“Life is a highway, and I wanna drive it all night long...”
- Tom Cochrane

“Road trip!” Remember those epic words?

When I was seven or 8 years old, my dad and I took a cross-country trip in a beaten-up old VW bug. He had bought it for the princely sum of one dollar, from a friend who had simply gotten tired of fixing the thing. (It needed about $900 worth of repairs.)

I’ll never forget that little bug. It was light blue with rust accents from all the dings and dents. The shifter was a crystal doorknob taken from someone’s house. And the entire back seat had been torn out, making room for a sleeping bag area where dad and I could sleep.

The trip took us from San Jose to Detroit... then down to Atlanta... then a westward swing through El Paso, Texas, and back home again to Cali.

On some of the wide-open stretches where no one was around for miles -- just us and the 18-wheelers out in the great American landscape -- Dad would sometimes let me drive. I would sit in his lap and steer while he worked the pedals. For an 8-year-old, that was pretty much the coolest thing in the world.

Like rock and roll, the road trip will never die. But it’s certainly taking a beating these days. Based on current trends, this will be the first year Americans drive less since 1980.

The road used to be a symbol of freedom. There are countless books and songs written about it, some more well-known than others. But thanks to the cost of a gallon of gas these days, that symbol of freedom has morphed into a symbol of oppression. The highway has become a driveway: “You want to drive how far? Do you realize how much gas money that would take? Maybe we should just fly...”

My Other Car Is a Hot Wheels

Detroit’s “Big Three” -- Ford, GM and Chrysler -- are really feeling it, too. With the three-ring circus unfolding on Wall Street, many haven’t noticed how bad things have gotten for motor city.

There are plenty of stats to illustrate just how hard up the big automakers are right now. But here is one of my favorites...

The market cap of General Motors (as of this writing) is $6.4 billion. The market cap of Mattel Inc. -- the company that makes “Hot Wheels” -- is $7.3 billion. (The tickers are GM and MAT respectively.)

So basically, it’s more profitable these days to make those little toy cars we all used to scoot around the kitchen floor as kids than it is to be the No. 1 or No. 2 volume automaker in the world.

If ever there were a lesson that “bigger ain’t necessarily better,” this would be it. General Motors’ total revenue in 2007 was more than 30 times that of Mattel Inc’s... roughly $181 billion, in comparison to just under $6 billion.

The trouble is, GM booked a whopping loss of nearly $39 billion in 2007... whereas Mattel showed a profit.

Trouble in the Heartland

And here’s an ironic thing: It used to be that U.S. car market was a huge profit center for Detroit’s Big Three. The rest of the world was more of an afterthought.

Now things have been flipped around. It’s the international market that looks good, and the home market that’s dragging the numbers down.

The Big Three are making decent money in regions like Asia, Africa, South America and the Middle East. At home they are drowning in red ink, thanks to sky-high labor costs, tightened belts, and a nasty drop-off in truck and SUV sales. Gas-guzzling SUVs and oversized trucks were huge cash cows before the gas crisis hit. For many years, the American love affair with “big iron” helped Detroit fend off the onslaught of smaller foreign models. Not anymore.

And how about the overseas automakers? How are they doing? I checked in with Sara Nunnally, our globe-trotting foreign markets analyst, to find out.

Sara’s view was surprisingly upbeat. “You'd be surprised to see how well foreign automakers are performing,” she said.

“Take Honda for example... When you combine high commodity prices and a strong Japanese currency, you might expect tough times for a big exporter like Honda. But Honda actually just increased its quarterly net profits by 8%! Its yearly profit forecast remains strong, too.

“And Toyota, while forecasting a drop in profit for this year, is still expected to top GM's sales for the year, and for the first two quarters is living up to that expectation, selling 300,000 more vehicles than GM so far.”

We already saw that bigger isn’t always better with the GM / Mattel comparison. The ultimate bottom line is profit, not gross revenues or market share. But the fact that Toyota is now so close to confirming the No. 1 crown, and turning a fair profit while doing so, speaks volumes.

The Future Is Elsewhere

So what is the answer to the Big Three’s problems? We already know those problems are set to get worse... much worse.

The 2007 numbers for GM, Ford and Chrysler were ugly as sin -- and that was all before gas skyrocketed to $4 a gallon, consumers started cutting up their credit cards, and banks started pulling in their horns on leasing and finance programs for pricey vehicles.

If there were no political element, the solution would be painful but clear... the Big Three should say goodbye to American markets. Let North American operations die, or otherwise naturally shrink back to a viable size.

(I’m reminded here of a tree I came across hiking through the Australian desert. This tree managed to survive countless droughts by letting its limbs die off from the top down, keeping precious water reserves in the trunk and roots. When the rains came back, the tree would resume growth in its upper limbs again.)

A strategy of “goodbye U.S., hello foreign markets” only makes sense when you think about it, for a number of reasons:

• The Big Three’s “home-turf advantage” has long been gas-guzzling trucks and SUVs. That advantage is completely wiped out by $4 a gallon gas. Even if gas prices ease, the big iron days aren’t coming back.

• The Big Three were struggling enough in U.S. markets as it is, even with SUVs and big trucks to bolster their profits. Now all they have is a hope and a prayer of getting competitive in the small car and hybrid markets before it’s too late.

• American labor costs -- legacy costs, union costs, healthcare burdens and so on -- are just too high for the status quo to continue in any shape or form. Hence the slow death marches in GM’s and Ford’s share prices. (Chrysler is private now.)

• The opportunity to build on promising developments elsewhere -- to serve new, growing markets with new, cost-efficient plants and lower labor costs -- exists overseas. This is just a cut-and-dry statement based on the numbers. It’s a matter of looking at where the profits are coming from, where the losses are coming from, and then saying “Hey, how about more of this and less of that?”

Politics Will Prevail

Pretty straightforward stuff, right? Obviously there is a lot more detail and more hard questions to consider. But the back-of-the-envelope calculations aren’t hard to figure out. North American operations should be pared back, perhaps dramatically so. The focus should be on profit, not unsustainable legacies. With all those new car buyers waiting in the wings in emerging markets, the Big Three can make money overseas. They just can’t do it at home.

But all that reasoning goes straight into a cocked hat once politics gets involved. No American politician worth his salt would ever let the Big Three wither away at home. (If you thought the fuss over Anheuser-Busch was something, that would be a tempest in a teapot compared to this.)

The political reality is that the Big Three couldn’t let go of their North American operations even if they wanted to. To do such a thing just wouldn’t fly politically. Not with the state of Michigan, not with the next White House administration (regardless of who wins), not with the labor unions, not with tens of millions of nostalgic Americans, and so on.

Warning: Bailout Ahead

What does that mean?

Ultimately, it means another massive bailout is coming. From a political standpoint, the Big Three have just as much of a “too big to fail” component as Fannie and Freddie do.

And how can they do anything but fail, given where things are headed? As we already pointed out, 2007 was an “annus horribilis” for these guys, and yet it might be a walk in the park next to the second half of ’08.

So what’s the upshot here? Get ready to short GM and Ford into the ground? Perhaps. I wouldn’t short them willy-nilly, but on upticks and false-hope jaunts that give a chance to play Whack-a-Mole, sure.

The real upshot, in my mind, is that America is rapidly becoming “bailout nation” in a big way. With each successive bailout, you hear a chorus of voices saying that was the last of it, that was the worst, now things will turn the corner and all will be well…

Uh-uh. Wish it were so, but it ain’t. After we get through bailing out Fannie and Freddie, we’re going to have to bail out Detroit. And maybe we’ll be bailing out someone else along the line, too, as all our debt-fueled chickens come home to roost.

And at some point in the not too distant future, overseas investors may well get fed up once and for all with bailing out the U.S. dollar... and then the real fireworks will begin.

Warm Regards,

JL

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