JOINT CCCT/TPC PLANNING MEETING - THURSDAY, JANUARY 31, 1985 3:15 P.M. - ROOSEVELT ROOM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R002303850004-4
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 7
• Document Creation Date: December 22, 2016
• Document Release Date: October 19, 2009
• Sequence Number: 4
• Publication Date: January 30, 1985
• Content Type: MEMO

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CABINET AFFAIRS STAFFING MEMORARDUM
Date: 1/30/85 Number: 169127CA
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
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Interior
Agriculture
Commerce
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HHS
HUD
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Energy
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Counsellor
UN
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0
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McFarlane
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Executive Secretary for:
CCGT
CCEA
CCFA
CCHR
CCLP
CCMA
CCNRE
There will be a joint meeting of the Cabinet Council on
Commerce and Trade and the Trade Policy Committee on
Thursday, January 31, at 3:15 P.M. in the Roosevelt Room.
The agenda is the "State of the U.S. Automobile Industry."
A background paper is attached.
Assistant to the President Associate Director
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 MEMORANDUM FOR Cabinet Council on Commerce and Trade
FROM: Malcolm Baldrige
Chairman Pro Tempore
SUBJECT: State of the U.S. Automobile Industry
Attached for your use at the joint CCCT/TPC meeting of January 31,
1985, is the Commerce Department staff analysis of the state of the
U.S. automobile industry in 1983:
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Condition of the U.S. Auto Industry
In 1984 U.S. manufacturers sold an estimated 11.5 million motor vehicles (7.95
million cars, 3.5 million trucks), 22.3 percent above sales in 1983.
Production increased about 18.5 percent. At the end of 1984, total auto
industry employment was estimated to be about 880;000 with about 50,000
workers still on indefinite layoff.
As of September 30, 1984 the financial condition of the U.S. auto companies
was at its best level since 1978. The U.S. companies have largely recovered
from the recession and are in much stronger financial shape. In both 1983 and
1984, the companies earned record profits. As of the end of September 1984,
industry profits stood at $7.6 billion, far above"the $6.2 billion they earned
for the full-year 1983. The industry is expected"to report full-year 1984
income of around $10 billion. In constant 1978 dollars, this figure would be
$6.3 billion, well above the 1978 level of $4.9 billion.
An examination of industry financial statements as of September 30, 1984,
shows that the company balance sheets have not returned to 1978 levels.
However, due to changes in the basic financial and operating structure of the
industry since the late 1970s, they may never do so. For example, the
industry has implemented aggressive working capital management programs
designed to reduce receivables and inventories (the "just-in-time" system),
while stretching payables. This program reduces liquidity, but increases cash
flows.
Balance sheet leverage, though higher than in 1978, is low compared with most
industries, and continues to improve. Barring radical increases in Japanese
market share, combined with a severe recession, cash flows should be
sufficient to finance capital expenditures, debt repayment, and dividends
without substantial borrowing. (Possible exceptions are Chrysler, whose 1985
tax liability may squeeze its cash flow, and AMC, whose earnings are still
modest).
Controlled By: C "V
Deputy Deputy Asst. Secretary or~
Automotive Affairs and Consumer Goods
Decontrol On: OADR
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Auto Industry Sales Production and Employment
Sales of automobiles continued to recover strongly in 1984, increasing 13.2
million uniover
car were oun7.95
its in
1984. Japanese cars sales declined 0.5 percent in 1984 to 1.91 million
units: Import penetration declined from 26.0 percent in 1983 to 23.5 percent
in 1984. Japanese market share fell from 20.9 percent in 1983 to 18.5 percent
in 1984 because of the restraint and the strength of the domestic car market.
Domestic auto production rose 14.5 percent in 1984 over 1983, totaling 7.76
million units in 1984. Industry employment rose substantially, from an
average of 757,800 in 1983 to an estimated average of 866,000 in 1984. While
t
his is a considerable improvement, total industry employment is still well
below the
illust ra1ted978 ae14.5fpe1.03 rcentiincreaserinr1984P n
production withimprovement,
only a .3
percent employment increase, suggests no return to 1978 employment levels.
Financial Condition
The financial condition of U.S. automobile manufacturers at the end of 1984
was at its best level in several years. Most of the companies' 1984
profitability indicators exceeded those of both 1983, a highly profitable
recovery year, and 1978, the last good year prior to the recession. Higher
earnings led to correspondingly greater cash flows in 1983 and 1984. Balance
sheet indicators improved steadily following the recession, but remained below
most 1978 levels as of September 30, 1984.
The cumulative effects of years of low earnings, losses, and large borrowings
to finance huge capital outlays are still evident when examining balance
sheets. For example, neither balance sheet leverage nor liquidity has
returned to 1978 levels. These factors, together with heightened foreign
competition, are the principal reasons the chief debt rating agencies (i.e.,
Moody's and Standard & Poor's) have not restored fully the 1978 ratings.
Table I
Senior Long-Term Debt Ratings
Moody 's Standard & Poor's
1aaaaa8a Aa2 GM Aa aa22 AAA AA+
Ford Aaa Al AAA A-
Chrysler Baa Baa3 BBB BBB
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management, and the product mix shift have enabled the companies to widen
their margins above those of 1978--on slightly lower volume. The.industry's
operating profit margin was 7.10 percent in 1978, compared with 7.17, percent
for the first 3 quarters of 1984. The 1984 amount would have been higher had
GM's, margin not deteriorated. GM experienced parts problems with new
front-wheel-drive models, production disruptions related to model changes, and
the loss of one week's production due to the UAW strike. These factors also
caused GM's operating profit to fall below that of 1978.
Return on sales rose from 4.03 percent in 1978,!to 6.38 percent for the first 3
quarters of 1984, reflecting the aforementioned improvements and substantially
increased earnings from unconsolidated subsidiaries (primarily finance
companies). Unconsolidated earnings tripled between 1978 and 1984, as banks,
long the main source of financing of retail purchases, retreated from the
market during the downturn of 1980-1982. Finance companies filled the gap and
experienced rapid growth in their receivables volume and net interest income.
Cash Flow
Chiefly because of record earnings, the auto companies' internal cash
generating ability was very strong in 1983 and.,1984. Internally generated
cash (cash from operations) was $12.3 billion for the first 9 months of 1984,
while the year-earlier amount was $8.9 billion. The full-year 1984 figure
should exceed $16 billion, compared with $15.4, billion for full-year 1983.
When compared with 1978, the companies' ability to generate cash internally to
cover capital expenditures, debt repayments and dividends rose. The ratio of
cash. from operations to capital expenditures, net long-term debt repayments,
and dividends climbed from 1.04 for full-year 1978 to 1.43 for full-year 1983
before dropping slightly to 1.32 for the first'9 months of 1984.
This improvement belies,some important developments. First, dividends were
low by historical standards in 1983 and 1984. The dividend payout rate
dropped to 18.5% as of September 30, 1984, compared with 44.8% for 1978.
Second, capital expenditures were low in 1983 compared with 1978, as the
industry reached a trough in its capital investment cycle. The ratio of
capital investment to sales was 5.8% in 1983, versus 6.4% in 1978. At the
same time, however, debt repayments increased in 1983 and 1984, as the
companies' stronger cash flows enabled them to reduce significantly the
borrowings incurred between 1980 and 1982.
Future cash flows should continue to be strong! although capital expenditures
and dividends, which are expected to increase rapidly starting in 1985, might
preclude continued accumulation of large cash balances.
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Table III
Balance Sheet Indicators: U.S'. Big Four
December 31
September 30
1978
1983
T983
T984
Working Capital
$12,270
$5,700
$2,633
$9,011
Current Ratio
1.55
1.19
1.09
1.27
Quick Ratio
0.77
0.70
0.55
0.81
Long-Tenn Debt-to
Equity Ratio
0.11
0.25
0.27
0.16
The companies' balance sheets have strengthened considerably since the.
recession, but they have still not returned to 1978 levels. Balance sheet
leverage, as measured by the ratio of long-term debt to stockholders' equity
(common and preferred stock, retained earnings, and foreign exchange
adjustment), improved from .25 on December 31, 1983 to .16 on September 30,
1984, but was still above that of December 31, 1978--.11. While the
companies' excellent cash flows permitted them to: repay large blocks of debt,
owners' equity (though sizeable) was lower than it would have been because of
cumulative losses and low earnings between 1979 and 1982. Owners' equity was
also adversely affected by the strength of the dollar, which reduced the value
of foreign assets and earnings when consolidated with American operations.
Additionally, fourth quarter 1984 owners' equity 'growth was adversely affected
by recent stock repurchases by Ford and Chrysler..
Liquidity followed a pattern similar to that of leverage. Working capital
rose from $5.7 billion at the end of 1983 to $9.0 billion on September 30,
1984; it was $12.3 billion at the end of 1978. Chrysler's working capital was
negative on September 30, 1984. The current ratio (current assets/current
liabilities) has also improved, but at 1.27 on September 30, 1984, it was
still below the 1.55 level on December 31, 1978. :Part of the drop in
liquidity resulted from the advent of "just-in-time" inventories. However,
much of the reduction also arose from the effects; of the recession during
which companies stretched payables and accrued liabilities while reducing
receivables in order to strengthen cash flow.
The quick ratio, which is the companies' most liquid assets (cash, marketable
securities, and receivables) divided by current liabilities, exceeded the 1978
level. It grew from .77 at the end of 1978 to .81 on September 30, 1984. As
noted earlier, the industry's strong cash flows were the primary cause of the
buildup,*and should help the industry weather the:next cyclical downturn.
However, even this rapid cash buildup was not enough to restore entirely
working capital and the current ratio to 1978 levels.
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