Alan Mulally On Pent-Up US Car Demand

I caught Ford CEO Alan Mulally on one of the two business cable networks, CNBC or Bloomberg, earlier this week on the occasion of the firm's earnings release.

Mulally was excited about the average age of the US auto fleet, which was somewhere in the 10 year range. He noted that this was an all-time high.

Fair enough, but is that really a fair historic comparison?

I drive a Subaru that is by no means new. But it's in infinitely better condition at its 7+ years than its predecessor, a 1986 Subaru, was at the same point in its life. My current car has had fewer serious problems than the earlier one. For example, my older one lost a timing belt, which is a car-stopping problem, after about 7 years. My present Subaru hasn't suffered that. Instead, it had a leaky fuel injector, which was, while annoying and not inexpensive to repair, not a problem which caused the car to cease functioning.

Today's cars are much more difficult, both stylistically and condition-wise, to gauge in terms of age. Bodies don't rust as easily, the quality of design and assembly are higher. Overall, a ten year old car doesn't look the same today as a ten year old car did, well, ten years ago.

So I wonder if Mulally's engaging in some wishful thinking. Yes, I understand that recent double-dip recession fears have eased. And I understand that US car sales have been good lately.

Yet I don't see the employment and income growth statistics which would seem to underpin a truly robust growth in US car sales. Moreover, as cars age much better, and, aside from computerized safety and communications systems, which are not essential for driving, have added fewer new systems, like anti-lock brakes, power systems, and such, it's not clear to me that financially-strapped consumers feel the need to replace their cars so quickly.

It would be interesting to know how the average US fleet age has changed with respect to economic conditions and the evolution of cars themselves over the past several decades.

I'd also be curious to know the composition of Ford's and other makers' recent sales growth. My hypothesis is that the growth has probably been among higher-end, higher-priced cars. Bought by upper-income consumers who haven't been affected by the last four years of US economic turmoil.

While it would be nice to accept Mulally's cheerleading about US fleet age and imminent replacement sales at face value, I just can't. There seem to be too many conflicting signals to make such a simple extrapolation.

Will The UAW Never Learn?

Yesterday's Wall Street Journal carried this headline for its Marketplace section's lead article,

For UAW, Jobs Trump Pay

Will this union never learn?

The article begins with comments from a Flat Rock, Michigan Ford employee who asserts,

"We know that we need more product in the contract because that will mean more jobs and job protection for the rest of us."

Job protection. What a quaint notion, eh? Especially in a company in a sector, which had to be rescued by the federal government, so badly was it mismanaged due to management's ineptitude in dealing with the UAW's egregious demands.

The article goes on to list some comparative hourly wage rates:

$58 for Ford
$58 for GM
$49 for Chrysler
$27 @ Volkswagen in Chattanooga, TN & Hyundai in Montgomery, AL

Those Ford and GM numbers equate to a rough gross annual cash compensation of $111,360. Chrysler is paying about $94K/year. Obviously, the right-to-work Tennessee and Alabama compensations are about half that, or just under $52K.

Meanwhile, the UAW is pushing hard, with German labor officials, to unionize Volkswagen's Tennessee operation. Interviews reported in the Journal with employees at the plant aren't particularly enthused and, at best, are open to hearing why they should join the UAW.

Not so promising for the union guys, is it?

Let's consider what's really going on here. Foreign auto makers locate their plants in Southern, right-to-work US states so they can be competitive with cars and trucks which they hope to sell to Americans.

Unfortunately for GM, Ford and Chrysler, their legacy plants leave them stuck in closed shop states in which they are forced to pay about twice as much per employee. Those cars and trucks, too, are destined for US consumers. With Boeing's recent attempt to open a second Dreamliner assembly plant in South Carolina under union attack, the Big 3 can't ever hope to simply move production south of the Mason-Dixon Line.

I'm guessing Ford, GM and Chrysler build as few vehicles as possible in Michigan and other northern plants. In an ideal world, they'd shut them and locate near their competitors' plants in the South. But that's obviously impossible.

From that perspective, what could the UAW possibly offer to get any of those assemblers to commit to more jobs, in a contract, at those sky-high wage rates? No wonder Ford, GM and Chrysler all want to move to more profit-sharing for union workers, and, I'm sure, in time, health care premiums more in line with their white-collar workers.

Is it really possible that rank and file UAW workers at Ford, GM or Chrysler, having witnessed the carnage in their sector in the past three years, really believe any of those managements can offer 'more jobs,' let alone 'job protection?' Hell, they're lucky that the Democratic administration repaid the UAW's election efforts by stiffing legitimate bondholders, short-circuiting a conventional Chapter 11 bankruptcy for GM and Chrysler, and handing over significant chunks of the companies to the UAW.

If a reorganization had put the profitable parts of those two companies up for bid, it's not even clear any of the buyers would have retained the Michigan plants. They may have just bought machinery, licenses to IP and various trademarks and patents, and re-opened production somewhere in the South.

It's truly comical that UAW members think that, global trade and competition notwithstanding, they should earn north of $100K/year for fastening subassemblies together for commodity cars and trucks selling in a hotly-competitive US market.

When will they learn?

Bob Lutz- Savior of the Car Making World!

To read Bob Lutz' version of Detroit's decline, he personally knew better than everyone else at Chrysler, Ford and GM how to run a car company.

So how is it two went into bankruptcy and he's not running the third which is doing better?

Lutz recently had his book published, so he's on the talk show tour as the Wall Street Journal released two excerpts of the book in recent editions.

Let's just say I'm completely underwhelmed with Lutz' tale. Where to start?

Well, my first reaction, after only about half of the first Journal excerpt, was that I believe objective auto sector journalist, Pulitzer Prize winner and former Journal executive and one-time squash partner Paul Ingrassia did this all better and earlier. You can still see Paul periodically on CNBC and read his pieces in the Journal. I think he was easily two decades ahead of Lutz in recognizing the same defects at the Big Three.

My second reaction is to distrust anyone who was a senior executive with real power at failed companies who claims he knew better, but it was the culture and everyone around him who were the problems.

Lutz clearly has no shortage of ego. He constantly describes himself as a 'car guy' who knew better than everyone else at Chrysler and GM. He portrays himself as patiently teaching design teams how to do their jobs. Ruminating on whether he was really able to impart enough of his personal values about cars to the teams. Did any of it take? Was it really just Bob doing all the work after all?

Frankly, most of what Lutz revealed was, as I noted above, either already disclosed by Ingrassia years ago, or are things which most business observers with a brain had already figured out.

For example, back in the 1970s, my late father, a senior engineer and marketing executive at an American mining equipment company, remarked on how badly designed and made the expensive Chrysler New Yorker was. How you could run your finger along the hood and cut it on the raw, unfinished edge of the sheet metal.

As I'm writing this, Lutz is hamming it up on CNBC, enjoying the adulation and on-air time as he goes on and on about no-longer shocking practices at the failed US auto makers. His remarks about debates at GM regarding incentives and margins is, again, old news.

For a retired senior executive at not one, but two failed companies and a nearly-failed third one, Lutz seems to feel compelled to tell 'his' story, regardless of the fact that it's no longer newsworthy.

From what I read in the Journal pieces, it's not enough of a personal career story to be unique in that way. All Lutz' comments on air and published passages attempt to paint himself as the one enlightened guy in a car company full of 'bean counters.'

In one passage in the first Journal excerpt, Lutz dated his epiphany on some issue to fairly late in his career, which leads one to conclude that much of what Lutz claims as insight was actually, well, hindsight.

His story just doesn't ring true. Either he was an early seer who failed to lead and manage, or came late to these realizations, and, therefore, like most of those three companies' managements, was naive and dull-witted during their declines.

Which was Bob Lutz' true path? We'll probably never know. But we know which path it wasn't- enlightened and talented manager rises through embracing the truth and leads company to success.

Given that, I can't imagine spending any money to read Lutz' self-inflating stories of his days at Chrysler, GM and Ford, or his views about them now.

The Economics of Electric Vehicles

Margo Thorning's editorial in an edition of last month's Wall Street Journal, entitled Pull the Plug on Electric Car Subsidies, assembled a useful set of data concerning the economics of electric vehicles.

Going back to 1832, Ms. Thorning noted the invention of the first electric car in Scotland by Robert Anderson. She mentions the first American electric vehicle making its appearance in 1907, then writes,

"Since that time Americans have seen tremendous innovations in everything from air travel to microwaves, yet there has been little progress converting consumers to vehicles powered by rechargeable batteries."

She begins by quoting Consumer Reports reviews which trashed Chevy's Volt as inefficient as both an electric and gasoline car. In terms of cost, she reveals that the Nisan Leaf's battery costs $20,000, yet still only provides an 80-mile range under optimal, which is to say, temperate weather conditions. Drive it in hot or cold weather, and that range shrinks dramatically. The charging unit for such a vehicle varies between $1-2,000. Of course, using an electric vehicle merely transfers energy usage from gasoline to our mostly coal-fired power grid.

Surprisingly, Thorning contends that you'd need $300/bbl oil, along with an electric car battery costing 25% of the current $20,000, to make an electric vehicle cost-competitive.

Thorning then ticks off the various government subsidies to try to sway consumers to buy electrics. There's the $7,500 tax credit, as well as credits for "installing charging stations in homes and businesses and for building battery factories and upgrading the electric grid."

Citing the current administration's goal of one million electric vehicles driven by 2015, she estimates this will result in a $7.5B federal subsidy.

Having read this piece last month, then reading Paul Ryan's editorial in yesterday's Wall Street Journal in support of the House GOP's 2012 budget, I have to wonder whether these subsidies will survive the next two years of federal spending fights.

And, in that environment, with such reliance by Ford, GM, Nissan et.al. on federal largess to market these cars, whether those auto makers are due for a nasty surprise, having sunk so much capital into designing and producing electric vehicles.

I saw Alan Mulally show a new Ford Explorer on CNBC's morning program yesterday. The amount of digital technology in a new car, including various remote cameras and warning systems, certainly distinguishes such a car from one that is just five years old. But those systems are hardly so novel as to be a barrier to competition.

That means all the major car makers will be designing and selling better cars with more useful safety/electronics systems without prices for them rising out of control.

So where will the payoff ultimately come for Ford, GM and the other competitors for electric vehicle design and production that ultimately makes no economic sense? Wages aren't rising, and unemployment is still high. Federal spending is now under more scrutiny than at any time that I can recall in my life.

With Thorning's informative editorial as evidence, does anyone really think the money being poured into electric vehicles is actually going to make an adequate return for these firms any time soon?

Paul Ingrassia's Success Call On "The Great Auto Restructuring"

Only a week ago, I wrote this post regarding AutoNation's CEO Mike Jackson's shameless, disingenuous cheerleading for auto stocks on CNBC. In the interests of equal time and treatment, I guess I must also discuss my one-time squash partner and friend, Pulitzer Prize-winning writer Paul Ingrassia's recent Wall Street Journal editorial entitled The Great Auto Restructuring Shows Signs of Success.

Rather than rewrite the prior post's highlights, let me quote from it,

"Thus, to hear Jackson's version of history, the only way America's automakers could be saved was by government rescue. And that was necessary to preserve jobs and technology.

Well, as I've written in several prior posts, a conventional Chapter 11 filing by GM and Chrysler would have provided both with the time and opportunity to reorganize, group healthy units together and refloat them independently, or sell them to bidders. Further, neither company had to cease operations to do this.
Why Jackson seems ignorant of this fact is beyond me. I guess he's either not creative or simply not well-versed in the very real and frequent occurrence of business death or dismemberment.
So, to hear Jackson sing the praises of GM and Ford and the coming high volume vehicle unit sales years is to listen to someone tell half of a story. Give any business free government help to an extreme and you'll get the same happy ending. Jackson failed to discuss government-mandated purchases of hybrids and other unholy consequences of the excessive intervention.
The chart above displays the lone US automaker with a continuous price history, Ford, and, for good measure, Jackson's Autonation, along with the S&P500 Index.

If you have a technical inclination, you might notice that both firms' recent rapid price gains don't have long term sustainable precedents. In Ford's case, it's pretty clearly just a function of the rebound from the nadir of the 2008-2009 market bottom. Of the three series, anemic as its last decade has been, the S&P is the least volatile, ending with a much better performance than either company.
Of perhaps more import is how both Ford and Autonation have current share prices below their 1990s-era tops. Autonation peaked a few years before Ford, but both had either a flattening or multi-year decline for most of the past 12+ years. Jackson became CEO of Autonation in 1999, so he owns most of that performance.
What Jackson chooses not to explain, or perhaps genuinely doesn't realize, is that automaking is, for the most part, an unattractive commodity business over the long term. He railed about how China is the real 'Government Motors,' but, if true, this simply proves my point. It's hardly the sort of industry in which you'd invest a billion dollar fortune, if you had one to invest.
When you consider where most of the so-called innovations in vehicles originate, it's typically with vendor-supplied assemblies or devices, e.g., anti-lock brakes, airbags, and, now, so famously touted by Ford's Mulally, all manner of wireless communications devices. Thus, most of the profit for the automakers would seem to be sourced in design, rather than manufacture. Otherwise, the smart, value-adding components are available from sector vendors to any assembler.

Doesn't sound very attractive as an investible sector to me. Rather, it sounds more like a case of advanced Schumpeterian dynamics, wherein the value-added growth has long since left the sector's auto assemblers. The entry of Korean and Chinese automakers, and near-exits of GM and Chrysler fits the description of an industry with low barriers to entry and exit."


Here's some of Paul's glowing prose regarding the alleged success and its meaning for broader American fortunes,

"The good times are beginning to roll again, far faster than anybody expected, at General Motors, Ford and even at the weakest of the Detroit Three, Chrysler. There might be a lesson here. If the Great Restructuring has the potential to resolve the seemingly intractable problems of Detroit, perhaps bold structural overhauls can produce similar results on some broader issues facing America. Sure, that's a lot to hope for—but consider what tough love has done in the Motor City.

In 2005, General Motors lost an astounding $10.6 billion—this in a year when Americans bought nearly 17 million cars and trucks, nearly an all-time record. Last year, industry-wide sales totaled 11.6 million vehicles, historically depressed by any standard, but GM posted net income of $4.8 billion through Sept. 30. The company hasn't reported full-year results for 2010, but earnings will easily top $5 billion.

At Ford, the only Detroit company that didn't go bankrupt, the financial turnaround has been even more dramatic. Ford lost $12.6 billion in 2006 but earned $6.4 billion in the first nine months of last year. It just announced it will hire 7,000 more employees. Chrysler, meanwhile, is operating at break-even, and its cash flow is positive.
The average vehicle on American roads today is 10.2 years old, says R.L. Polk Co., which collects such data. This compares to an average age of 9.4 years five years ago and 8.8 years a decade ago. The point: Cars and trucks are getting older and will have to be replaced.

GM now makes 28 vehicles per year for each employee, calculates Goldman Sachs auto analyst Parick Archambault. That's more than double the company's productivity during the 1990s, he notes, and fully four times as high as in the 1950s, Detroit's glory years. GM's hourly labor costs now amount to just 6% of its revenue in North America. That's down from nearly 30% a few years ago, when the company was paying tens of thousands of workers to sit idle, and paying the full freight for employee health care.
GM's gains, and similar ones at Ford and Chrysler, have occurred because of the Great Restructuring, much of which came at the insistence of President Barack Obama's automotive task force.
The car companies' unlimited health-care obligations to retired workers have been replaced by a trust, funded by company contributions that are capped at a fixed amount. Active workers now pay about 5% of their health-care costs, up from nothing a few years ago.

Of course, 5% is only about one-fifth of what the average American employee contributes out of wages to his own health-care plan. That's one sign Detroit's turnaround remains fragile, threatened by the companies' traditional tendency to confuse comeback with victory. But even in labor relations there's a whiff of fresh air.
When GM's new CEO, Dan Akerson, suggested this week that workers' wages should be tied to corporate performance, the new president of the UAW, Bob King, quickly said he's willing to discuss the idea.
The United States is facing trillion-dollar federal deficits that are patently unsustainable, and the broad debate in Washington is whether tax increases or spending cuts are the proper solution. But neither approach, nor a combination of the two, will work without restructuring the vast federal entitlement programs that are the national equivalent of Detroit's Jobs Bank.

Social Security can't and shouldn't be abolished like the Jobs Bank was. But it can and should be restructured—to encourage later retirements, for example—as part of a broad entitlements reform.
States are burdened with underfunded pension plans for public employees that have destroyed their fiscal probity. It's nutty to raise taxes to plug state budget deficits, as Illinois just did, without restructuring public-employee pensions that allow workers to retire in their fifties, in some cases, with 80% of their pre-retirement incomes. Restructuring public-pension plans into 401(k) programs will spur fierce union resistance, just as key elements of the Great Restructuring did in Detroit. There's no painless way out of this problem. But further delay will only increase the pain, as Detroit's disaster of 2009 proved.
We should learn from success. Tough-love restructuring can produce renewal. With political will, resolve can produce results."


First, let me suggest reading this post from last summer. In it, I discuss Paul's review of another journalist's book about the Detroit automakers. He admits to journalists cheerleading without giving full disclosure,
 
"Ingrassia's opening sentences say it all,

"Many of the journalists who covered the long decline of General Motors that led to last year's bankruptcy were, in their hearts, rooting for the company. Such reporters- I among them- would seize on the occasional piece of good news about GM to write something upbeat. It would be a journalistic coup, after all, to be the first writer to call the company's turnaround. In any case, no one who grew up during GM's heyday, in the 1950s and 1960s, wanted to see an American icon self-destruct."
Together, Ingrassia's inclusion of these passages tells us a lot about why we should simply not trust most beat reporting on US companies and industries.

Reporters are not sell-side analysts. And, for that matter, we know from the last decade's dot-com bubble that sell-side analysts are, in reality, marketers for the equities which their firms underwrite and in which they make a market.
You'd ordinarily think that a reporter was more objective than an analyst whose firm clearly has conflicts of interest.
Ingrassia's review tells you different. I am not sure Paul meant to open the media kimono quite so widely, but there it is."


Let me reiterate that I like Paul Ingrassia as a person, but, thanks to that review, I can't say that I completely trust his coverage of the auto sector in the public press anymore. His own words make that a reasonable stance.

Next, I won't question Paul's many numbers involving Ford's and GM's costs, volumes, profits, etc. I simply reiterate my contention that the basic entry/exit realities of the sector suggest it's very mature and suspect for investors.

Further, Paul makes quite clear that none of this was possible without egregious government intervention. Give your local dry cleaner or restaurateur the same help, and he will eventually show promise, too. But what about years later, when the free bailouts are finished and these businesses have to prosper on their own?

Don't you think that as soon as GM or Ford book large profits, the unions and government will come screaming at management nest-feathering? Sure, it sounds good that a union official "is willing to discuss" linking wages to profits. Try getting that into a contract. The existing health care cost-sharing remains a glaring inequity for UAW members versus the rest of America.

Now, I don't even agree, based upon my prior posts, including the linked one at the beginning of this post, that Ford and GM have accomplished legitimate, long term, sustainable turnarounds. But whatever improved performances have occurred would not have been so, in GM's case, without the bailout, unless the firm were put into Chapter 11 and allowed to exit the traditional way.

So I find it troubling that Ingrassia gets all googly-eyed about how what worked for Detroit could be a template for America to self-rescue on its federal entitlement programs.

Of course, as all pundits, Paul quickly disavows really scrapping Social Security or public pensions. Instead, he is in the camp of some sort of sensible discussions and negotiations with recipients to rationalize and temper the liabilities.

Well, Paul, there's a bit of a problem with that. First, GM's bailout only happened because the federal government basically printed the money for it. That has caused enough problems already. Some of the backlash by overseas investors was precisely because they watched their loans to the US government be funneled to the UAW.

However, there's nobody to bailout the US.

If anything is an object lesson in the administration's bailout of GM, it's to borrow the template used to illegally stiff legitimate senior creditors. If the US could do that to GM bondholders, why not use such tactics to cram reforms down the throats of Social Security and public pension recipients?

Works for me!

Other than that, there's nothing about the GM bailout that is really transferable to the larger public pension or federal entitlement spending mess. It's not just like a business problem. And that particular UAW benefits problem was 'solved' by our government printing and throwing money at it.

Despite Paul's best hopes, I just don't think that's going to work for the entitlements messes he believes will be resolved in that manner.

Mike Jackson Flacks For US Automakers

Autonation's CEO, Mike Jackson, a guest host on CNBC yesterday morning, spent his time flacking for the US auto sector.

It's exasperating to me to listen to Jackson recount a history that never was as he extols US automakers to the detriment of those overseas. What one has to remember is that Jackson, whose company is in the business of selling cars, is a ceaseless promoter of all things automotive.


Thus, to hear Jackson's version of history, the only way America's automakers could be saved was by government rescue. And that was necessary to preserve jobs and technology.


Well, as I've written in several prior posts, a conventional Chapter 11 filing by GM and Chrysler would have provided both with the time and opportunity to reorganize, group healthy units together and refloat them independently, or sell them to bidders. Further, neither company had to cease operations to do this.


Why Jackson seems ignorant of this fact is beyond me. I guess he's either not creative or simply not well-versed in the very real and frequent occurrence of business death or dismemberment.


So, to hear Jackson sing the praises of GM and Ford and the coming high volume vehicle unit sales years is to listen to someone tell half of a story. Give any business free government help to an extreme and you'll get the same happy ending. Jackson failed to discuss government-mandated purchases of hybrids and other unholy consequences of the excessive intervention.


The one- and only- thing which Jackson got right in this morning's auto fairy tale is that Alan Mulally rescued Ford by better leadership, focus and management, not wholesale reinvention- yet. Because it's way too soon, despite the views of many sector cheerleaders with agendas, to declare Ford a medium- to long-term shareholder winner.


The chart above displays the lone US automaker with a continuous price history, Ford, and, for good measure, Jackson's Autonation, along with the S&P500 Index.

If you have a technical inclination, you might notice that both firms' recent rapid price gains don't have long term sustainable precedents. In Ford's case, it's pretty clearly just a function of the rebound from the nadir of the 2008-2009 market bottom. Of the three series, anemic as its last decade has been, the S&P is the least volatile, ending with a much better performance than either company.

Of perhaps more import is how both Ford and Autonation have current share prices below their 1990s-era tops. Autonation peaked a few years before Ford, but both had either a flattening or multi-year decline for most of the past 12+ years. Jackson became CEO of Autonation in 1999, so he owns most of that performance.

What Jackson chooses not to explain, or perhaps genuinely doesn't realize, is that automaking is, for the most part, an unattractive commodity business over the long term. He railed about how China is the real 'Government Motors,' but, if true, this simply proves my point. It's hardly the sort of industry in which you'd invest a billion dollar fortune, if you had one to invest.

For what it's worth, you don't hear this analysis on CNBC during the day, either, when they prominently showcase all those analysts singing GM's praise. There wouldn't be any agenda there, either, would there? Say, for pieces of future underwriting?

Holman Jenkins, Jr., of the Wall Street Journal, has written many times how US auto manufacturing, especially of small cars, has been legislated onshore to appease unions, thus hurting profitability of the assemblers. When you consider where most of the so-called innovations in vehicles originate, it's typically with vendor-supplied assemblies or devices, e.g., anti-lock brakes, airbags, and, now, so famously touted by Ford's Mulally, all manner of wireless communications devices. Thus, most of the profit for the automakers would seem to be sourced in design, rather than manufacture. Otherwise, the smart, value-adding components are available from sector vendors to any assembler.

Doesn't sound very attractive as an investible sector to me. Rather, it sounds more like a case of advanced Schumpeterian dynamics, wherein the value-added growth has long since left the sector's auto assemblers. The entry of Korean and Chinese automakers, and near-exits of GM and Chrysler fits the description of an industry with low barriers to entry and exit.

Hardly your choicest sector for long term investing.

GM's Misleading Volt Launch

There was a fair amount of media hype over GM's launch, earlier this week, of its Volt automobile. Coverage ranged from the expected to the ridiculous.

The latter, of course, featured former GM exec Bob Lutz crowing about how wonderful the Volt was to drive, and how profitable it would be. When asked about the latter topic, Lutz first cited his lack of current information about it, then proceeded to assure the reporter that he was sure that all the key component costs would decline with volume, and the vehicle would make tons of money for GM.

Bob curiously- or not so- failed to mention those hefty federal government subsidies for buying a Volt. Without which, demand would likely slow to a trickle.

Seeing videos of the car, I'm struck by its ugliness, if not plain design. Like so many GM vehicles, it fails to excite. Nobody, including Lutz, has discussed various features or interior details which are always the subject of reviews of other new cars. I have this sense that the Volt is a sort of electrically-powered equivalent of a Volkswagen, i.e., simple and relatively spare. Nothing to write home about.

Except the currently-chic electric power thing.

On that note, a pundit on CNBC weighed in on how poorly-prepared the US electrical grid is in the major cities in which the Volt might actually make some sense. With a fully-charged range of about 40 miles before resorting to the gasoline engine to charge the electric batteries to run the motor, the guy pointed out that the car is truly practical only in the larger US cities with fairly dense populations. As such, he noted that few had power grids and capacities which could take a hefty dose of Volt users.

And, of course, there's the embarrassing fact  that most of that juice comes from coal. So all that good feeling of avoiding burning gasoline is offset by the reality that the Volt owner is causing more emissions-creating coal to be fed into power plants in his city.

Lastly, the GM CEO who gave a CNBC interview was largely incapable of explaining his rather stratospheric claims of something north of 200 MPG for the car on a cross-country road trip. He boasted that you could drive the car across the US like any conventional gasoline-powered vehicle, then botched a simple explanation of how, with an 8-gallon gas tank, that would work. I'm still a bit unclear myself.

So much for marketing. But, then, this is GM. They haven't done effective marketing since Alfred P. Sloan left the company, have they?

Will Auto Makers Really Lead A Jobs Recovery?

I happened to catch my old friend, auto journalist Paul Ingrassia, on CNBC yesterday afternoon. He was debating, with several other pundits, including Bob Lutz, the role of Detroit's auto makers in sparking a US economic recovery.

From what I gathered, Paul was arguing that the best chance the economy has of creating jobs is for the three US-based auto makers to grow smartly in the years ahead. Essentially, he and the other guests, including, I think, an economist or two, some industry analyst, and the irrepressible Lutz, all agreed that we must pin our hopes for economic rescue on the auto sector.

What??????

Are these people crazy?

Autos are pretty much commodities. Sure, one or two models are special and command price premiums. But, generally speaking, as evidenced in China, entry into the auto sector is pretty easy. Auto makers are, in fact, auto designers and assemblers. It's not like River Rouge in 1920 anymore.

Plus, last time I looked, most economist bow to the Small Business God for job-creating growth. Ford, GM and Chrysler, wounded as they are, aren't small businesses. Except maybe in the 'small-minded' sense.

So how do you resolve this paradox? Three poorly-run large, old-industry companies, two of which should have died a few years ago, are going to magically lift America out of its recession? And magically create millions of jobs?

Sure, an uptick of auto sales gives these three companies their share. They hire a few people, and, indirectly, their orders for parts and materials spark hiring at their suppliers. I get it.

But that's nowhere near the number of jobs lost, plus population growth, since the official beginning of the recession in late 2007, is it?

Don't we usually hope and expect job growth from smaller, newer, more innovative firms than the erstwhile Big Three? Something more related to new applications of technology? Perhaps more in the vein of the next Google, Genentech, etc?

I respect Paul Ingrassia immensely for his knowledge of the inner workings of the auto industry. But I must confess, I missed the part where he became a respected macroeconomist by correctly explaining and predicting hiring in a large, complex economy as it exits a recession. And I guess I missed Bob Lutz having those credentials, too.

Electric Cars- Yes or No?

This morning's Wall Street Journal, being the immediate post-weekend edition, was characteristically light on news. So the edition's major Marketplace section focus on electric/hybrid cars was not surprising.

What was surprising is the evolving split between auto makers concerning growth for the pure electrics. Ford's management is reticent about jumping into the segment, foreseeing greater opportunity in hybrids.

Meanwhile, Nissan's Carlos Ghosn predicts fast growth for the vehicles, worrying aloud "that this market is going to grow too fast" and require additional investment in plants."

It's always exciting to see two such divergent views on the potential growth of a product/market segment.

Reading the entire article, I was struck by how heavily dependent the vehicles are on massive federal government subsidies. The most commonly stated number is $7,500/car. That's a shockingly high offset. One wonders, with the current US fiscal situation, and the prospect of an imminent change in party control of Congress, how long such a staggering per/vehicle subsidy will remain in effect.

Then there's the risks of mistakes in calculating range for an electric-only vehicle. And the need for one's travel patterns to precisely match the vehicles' recharging requirements. While hybrids may gain favor, the electric-only vehicles are seen, by most of the industry personnel interviewed in the piece, as being confined to market for "short-distance commutes."

It appears that you have GM and Nissan pushing the EVs, as electric-only vehicles are called, for short, while Ford, Toyota and various suppliers see a much less robust future for them, even ten years out.

Given GM's notoriously tin ear for consumer sentiments and preferences, it almost makes you side with Ford and Toyota, doesn't it?

More Inappropriate Consequences From The Government's Rescue of GM

The Wall Street Journal ran two articles concerning effects of the government's bear hug on GM, after the latter unwisely requested federal 'help' last year.

Yesterday, the Journal noted that Kent Kresa, GM's interim chairman, was ordered by Treasury officials to hire search firm Spencer Stuart to find new board members. Kresa had planned to search for new board members on his own, using his considerable contacts from a career as CEO of a major company.

No dice. The T-men said hire Spencer Stuart, and that is what Kresa did.

Yet, at present, the federal government owns now GM common equity. Is this thuggery, or what?

As bad as this is, it may not be the worst outcome so far from the unholy alliance of the failed auto maker and our federal government.

Dennis Berman writes in today's edition of the Journal of the stealth takeover of GMAC, GM's former financing unit, by the feds. It's one of Berman's better pieces.

First, he notes the inherent unfairness and anti-competitiveness of allowing the government to subsidize GMAC in its operations, while Ford's credit arm has no such advantage.

Just as in banking and insurance, and, perhaps, soon in health insurance, the federal government is wading into our various private business sectors, choosing winners, and backing them with free, printed money, or extremely low-cost federally-provided funding.

Berman tracks the funding going into GMAC from the federal government, as well as the FDIC's reservations and, ultimately, refusal to consider the at-shotgun-point-created "bank" that GMAC now is for emergency funding relief. One Fed governor also declined to approve the recent chartering of GMAC as a bank, opining that the granting of a bank charter wasn't meant to be used to facilitate corporate rescues.

Berman concludes with this passage,

"Put it together and what have you got? A bank potentially owned and regulated by the government. One that is embarking on an ambitious merger in a troubled industry, directed by a board in flux. Looming above are a Congress and White House that have expressed little public care for strategy or accountability.

Congratulations, indeed, taxpayers."

I'll provide my own ending thoughts, to follow on Berman's excellent digest of the GMAC situation.

The government owns a big chunk of Chrysler. It will doubtless end up owning a big chunk of failed GM, too.

We all know of the Democrat's appetite to wave a magic wand and make everything related to energy "green."

Add to the two failed US car companies in government hands a government-owned, former auto-finance company, and you have the pieces with which to mandate and subsidize green autos.

Look for Congress and the administration to mandate/coerce Chrysler and GM to produce 'green' cars and trucks, plus other 'personal' vehicles, for which subsidized financing will be offered from GMAC, the government's wholly-owned little bank.

Ford and the non-US based auto makers with production facilities onshore will be competitively disadvantaged, of course.

Perhaps the best hope here is for Ford, Toyota, Daimler and the other auto makers producing vehicles in the US to sue the federal government under the Sherman anti-trust law.

Otherwise, I'm very much afraid we are going to see a completely non-transparent, uneconomic, wasteful effort by the current Congress and administration to produce and 'sell' and finance vehicles built with their pet, though inefficient and unproven green technologies, in unfair competition with privately-financed, publicly-owned auto makers, with no way to stop them.

Holman Jenkins On Chrysler/Fiat

Holman Jenkins, Jr., wrote another piece in his Wall Street Journal column on Wednesday of this week that is scathing in its assessment of the current US administration's approach to the two US-based auto makers which are in or near bankruptcy. Continuing his outright mockery of the president, Jenkins pokes fun at the tangled, mixed-up, illogical positions in which the current administration, and Congress, now find themselves.

For example, he begins with,

"When you buy a car, I hope it will be a Democratic car."

Oops. We have misquoted the president. He said last week he hoped you would buy an "American car" -- though apparently not one built in a red state in a plant owned by Japanese or German investors. He meant a car built by a company headquartered in Detroit, even if the car itself is assembled in Mexico or Canada. How confusing.

Hundreds of shoppers certainly understood him to mean a Chrysler car. They rushed into dealerships last weekend. Never mind that Chrysler isn't technically making cars in the U.S. at the moment -- it shut down its factories -- and when it reopens it will be on a path to ownership by a company based in Turin, Italy."

It is pretty riotous to hear the president fumble with his call to 'buy American,' when that really means cars assembled outside the US, by a firm which will now be owned by foreigners. Does he ever mention that American workers in South Carolina and nearby states assembling cars for Mercedes, Toyota, et.al.?

Jenkins then observes how astute the Germans at Daimler were to quickly dump Chrysler a few years ago.

"Daimler, its previous parent, certainly had no desire to fund such profitless extravagance. The Germans took a lot of guff but they're the ones laughing now. They sold their majority stake in Chrysler just months after Democrats took over Congress, and just weeks after President Bush began blathering about "oil addiction" and echoing Democratic demands for stringent new fuel-mileage rules (after opposing them for years).

It's no exaggeration to say the rest of the story is told in Chrysler's bankruptcy filing. In search of a partner to underwrite development of fuel-sipping hybrids and electric cars that would be almost certain to lose money in the U.S. marketplace, Chrysler's Tom LaSorda spent two years seeking alliances with Nissan, GM, Volkswagen, Tata, Magna, GAZ, Hyundai, Honda, Toyota, Beijing Auto and others -- efforts that were "uniformly without success." Fiat, he said in an affidavit, was "Chrysler's last best hope."

A stunning rebuke to this whole notion that anyone with brains and money believed that Chyrsler can return to profitability by building cars that the green crowd in America demand. Jenkins then mentions the ill-famed car of the editorial's title,

"Not since Renault teamed up with AMC to bring you Le Car has an odder pairing been seen -- or a less promising one.

Unless gasoline prices go to $5 a gallon, Mr. Marchionne certainly is not so foolish to believe making and selling teensy eurocars in the U.S. is anybody's route to salvation.
Even in Europe, he has noted, a move to bigger, more powerful cars is underway. Motorists are getting fatter and older -- and unwilling to contort themselves to get in and out of a car.

He also understands that trying to beat Toyota at its own game is a nonstarter. Toyota sets a standard of quality and technology that all must meet -- that's the price of admission. But "what we have that Toyota does not have -- and I say this with all modesty -- is the great historical heritage of the brands." "

This is pretty funny. A collection of largely has-been brands, with the possible exception of Jeep, which, of course, has bloated into a non-eco-friendly car line. And this is what taxpayer money is funding to take on the world's best auto manufacturer?

Then Mr. Jenkins notes how the head of Fiat is aiming to build a car maker with sufficient scale to survive the coming thinning of the vehicle-manufacturing herd,

"He's already turned his attention to Opel, GM's European arm, which is on the market. Notice, though, that he's committed no money to Chrysler, only a promise of vehicle technology. As a New York Times story recently trailed off, ". . . at some point, some [Obama auto] task force members acknowledge, the drive for profitability is likely to collide with Mr. Obama's fuel-efficiency and low-emission goals."

Yup. Mr. Marchionne has kept his skin out of the game for a reason. Don't expect him to reach for Fiat's modest checkbook until Team Obama can explain exactly how Chrysler is supposed to make money building the "green cars" Mr. Obama wants it to build. But you already know the answer: You, the taxpayer, have not finished chipping in to keep Fiat-Chrysler alive."

As usual, Jenkins pulls no punches. He correctly concludes that you, the US taxpayer, will now continue to fund this Don Quixote-like dream of profitably building green cars in America. From a failed manufacturer.

Everyone in power over the past few years in Washington is guilty on this one. And, as Jenkins sadly notes, we're nowhere near finished with this travesty yet.

A Reader's Rebuttal To Ingrassia & Me

I wrote this post last night and set it to publish automatically at about 5AM this morning. At 5:23AM, I received this email from a reader:

I think that you must think that the auto workers don't deserve the retirement that they are entitled to. How about the veterans of the armed services that get a pension after 20 years? How about the municipal workers that get a pension after 30 years?

You must not have a clue of what it is to work in an auto factory for 30 years. After standing on the factory floor during that amount of time your ankles, knees and hip joints are about ready to give out. I know a lot of hard working people who've had knee replacement surgery because of that. Carpal tunnel is another major problem. You've probably never woke up in the middle of the night with your hands aching.

All you "experts" have no idea about the people who worked in the plants. Paul Ingrassia is another "expert" that doesn't have a clue. I wake up every day with the same sore back, ankles, knees and hips.

Maybe you should rethink what you write. There are a lot of people out there that believe anything that they read.

Sincerely
A Veteran of the U.S. Armed Services and also a Retired Auto Worker

Let me address this post to the reader who sent me this email.

First, as a US armed forces veteran, you have my respect and gratitude.

But that has nothing to do with your choice of employment thereafter. It's obvious even you don't consider your employment history sufficiently convincing to discuss it on its own merits, because you had to drag patriotism into the discussion. Do you know what Samuel Johnson had to say about that?

"Patriotism is the last refuge of a scoundrel."

So, as a favor to you, I'm going to ignore your inappropriate marrying of being a veteran with being a UAW member and retired auto worker.

Did someone put a gun to your head and force you onto an auto assembly line for 30 years? I didn't think so. You probably chose it for the cushy union benefits and wages. Well, welcome to the real world. You make your choice, and you live with the consequences.

I am supposing you are one of those people who equates "hard working" with a lack of education and the requirement that one works in manual labor.

In fact, as a UAW member, I believe that you probably only had to show up for work, sober and not under the influence of drugs, to keep a lifelong job. If your job got cut, you were paid from the infamous "job bank." Your employer could cut your wages only with extreme difficulty, and the risk of a long strike by your union.

I, on the other hand, and many millions like me, chose to purchase more education and work in less physically-taxing careers. We never have unions. We have to manage our own careers, and live with the constant risk of unemployment on the whim of a manager or the result of a bad year in our sector.

It's a tradeoff. We all make them. Nobody is a saint for choosing one path over another. In your case, you decided to spend your physical health in exchange for what you felt was a sweet economic deal.

As for municipal workers, I don't think they deserve 30-and-out, either. Their time will come, and soon, for renegotiation. We cannot, as citizens, afford the lush promises made to these unions by many municipal and state office-holders of both parties.

Veterans of the armed forces are a completely different story. Nothing, in my view, equates with those who have voluntarily chosen the risk of combat as a career.

Finally, I know Paul Ingrassia personally. He has considerably more than a clue.

To be frank, I don't know of many intelligent, highly-motivated people who didn't choose to become better-educated and leave plant floors for more fulfilling work, even if it meant incurring student loan obligations to do so. My brother did that, as did my father. Both have had professional careers of considerable creativity, but both worked in harsh conditions as blue-collar laborers earlier in their lives.

I think that you have an attitude of entitlement that is without merit. You chose a path, made a bargain, and now believe that everyone should feel sorry for your outcome.

I don't. I doubt Ingrassia does, either. Nor most readers of this blog.

You don't have to be vey intelligent to see the folly in a society which allows people to "retire" and earn more in that retirement than they did during their working years. It's simply an unsustainable model. It can't work for long, in very many parts of society, at the same time.

How on earth does anyone really believe that the value created by an employee of any sort, over just 30 years, will pay for both his/her compensation for that 30 years, and then their retirement pay and benefits for up to another 40 years?

It's crazy!

You sound like a whiner with the attitude of a victim, because you are now unhappy with the career choices you made earlier in life.

Quit whining and take responsibility for the choices you have made in life.

Our Best Economic Sectors Remain Safe From Government "Help"

It's been a tough last two quarters for the American capitalist system.

Uncle Sam forcibly took stakes in the nation's largest commercial banks, induced the publicly-held investment banks to become chartered commercial banks, took over AIG and lent billions to GM and Chrsyler.

The good news is that these are not the engines of growth of our economy. In fact, information technology, bio-medicine and other innovation-fueled sectors have studiously avoided involvement with Washington.

You don't see Google or H-P taking government money.

In the banking sector, it may well be time to correct the country's historic vulnerability to a legion of small, poorly-run and failure-prone community and local, state-chartered institutions. As such, nationalizing the sector might well close a recurring weak spot in our nation's economic system.

The most recent bout of financial-sector induced US economic troubles stemmed from inept and jealous CEOs and senior executives in the financial sector attempting to make it a 'growth' business.

Unfortunately- for all of us- the financial services sector, being a derived business of a nation's economic activity, cannot be a growth sector over the long term. Individual products, over short timeframes, can achieve 'growth' status akin to a technology business. But, beyond that, with above-economic-growth rates come excessive risk.

Something with which we are now all familiar.

As for US-domiciled auto assemblers, they are ready for the scrap heap. Contrary to the protests of their defenders, Ford, GM and Chrysler have little role in defense production. Better cars are made by foreign-based producers in southern US plants.

Like it or not, putting all three of these firms into Chapter 11 bankruptcy was and remains the right thing to do. Profitable parts of them would be merged or acquired. The loss-making parts would be closed. Shareholders would bear the capital losses, while government could provide modest but necessary stipends to displaced employees.

Losing the corporations that are GM, Ford and Chrysler doesn't mean losing all of their products, nor all of the jobs associated with them.

I'm as sceptical of government intervention as the next person, and probably moreso. But in these cases, the damage could be much worse. As it is, some tens of billions will be lost in a last gasp to help the auto assemblers. But, fortunately, it's not as if a vital, value-creating industry is being corrupted and hijacked by Washington- yet.

Of course, time will tell whether the current administration meddles in the successful, high-growth, value-adding portions of our economy. But, for now, those parts are safe and operating without further Federal "help."

Fiat Proves My Point On Detroit Bankruptcies

Yesterday's Wall Street Journal reported Fiat's interest in taking a controlling interest in Chrysler.

According to the article, Fiat would begin by taking a 35% position, with the option of increasing to a controlling 55% ownership. Incredibly, Chrysler has fallen so far that all Fiat must do for this position is to cover

"the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S."

Thus, my claim, along with others, expressed in this November post, is being shown to be true. Given the opportunity, other auto makers will step in to buy parts of the troubled Detroit-based US auto makers, when they prove attractive for those buyers' own strategies.

Fiat is essentially getting a US base on the cheap. They don't even want to build Chrysler cars, just use the existing plant infrastructure. Then they'll escape foreign-import laws and sell their cars as US-made.

If Congress and the prior administration had simply let GM file Chapter 11, the same sort of market self-cleansing would have occurred. Maybe it still will, but the odds grow longer as Wagoner feels he's successfully elbowed his way to the Federal cash trough.

It's really a shame, because now, during the very week of US political power transfer, Schumpeter's theory of creative destruction is being proven true for the zillionth time.

Chrysler's millstone becomes Fiat's new beginning in the US market. Problem solved!

When, if ever, will politicians, collectively, ever learn that markets do right themselves, and, short of that, forced, arbitrary intrusions by government, and false price-setting always distorts or delays eventual market self-healing?

BYD As Auto "Manufacturer"

Amidst the hue and cry over whether and how GM, Chrysler and, in time, Ford might survive and perhaps even prosper again, a mention was made in a recent Wall Street Journal article of battery manufacturer BYD.

This Chinese firm specializes in lithium ion batteries, but is showing its plug-in hybrid at the upcoming Detroit Auto Show.

What I find remarkable is the implication for the three remaining US auto makers which is going largely unheralded.

Part of the recent and, so they hope, upcoming bailout of GM and Chrysler by the US Treasury is an expectation that the companies' new minority partners, Uncle Sam, will mandate 'green' car technology- hybrids, electric cars, and that sort of thing.

But it would seem to be a troubling omen that a Chinese battery-maker is already showing a complete and functioning electric hybrid vehicle. Specifically, given that so much automotive technology is provided by suppliers to the 'manufacturers,' i.e., assemblers, even a simple batter maker can toss a hybrid car together.

This would seem to spell serious doom for the UAW and its employers in America. Not even having marketed production quantities of hybrids yet, these firms and the union depending on them will have to contend with a vehicle built by non-union Chinese workers. Something so simple, evidently, that it would presumably be tough for US auto makers to add sufficient value to make their cars more salable. Yet, the vehicle doesn't emanate from a vehicle manufacturer.

Does this not suggest that hybrids are going to be so easy to make that Detroit producers, with their high legacy costs and union employees, have basically zero chance of making the hoped-for bonanza on this type of vehicle?

So much for throwing tens of billions of taxpayer money into GM and Chrysler so they can make it all back, and then some, with so-called world beating hybrids and other non-gasoline cars and trucks. It's looking like they'll once more be late to market and competing with much more nimble, imaginative and dangerous competitors.

New Evidence On Consumer Choice & Cars From Bankrupt Producers

Yesterday's Wall Street Journal provided new evidence concerning whether American consumers would still buy cars from producers in Chapter 11 bankruptcy.

The answer is, 'yes,' for 90% of those surveyed. As the article notes,

"A pair of new surveys suggest buyers aren't completely unwilling to buy a car from an auto maker in bankruptcy court, as long as the federal government is willing to play a role in helping the company restructure.

This contradicts the conventional view of Detroit auto makers that suggests consumers would shun a bankrupt auto maker over fears related to the resale value of a car, the warranty and the ability to secure service and replacement parts.

Merrill Lynch & Co. recently completed a study showing 90% of car buyers would consider purchasing a vehicle from a car company in bankruptcy court.

Another survey, by CNW Marketing Research, found 48% would consider buying from a bankrupt auto maker if the company were getting help from the government, but that is up from a previous survey conducted by the Bandon, Ore., company."

Of course, this provides refutation of one of the more forceful arguments with which the UAW, GM, Ford and Chrysler have pursued Federal aid. The Journal provided more detail further on in the piece,

"The Merrill Lynch study, conducted for its clients and which included talking to 500 people, concluded that a "large majority of consumers would consider buying or leasing their next vehicle from an auto maker that is backed by U.S. government funding and may emerge as a strong company, following a restructuring through the bankruptcy process."

Merrill has had a banking relationship with domestic auto makers within the past year.

The CNW Marketing Research survey, of 9,700 domestic car owners completed Dec. 14, suggested 48% of buyers would be willing to consider a product sold by an auto maker in bankruptcy court, as long as the government was involved in the process.

CNW had been the source of an earlier study whose conclusions raised concerns about the impact of a bankruptcy filing on a car company. That survey found 80% of buyers would stay away, and the auto maker's revenue would plunge.

But CNW President Art Spinella said in an interview Tuesday that new research suggests people would feel much better about a bankrupt auto maker's chances "as long as there are loan guarantees by the government."

The results contradict much of what executives at U.S. auto makers and the United Auto Workers argue would be the impact of a bankruptcy on one or more of the companies."

Clearly, a Federal loan for debtor in possession financing would meet this criteria, as would some provision in any package for a separate warranty-funding facility.

Thus, once again, we see that the reasons for avoiding Chapter 11 filings for the US auto makers continue to fall by the wayside under closer examination.

The Real Value of A Bankrupt Company's Cars

For the past few weeks, CNBC's mediocre auto- and airline-correspondent, Phil Lebeau, has been shouting to anyone who would listen, that the value of cars made by an auto maker which files for bankruptcy will fall precipitously.

On Friday, he was screaming about the value decline in Oldsmobiles, once GM decided to discontinue the nameplate.

I was talking with my business partner at length on Friday afternoon about the failed auto bailout bill, and brought up LeBeau's continuing assertions.

As I related his ongoing bluster, something occurred to me regarding the entire topic of used car valuations.

Perhaps LeBeau has it backwards.

Maybe the true value of all these GM cars is actually lower than their present value. The only thing propping them up is the thin reed of possibility that the company won't file Chapter 11.

With CEO Wagoner having caused GM's stock to fall from nearly $60/share five years ago to than $4 now, why wouldn't you expect the resale value of the firm's cars to plummet heavily, as well.

To worry about the loss of additional resale value of GM products is really sort of moot at this point. The company is, on a valuation basis, so near dead that everyone knows there is unlikely to be an independent GM in another twelve months.

Thus, any further drop in resale values is probably to their true value, from a current, artificially high value as the firm tries to get Congress to give it a temporary stay of execution.

All this handwringing about resale values and warranties seems to me to be beside the point. Few people buy GM products anyway, and those people must be purchasing GM cars and trucks for reasons other than resale value.

To try to turn well-functioning Schumpeterian dynamics on its head, and refuse to let a failing auto maker, or two, die, because of the likelihood of their products' values falling to their true level, seems ludicrous.

Washington's Bailout Bill for Detroit

Take $20B, divide into 400,000 employees, and you have $50,000/person.


That's what you could do with a little more than the money currently being offered to Ford, GM and Chrysler, in exchange for something less than bankruptcy.


After all, not every employee of the three US-based auto makers will be out of work. Some will transfer with their successful, profitable product lines to other owners. So, between out-of-work auto employees, and some among their suppliers, you could assist a lot of non-management employees without 'bailing out' shareholders and management.


Let's help the non-management employees, and let management and shareholders pay the price for decades of lousy management.


Force Wagoner to file for Chapter 11, and probably Nardelli, too.

But under no circumstances should Congress give any of the three US auto makers money prior to a Chapter 11 filing.

Today's Auto Sector Woes Are A Rerun of The 1970s Steel Sector

As the current drama involving GM, Ford and Chrysler has taken center stage on business news for the past week and weekend, I've written quite a few posts about it, here, here and here.


In discussing the topic this weekend with my business partner, I was reminded of another US industrial sector which experienced the same pressures and difficulties in the 1970s and 80s.


I am referring, of course, to the once-significant US steel industry. In fact, while researching some history for this piece, I found, to my shock, this article, appearing recently in the Herald Tribune, a unit of the NY Times.

The opening of that piece observes,

"A few years ago, an industry whose history and mythology were indelible parts of the U.S. identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built the United States, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.

If they were allowed to go under, their partisans warned, the consequences would ripple through the economy at a cost too high to bear. The old saying, "As steel goes, so goes the nation," was as much a threat as a boast.

The Detroit automakers are using the same argument as they seek a $25 billion bailout from Congress. "What happens in the automotive industry affects each and every one of us," a General Motors Web site declares, warning that the consequences of a shutdown would be "devastating."

Yet steel's savior was not the government bailouts it ardently sought but exactly what it tried so long to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures. As debate continues over what, if anything, should be done for GM, Ford and Chrysler, the steel industry may offer a model."

I could not agree more.

Back when I was in graduate school, the old-line steel industry in this country was on the ropes. The situation was eerily similar to that of today's US-domiciled auto sector.

Just to refresh your memory, I am referring to: US Steel, Bethlehem Steel, Lukens, LTV, Republic, Armco, to name a few.

As the Herald Tribune article correctly notes, the steel industry- both companies and their union- claimed the same disastrous results if they were allowed to go bankrupt as GM, Ford, Chrysler and the UAW now do.

Back in the 1970s, it was mini-mills, cheaper foreign steel, and bloat USW contracts that led to Big Steel's demise.

And, make no mistake about it, they were left to file Chapter 11, consolidate, and, ultimately, emerge as a smaller, profitable sector.

The sky did not fall. Economic ruin did not visit America once these firms began to reorganize.

And it won't, now, either, when the auto makers are allowed to choose filing for bankruptcy.

The Herald Tribune piece notes, near the end,

"Over the decades, the companies had shed employees to stay afloat. Soon, retirees greatly outnumbered the actual workers. At Bethlehem, the ratio was six retirees for every worker. All these retirees had good pensions and good health care plans, which they thought were guaranteed. But these costs were a tremendous weight on the companies.

Bankruptcy changed the rules, allowing the steel makers to unload billions of dollars in pension obligations onto the government's Pension Benefit Guaranty and to cut more than 200,000 workers from their supposedly guaranteed medical care.

The failures also allowed for the renegotiation of labor contracts, something Wilbur Ross Jr., a specialist in distressed assets, realized when he began looking at the moribund industry. The only bidder for the bankrupt LTV Steel, he proceeded to buy Bethlehem and other old-line companies, putting them together as International Steel Group. He cut more employees and revamped work rules, taking Bethlehem, for example, from eight layers of management to three.

Steel's turnaround was dramatic. The 17 leading companies went from a combined loss of $1.1 billion in 2003 to an after-tax profit of $6.6 billion in 2004, according to an analysis done for an industry trade group. Ross sold International Steel to the Indian entrepreneur Lakshmi Mittal for $4.5 billion in 2005, earning a tremendous return.

Thanks to all of steel's tribulations and consolidations - and a world economy that was booming until recently - the industry is relatively healthy."

The article goes on to note some issues which could make an auto sector bankruptcy result in a different outcome than that of the US steel sector. For example,

"Not so fast, Ross said. He doesn't dispute that the auto companies are as bloated as the steel companies were, and certainly doesn't think they should get a blank check. But he thinks the consequences of what he calls free-fall bankruptcies - ones without any government role - could be disastrous.

GM would drag hundreds of suppliers down with it, and they would all have trouble getting back up again.

Furthermore, it is a tremendously problematic time. The final collapse of the steel industry came when the economy was relatively healthy and could absorb the blow. The current economy is the weakest in decades."

Well, a Federal DIP loan is solution in which the government will play a role. Just not one which puts a dead corpse on life support.

In my opinion, it's more than worthwhile to learn from the success of letting market forces work in the sector of 30 years ago, and do so, again, in the auto sector.

The "Other" US Auto Makers

Last Thursday's November 20th Wall Street Journal contained an article entitled, "South Could Gain as Detroit Struggles."

The article begins,

"As Detroit's auto makers seek a government bailout, the resilience of their foreign rivals could vault the South to the forefront of the U.S. car industry.

Foreign makers have been lured to South Carolina, Alabama and other Southern states over the past decade by generous tax benefits and laws that make it easier to build a largely nonunion work force.

Foreign-owned car makers are adjusting to the sales slump with assembly lines that can make multiple models and labor rules that allow faster downsizing.

That labor flexibility has emerged as a key advantage during the industry downturn, allowing foreign-owned plants to rapidly downshift in ways their unionized U.S. competitors cannot. Looser work rules are allowing German automaker BMW AG to lay off up to 733 employees at its Greer, S.C., plant by the end of the year. And Toyota Motor Corp said Wednesday it plans to let go at least 250 people at a Georgetown, Ky., factory in the first quarter of 2009.

Such moves would be largely out of reach for the Big Three U.S. auto makers, which have been saddled with stricter labor rules as vehicle sales have plummeted. Union rules often guaranteed jobs for workers along with generous benefits and wages that surpass those of most other U.S. manufacturing sectors.

The foreign manufacturers -- which are also reaping benefits of advanced production lines and a more popular lineup of models -- are positioned to grab market share from domestic competitors when demand revives. "If the American car companies died, this is what would replace them," said Laurie Harbour-Felax, an auto industry consultant.

Michigan and Ohio are still dominant centers of U.S. vehicle making, producing more than 38% of all cars and trucks in 2007, but Southern states are making gains as foreign car makers add more plants in that part of the country. Four Southern states were responsible for 24% of U.S. production last year, according to Automotive News, a trade publication.
Volkswagen AG, Toyota and Kia Motors Corp., which collectively will benefit from more than $1 billion in government incentives, are pushing through the downturn to complete new factories in Tennessee, Mississippi, and Georgia.

Foreign makers, which currently operate eight plants in the South, have the firm support of many Southern legislators and governors, who have spent much of the past week giving high-profile denunciations of a Detroit bailout. They argue that buttressing ailing U.S. car companies would create unfair competition to foreign makers that have brought thousands of jobs and billions of dollars in investments to the region.

"We shouldn't reward bad business practices made by competitors to the company that is about to employ 2,500 workers coming to my district," said U.S. Rep. Lynn A. Westmoreland (R, Ga.) in an interview. Rep. Westmoreland represents the area around West Point, Ga., where Kia of Korea is building a $1 billion plant set to open next year. At the same time, General Motors Corp. closed a plant in September in Doraville, Ga., that employed 1,000."

I think this is the missing picture of the US auto sector that many in America overlook. And it's fair to say Wagoner, Mulally and Nardelli would like them to continue to overlook this Southern state auto manufacturing success.

Of course, this success looks different than the Detroit failure. It's non-union. And it's owned by auto makers whose headquarters are in other countries. But these plants still employ American workers. And drive economic prosperity in American towns and states.

The nearby map from the article is fascinating. To me, it shows the completion of the original US worker migration up the middle of the country from the South, Kentucky and Tennessee to Chicago and Detroit in the 1940s for war production.

Now, US manufacturing is thriving in the states that gave up population in that initial, largescale northern war and post-war industrialization.

So, when Michigan Senator Debbie Stabenow contends that to lose the Detroit Three auto makers is to lose US manufacturing, this picture shows how totally wrong she is. Simply put, she's lying.

Further paragraphs in the article discuss the economic realities of these Southern car manufacturers. It's not all sweetness and light, but you don't hear the local and state governments complaining,

"And in Vance, Ala., Daimler AG's Mercedes-Benz factory slowed one of its assembly lines, cut back shifts and offered buyouts to its 4,000 workers. The cutbacks are the most severe for Alabama since the state began attracting foreign car makers, but "flexibility has allowed them to manage their operations in a way that will make them competitive in the long term," said Steve Sewell, executive vice president of the Economic Development Partnership of Alabama.

After a 12% drop in sales in October, Toyota this week said it would suspend assembly work at all North American plants for two days in December and trim output at plants in Indiana, California and Kentucky. Though it could delay the 2010 startup of its $1.3 billion plant in Blue Springs, Miss., which will build the Prius hybrid vehicle instead of the Highlander SUV it was originally meant to produce, "we are committed to the project," said Mike Goss, a spokesman. "The concrete is poured and the roof and walls are up and the equipment has been ordered." "

These US states- Alabama, Mississippi, Georgia, South Carolina, Tennessee- are among those with the lowest incomes, educational levels, and economic opportunities. It is simple Schumpeterian dynamics that US jobs and economic manufacturing activity should flow to those areas most able to compete, and most in need of the opportunities.

Moreover, the fact that these states can provide the necessary labor at lower costs suggests just how unnecessary much of the self-proclaimed value the UAW union workers actually provide a modern auto manufacturer.

It's an eye-opening article and graphic presentation of the shifting sands of US auto production. Even a few billion dollars of uncollectable loans aren't going to change the long term economics of this picture.

Detroit is finished as a viable long term future home of significant US auto production.