Out of the Spotlight, an Industry Copes With Crisis

New  York Times: November 28, 2008

When you live and work in New York, it is easy to succumb to the fallacy that the financial crisis is all about us. It’s about giant, New York-based institutions failing or coming close to failing. It’s about high-stakes weekends in the offices of the New York Federal Reserve. It’s about credit-default swaps and mortgage-backed securities and the wild swings of the New York stock exchange. It’s about Jamie Dimon and Richard Fuld.

But of course it’s not just about us. It is not even primarily about Washington, where so much of the response to the crisis —$700 billion bailouts! Front-page Congressional hearings! Economic summit meetings! — has taken place.

No, it is about everybody, in every part of the country: neighborhoods awash in foreclosures and For Sale signs. Layoffs at the worst possible time. Small companies struggling to stay alive. Credit card companies raising rates unconscionably. People with perfectly fine credit scores finding it all but impossible to get loans.

The credit crisis is rippling up and down the economy in ways that may not create obvious headlines but that affect the way people do their business and live their lives. People, for instance, who sell and drive trucks.

“Even in good times, the trucking community works on razor-thin, single-digit margins,” said G. David Gerrard, who runs a Chicago-area business that is the largest truck dealership in the United States. “If somebody bumps your lending costs by three basis points” — that is three hundredths of a percent — “it is a big deal. There is no price elasticity.”

He continued: “We have a customer here in Chicago, a 50-year-old company, that just shut down. It had all of its eggs in one basket — 80 percent of its revenues came from an auto parts company that just liquidated. I have another customer with 280 to 290 drivers that had its first layoffs in 40 years. They laid off 20 drivers. One truck deal blew up when we discovered the guy was four months late on his mortgage payments. I have guys who buy 25 trucks a year from us who aren’t buying anything this year. We sold 38 percent fewer units in 2008 than we did in 2007.”

I had gone to Chicago to learn about the effects of the credit crisis on a large, industrial, somewhat under-the-radar company called Navistar, one of two independent manufacturers of trucks and buses in the United States. Founded at the turn of the last century as a maker of agricultural equipment, it was known as International Harvester until the mid-1980s (truckers still call it “International”). The company has survived two World Wars, the Great Depression, a near-death experience in the early 1990s, and, most recently, an accounting problem severe enough to cause it to be delisted for almost a year and a half from the New York Stock Exchange.

Because it is conservatively managed — no fancy financial engineering, no excessive debt, no risky loans to customers — Navistar is going to survive this crisis as well. But that doesn’t mean it isn’t feeling any pain, or that it doesn’t see the effects of the crisis all around it. On the contrary, companies like Navistar see the effects of the financial crisis far more clearly than most policy makers do. Because trucks haul 70 to 80 percent of everything we buy, truck drivers and trucking companies feel even the slightest economic downturn. They’re on the front lines of the crisis.

Mr. Gerrard, a garrulous, animated, 50-year-old executive who looks like a retired middle linebacker, runs a huge Navistar dealership that generates around $200 million in annual sales. Outside, in the company’s lot, stood rows of trucks of all sorts, from basic city delivery trucks to spacious truck cabs priced at more than $100,000. Mr. Gerrard took over the dealership several years ago, when Navistar concluded it needed to bring in new management, and he’s been whipping the place into shape ever since. He employs 400 people in and around the Chicago area.

Thanks to cost controls and other measures Mr. Gerrard put in place, the dealership still expects to make a profit this year, despite the drastic drop in sales and revenue. He is managing his receivables very tightly, he told me — even going to the homes of customers who are in arrears on their payments. Since the financial crisis began, he hasn’t had to lay anyone off. But he is consolidating two shifts into one, and getting rid of a lot of overtime pay. His employees aren’t complaining, though, not in this environment. They still have jobs.

Like most companies in America right now, a crucial issue for Mr. Gerrard is credit — in his case, credit for his customers. Navistar has a captive finance company, Navistar Financial, which is the trucking equivalent of GMAC. But its cost of capital has risen sharply, thanks to the crisis. That means Mr. Gerrard’s costs have risen as well, since Navistar Financial supplies much of his financing needs.

Perhaps more important, it means that it costs his customers more when they need loans to buy a truck. What’s more, other lenders, like GE Capital, have ceased making truck loans in the Chicago area. When I suggested to Mr. Gerrard that this must be good for Navistar’s business, he shook his head vigorously. It is impossible for Navistar Financial to make 100 percent of the truck loans, so the withdrawal of other lenders means that trucking companies will not be able to get loans to buy vehicles.

“We have situations where customers need or want trucks but they can’t get financing,” he said. “They are really, really struggling.”

The next morning I drove out to Warrenville, in the Chicago suburbs, to visit Navistar’s headquarters. The company’s chief executive, Dan C. Ustian, had just returned from Washington, where he had attended a big executive conference held by The Wall Street Journal. He had originally been put on a panel to tackle energy and environment — a natural spot for a truck executive — but he had asked to be moved to the finance panel instead.

As I quickly discovered, the state of lending in the financial crisis is his most pressing concern, far more than, say, the new emissions requirements on diesel engines that are mandated for 2010. No sooner had he shaken my hand than he launched into a passionate speech about the failure of the banking industry to do what it was supposed to be doing to help get us out of this crisis.

“It appears that money is being loaned by the government to the banks at a very attractive rate, and that money is not getting down to consumers or businesses,” he said. “We have had 2,500 bankruptcies in our industry in a nine-month period. You can’t believe how many of those trucking companies have been in business a long time, and they’re profitable, but they can’t get working capital. And when they can get it, they have to pay an arm and a leg. Some of the midsized customers we do business with are paying 14 and 15 percent for money, with a lot of onerous covenants. So that is what is happening to our customers.”

Like Mr. Gerrard at the dealership, Mr. Ustian was fairly sanguine about Navistar’s own prospects. The company, he explained, had happily negotiated a five-year financing in January 2007, at very favorable rates, which was helping keep its own capital costs low even as everyone else’s were soaring. But that didn’t mean there wasn’t going to be pain. When I asked him about layoffs, he sighed. “Yeah, for sure, they’re coming,” he said. He also explained that in a normal economy, this should be a time when truck sales increase. The truck business is highly cyclical, and the industry was just coming out of a low point in the cycle. What’s more, there is usually a big uptick in sales in the year before new emissions standards take effect, because the new engines required to meet the standards push up the cost of a truck by thousands of dollars.

But that wasn’t happening this time. “We were gaining in market share and overall sales” earlier in the year, Mr. Ustian said. But then came the traumatic events of September — Fannie and Freddie, Lehman Brothers, American International Group, the bailout bill and all the rest of it — and “it just stalled,” he said. “You could see it starting to get better, and then it just collapsed.”

Something else happened to Navistar in September. Its stock price went into free fall. After working through its accounting issues, the company was relisted on the New York Stock Exchange in July, with its stock in the 60s. (It had traded over the counter during the delisting.) But in a two-month span between mid-September and mid-November, it dropped from $62 a share to $15.

Mr. Ustian found this bewildering — and more than a little frustrating. On the one hand, other trucking companies were suffering similar declines, and truck sales were certainly down. On the other hand, his company’s fundamentals hadn’t really changed all that much between September and November.

So what was going on? When Navistar was delisted in February 2007, large institutional investors like pension funds had to get rid of the stock. The shares were picked up by hedge funds, which at the peak owned well over half of Navistar’s stock.

Though no one at Navistar can prove it, they strongly suspect that the stock has been hammered because hedge funds, badly hurt during this phase of the financial crisis, have been forced to sell some of their more liquid positions to return money to exiting shareholders. I suspect this theory is correct, and it would be yet another way that fallout from the financial crisis has spread from New York to the rest of the country.

“My opinion is that it is going to get worse before it gets better,” Mr. Ustian said, as I prepared to leave. He wasn’t talking about Navistar anymore, but about the American economy. “Unemployment is going to get worse. We have to free up money so that people have confidence again to spend. It’s psychological. We have to get some confidence back.”

This article has been revised to reflect the following correction:

Correction: December 2, 2008
The Talking Business column on Saturday, about the effect of the credit crisis on truck manufacturers and dealers, misstated the singularity of Navistar, a Chicago-based maker of trucks and buses. It is one of two independent American truck makers, not the only one. The other is Paccar, which makes the Kenworth and Peterbilt brands and is based in Bellevue, Wash.

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