
falling?
How are they going to pay back their government bailout if no one wants to buy their products,
even though consumers can afford them again?
I mean it's not hard to notice the emptier
looking car dealerships these days.
Something is up.
Sure, component shortages with supply chain issues.
But it's possibly a deflection as to the real truth, no one wants smelly old noisy ICE cars
any more.
They are antiquated.
People come up to me often, saying they are interested in an electric car.
Now where I live is not quite the same as somewhere California.
Teslas are not quite everywhere.
Also cars are generally more expensive, as is gas.
My point is, as a society they are not as educated about Teslas.
Despite that, there is a definite conscious movement to people choosing electric as their
next car, even if it is a Nissan Leaf.
And they feel it would be stupid almost to buy an ICE next.
Especially if you have $50 to 60,000 to spend, thats a lot of money to spend on something
that will quickly be antiquated.
Oh so for legacy they are getting hit double hard in this recession.
For starters its tough enough for them right now with Tesla eating their market share with
a product they don't know how to compete profitably.
Then on top of that the aggregate demand drops due to a recession.
Well perhaps they can fall back on their cash position and carry them through, except that
happens seems to be about negative 100 billion dollars, probably wont last long.
HELP!
They call.
But it's all good, like I said, they've pre-planned
this.
Now you do realize there is a possibility that some of these legacy execs actually do
have a brain and the task in front of them is just too difficult.
But you see we are all too naive.
We are thinking how will legacy be able to get out of this mess, with the tools at hand.
The tools being good business practices.
Like I said, we are naive, legacy don't have to play in the rules based society of business
that we know.
No, their planning wasn't about trying to get a more efficient power train.
Their planning was working out the best way the government can carry them forward.
So what did they do?
They got the government, and by extension the tax payers, likely the majority of people
I am talking to now, well they got you to pay for it.
So they get some sort of bail out, but what good is it, if no one wants to buy your products
any more.
The government could have bailed out Blockbuster Video too, but then there would just be all
these zombie video rental stores.
I don't think the US government would want to support zombie corporations just making
products for the sake of it and not even selling all of them to the consumer.
Zombie corporations like are a in Japan, and a way of managing, for lack of better word,
their insane debt.
Whilst legacy's ICE business is going down in flames, at the same time, they are very
close to another industry that happens to be a whole lot more profitable, the EV industry.
In fact they have already started planting their seeds for their EV businesses to flourish.
They are going big, I mean really big, almost betting half of their company's market caps
on growing out cell and battery factories with new EV plants.
Some of them are boring as big as $50 billion to do this.
That is a lot of money.
I mean seriously, its enormous, how are they going to pay that much back, especially if
we go into a recession and they end up going bankrupt, how will a bail out fund that?
Oh wait, oh that's it, isn't it?
That's the bail out?
Legacy have taken the liberty of, perhaps you might call it, a pre-bailout for themselves.
That's right, they decided to borrow the bailout money before they even received it.
In fact they are borrowing as much money right now as physically possible, to expand as big
as possible with battery supply market share, and with the knowledge of knowing they don't
have to pay it back.
What's the worst that could happen?
Either legacy bet the entire company on EVs, if it doesn't work out they go bankrupt.
Or they don't invest in EVs and go bankrupt anyway.
There is nothing to lose, and with the former, investing in EVs, there is at least something
that can be bailed out, a legacy EV business.
That's right, your tax dollars will go to building up legacy autos EV business to compete
with the Tesla business you invested in as the future.
And that is governments and cronyism for you.
This halts our innovation and standard of living.
In fact most autos weren't supposed to get this far.
Tesla was quite naughty getting past all the other hurdles that already been set in place
for so many auto companies to fail over the decades.
Yet Tesla managed to escape, although only just at times.
Tesla survived, and made it, and then flourished.
It would seem legacy can't do as much to hold back Tesla now, and instead need to actually
do some work for once and actually make a half decent electric car, and of course with
the governments help.
And what about Tesla, will they receive a
bail out of some sort too?
It has to be industry wide.
Well perhaps the government may decide this bail out is just for autos with unions, or
ones that only make ICE or something.
Either way Tesla likely doesn't want it anyway.
They don't need the government to succeed,
I do think we are under estimating some of
the tactics that legacy autos may have up their sleeves.
For them right now, it's getting close to a do or die moment.
With a bail out like this, then it may mean that legacy survive another round, and are
even able to make it so far as to make a profitable EV.
Of course this will be short lived until legacy run into the next roadblock due to the fact
they are companies that specialized in making engines, not software.
Yup, their next roadblock is going to be FSD.
Anyway, I think this is how the bail out will occur, it will be the governments rescuing
all the EV sides of the business, and trying to transition as many workers over, and likely
redesign some of their existing factories.
Remember though, this doesn't suddenly mean Ford will be able to make more EVs, it just
means they may last long enough to make EVs.
But it's still going to take Ford or GM years until they are at a million a year run rate,
and of course producing non-profitable EVs until then.
So this recession might finish of their ICE businesses, but there will still be years
of losses in the EV businesses.
Perhaps the market will give them a higher p/e ratio so they can float some more shares.
Although that EV bubble has somewhat burst for now, and without profits, or a clear path
to profitability, it might be hard, and the market has likely gotten wiser somewhat since
Nikola, Lucid and Rivian.
This bailout might cover their EV debts of $30 to $50 billion, but then legacy are still
stuck with an EV business likely losing billions a quarter, if Rivian is anything to go by.
It will require serious ramping until it gets to profitability.
There may still be some profits coming from the spare parts side of legacy business, maybe
even some car loan income too.
But will it be enough?
Even with a bail out, its a tough job.
But without one, it looks like a sheer impossibility.