Bailing out the automakers: are finished goods assets?

So the big autos are going to get bailouts. But there is a condition attached - they must have a plan to be "viable" by the end of 2009.

My suggestion? Use this crisis to make fundamental changes to they way they manage and report the bottom line. My (limited) understanding is that currently most of the big autos treat finished goods as assets, which looks great on the balance sheet and makes investors happy. But are they really assets?

TheAge newspaper just published an interesting article on the mounting costs of new cars that are sitting idle in storage yards as a result of the downturn. It includes an estimate that the australian auto industry losing approximately $2M a week just in storage costs, let alone in the depreciating value as those vehicles age and become less attractive to customers.

These cars are not assets. They are liabilities. They are non-liquid, have high "operational costs" (storage) and are losing value. A very bad investment indeed.

I think the balance sheets of the big autos need to be changed to reflect this. I would suggest instead focusing on ROI, as calculated in a throughput accounting model as:

ROI = (throughput - operational expense) / inventory
where throughput = net sales - totally variable costs

In this model, the bigger the inventory, the proportionally smaller the ROI (the same goes for the operational costs, although this often has less impact). Looking at things this way immediately shows the ridiculousness of treating these cars as valuable assets.

My understanding is that the Japanese auto makers report in exactly this way. Revenue is not recognised until the car is sold to a customer - not when it rolls of the production line to sit in a big finished goods yard. In the past, however, this sort of change would probably have been suicide; any firm making this change would take a massive hit to the balance sheet that would have decimated the share price. But given they now are already in a huge mess, perhaps this is exactly the time to be making big changes like this.