GM announced that is disbanding the group responsible for the high-performance versions of many of their “regular” cars, High Performance Vehicle Operations (HPVO).  HPVO is responsible for the V-Series Cadillac CTS/STS/XLR and for the Chevrolet SS versions of the Cobalt and HHR.  More were to be on the way, including a rumored SS version of the upcoming Cruze small sedan.  Enthusiasts should mourn the loss of this “tuner” division with the General’s ranks, even if you don’t like GM’s products.  The existence of this type of “car guy” division likely has influence not only on the General’s products, but on other manufacturer’s as well.  The automobile business is largely one of copy cats.  When one has an original idea and implements it successfully, the others are sure to follow as soon as their engineering and manufacturing systems will allow it.  The interesting thing there is that they don’t even try to hide it, at least internally.  When Chrysler introduced the Neon in 1994, Ford immediately put a product in the cycle plan called (and I’m not making this up), “Neon Fighter”.  While the Excursion was still in development and before it was named, it was known as “Suburban Fighter”.  The point is that if the General doesn’t see value in the performance division, then others may start to question theirs.  Then we all lose.

The problem is that the HPVO products simply don’t generate enough revenue to cover the costs (ongoing per-unit costs and development).  However, I think GM is missing part of the equation.  Products like these help sell the lesser, more plebeian versions of those same products.  A customer enthusiastically enters a Cadillac dealer to check out the CTS-V, for example.  He read about the CTS-V in an enthusiast magazine, and is excited to have the “fastest production sedan in the world.”  The $60K+ price tag, though, is a major buzz-kill.  He looks next to his dream and sees a “regular” CTS, which starts at less than $40K, looks about the same, and has as much as 304hp!  It’s a steal compared to the V, because he realizes that he really wouldn’t be able to use the 556hp anyway.  The V or SS versions drive traffic in the showroom, but it’s the regular versions that pay the bills.  To properly evaluate the benefit of HPVO, you need to understand this dynamic.  I’m sure the General understands this, but lacks an ability to measure it.  In the D3 world where the “bean counters” have final say, if you can’t measure it, it doesn’t exist.

With this action, GM is NOT going to pull any products already on the road; it is redeploying the engineers to other programs that will get more bang for the government-loan buck (this is good for your humble reporter, as I have my eye on a Chevrolet HHR SS for my next vehicle).  This also does not affect Performance Vehicle Engineering - a separate group that develops performance vehicles from scratch like the new Camaro or the Pontiac Solstice - or Corvette, which has its own engineering team.  Maybe this is part of the General’s problem: 3 separate groups with the task of developing performance vehicles.  If there were only 1 with all 3 roles, they would likely get better efficiency and maybe be able to keep developing these stealth rockets.

All this doesn’t change the fact that GM needs to cut costs as quickly and as severely as possible, without damaging the revenue stream.  With apologies to Fig Newton, that’s the tricky part.  Cutting costs where the customer can’t see them requires engineering money and resources and time; cutting features and options is relatively easy and quick.  It’s the catch-22 of the modern automotive industry.  Cut later and do it right and you might not be around later.  Cut now to live later and you hurt your ability to generate revenue now and later.  The answer is, of course, constant vigilance on reducing costs where the customer cannot see them.  You must build that into every new product program.  No detail is too small.  Unfortunately, the D3 have not done a good job of managing this in the past, and it might be too late now.

What Would Slandy Do?  I’ve been asked many times recently - what is the answer?  Surely, the government shouldn’t just throw money at the D3.  They need to reform, etc, etc.  At the risk of being presumptuous, here’s what I would do, if I were emperor for a day (just for the auto situation - I have a whole separate list for other topics :^) ).

First, I would allow ALL of the protections of chapter 11 bankruptcy without the actual filing.  The “B” word would be death to the car makers.  Nobody is going to buy a car from a bankrupt automaker.  This would allow them the breathing room to make the changes they need, including rewriting the UAW contract.  I’ve written that the UAW has already given, which is true, but other areas need to be addressed.  The top of that list is work rules.  It is true that the cost of a UAW worker is about the same as a “transplant” worker, but the onerous UAW work rules force the D3 to have too many workers and pay all of the workers the same, regardless of their actual job.  This results in the guy who cuts the grass to be paid the same as the workers in the plant who actually make the cars.

This would also include a provision that supersedes the state franchise laws.  One of the biggest problems is the number of dealers.  The D3 (or any other maker) is severely restricted from rationalizing the number of dealers by state franchise laws.  The D3 have way too many dealers, primarily in urban areas, but would have to pay billions to reduce the number.  Meanwhile, the dealers can’t make any money because there aren’t enough sales to go around.  The D3 need to have the power, with some restrictions/oversight to reduce their dealer count without using all of their cash.

Next, I have suggestions for each of the D3.  First, Chrysler.  Chrysler is in a unique situation, having ownership that is a private equity firm (Cerberus) that obviously doesn’t want to be in the car business.  Cerberus obviously bought their 80.1% stake in Chrysler cheap (or so they thought) and hoped to make a quick buck.  Oops.  Some think the government should just let Chrysler die, because Cerberus doesn’t deserve the help.  Maybe, but what about the workers and management that had nothing to do with all of the ownership changes?  Why should they suffer?  To address this, Emperor Slandy will give the loan to Chrysler in exchange for 100% ownership of Chrysler, including the 19.9% Daimler stake.  Next, I GIVE (or sell for a nominal amount) Chrysler to Nissan-Renault or Volkswagen or another OEM whose product lineup would be complemented by Chrysler’s.  In return for this gift, they would have to agree to keep a certain number of employees and plants open and working.  They would get the benefit of the Chapter 11-like protections to restructure Chrysler’s business.  Cerberus should be happy with that, as they can just walk away without any further losses.  Same for Daimler.  Chrysler employees should be happy too, especially considering the alternatives.  And we, the taxpayers should be happy as well.  We’ve saved jobs with potentially no cost, assuming that the loan is paid back.

General Motors needs the loan, and the fake bankruptcy will give them the room to restructure into a leaner, meaner, more competitive enterprise.  One cost savings that GM should have put in place years ago is their company car program, otherwise known as PEP (Product Evaluation Program).  In its present form, PEP car drivers get a new (usually fully-loaded) vehicle to drive every 4 months.  For this, they are charged a nominal fee ($150/month), which includes EVERYTHING (gas, insurance, maintenance and repairs, unlimited miles).  GM justifies this program by saying it puts the products in the hands of the employees so they can be more familiar with the products and can therefore make suggestions for improvement.  Possibly, but this program, with the structural costs that go with it, is a huge expense that GM cannot afford, even in good times.  The dealers would certainly appreciate the increase in business that would follow (see comment above).  GM could adopt Ford’s company-car program.  See below.

Ford is in the best shape, and doesn’t need any loans…for now.  Ford’s company-car program could use some changes as well.  Management-level employees at Ford get to lease 1 or 2 (depending upon the level) vehicles per year which include everything the GM program does except gas.  The difference is that Ford employees pay much more and the amount depends on how expensive the car is, so Ford makes money on its program.  The suggested change is to eliminate the company-car garages and infrastructure that support the program in and around Dearborn.  Give the dealers the business; they will appreciate the increased business as much as GM’s will, and Ford saves millions.

I also think that all remaining employees, from the top down, should take a pay cut of 5%.  The sacrifices should be spread out among everybody.

The government needs to do its part as well.  We need health care reform (as the countries of the foreign competitors do), trade reform (previously discussed), a coherent energy policy that would include a significantly increased carbon/gas tax and better monetary policy that would address currency manipulation practiced by our friends in other countries.  With all of these in place, the playing field will be more level, allowing our home teams to really show that they can be competitive when the deck is not stacked against them.

If this makes sense to you, you need to do 2 things.  First, write your congressional representatives.  Second, vote Slandy for Emperor!  If you don’t agree, post a comment below with a better idea.  I am always willing to listen to the people.

I sent this letter to President Bush today.

Dear President Bush,

It is hard to believe that it has even come to this, but PLEASE support the loan package for the auto industry.

Forcing GM and Chrysler into Chapter 11 bankruptcy would not only devastate an already weak economy, but also signal the end of American manufacturing prowess to the rest of the world.  Because of the overlapping supply base, the collapse of any of the 3 US automakers would take down its suppliers, which would not only take down Ford, which is not in imminent danger, but also the foreign manufacturers operating in the US.  A general manufacturing collapse would follow, taking out basic industries in all sectors of the economy.

What the “Big 3″ are requesting is a loan, as you know.  They fully intend to use the money to maintain liquidity to get them through the worst economic and credit crisis in 75 years.  Without credit, dealers cannot stock cars and consumers cannot buy them.  Foreign automakers have been requesting help from their home governments as well - so this is clearly not simply a case of mismanagement by the US automakers.

Comparing the situation against the foreign automakers is also not a fair one.  While I fully support free trade, it also must be FAIR trade.  We welcome products from around the world to be sold here, but the rest of the world is not so accommodating to our products.  They protect and nourish their home-grown industries, while we scorn and punish ours.  They give particular attention and help to their auto industries, because they know that auto manufacturing brings with it vital ancillary industries - basic research and development, plastics, steel, rubber and semiconductors, to name a few.  Why do our policies not place such value on our manufacturing industries?  We have already lost many industries, including steel, televisions and computers to foreign countries which support their own.  How many more can we stand to lose before we are relegated to 3rd world status??  We can’t all work at WalMart or Starbucks!  Senate Republicans that voted against this bill last night know this too, as their state governments have spent billions to lure foreign auto plants and suppliers to their states.

Unlike Wall Street, with its $700 billion giveaway, none of the Big 3 has engaged in questionable business practices that have put this economy in such danger.  They have made mistakes, which they freely admit, but all of them were well on their way to righting their respective ships when this crisis hit and pushed them over the edge.  They have already done what the so-called experts have told them they must do:  Ford and Chrysler have brought in respected managers from outside the industry, all 3 negotiated major concessions from the UAW last year.

President Bush, this is perhaps your last chance to leave behind a legacy as the person who saved millions of jobs and perhaps the very future of our economy.  Please do the right thing for all of us, including those who don’t know it yet.

Thanks for your consideration,

Slandy
Publisher, The Slandy Report
http://slandyreport.com/




Well, it looks like the D3 will get their bail…er, loan after all.  As of this writing, reports out of Washington say that GM and Chrysler may get up to $15 billion in short-term loans to carry them over until approximately March.  The lame duck Congress and administration are punting this issue to their successors next year.

Congress has been throwing around many ideas to “help” make the D3 more efficient and more profitable, all under the guise of protecting the taxpayers’ money.  Among the ideas:

• a shotgun wedding of GM and Chrysler
• limits on the companies’ lobbying - specifically against states’ efforts to regulate greenhouse gas emissions (Democrats want this)
• appointment of a “car czar” to oversee the restructuring of the industry, including the power to rewrite contracts with lenders, suppliers, dealers and unions
• force bankruptcy if certain conditions and deadlines are not met
• cut the union wages and eliminate the so-called “jobs bank” (Republicans)
• compel bondholders to accept a debt for equity swap
• forcing the ouster of 1 or more of the CEOs of the D3 and limitations of executive pay and/or bonuses

Depending on the exact final wording of the bill, this could be a disaster for the D3.  Many cliches come to mind, specifically that the “medicine might be worse than the disease.”

I have addressed the GM-Chrysler merger in a previous article, so you can read my thoughts there.

The separate greenhouse emissions regulations by state is beyond ridiculous.  Briefly, you have a group of companies that might not make the payroll this month, and DC wants to saddle them (as well as their competitors) with a ragtag set of regulations that will drive up the complexity of their products many times.  This will further undermine their ability to recover from their current situation.  For those that don’t understand this issue, California and 15 other states have already passed regulations that limit greenhouse gas (carbon dioxide) emissions from tailpipes.  Present federal law prohibits states from setting fuel economy standards.  There is one set of standards and the feds have that right exclusively.  So what’s the problem - fuel economy standards aren’t the same as emissions, right?  Wrong.  Gasoline (as well as Diesel fuel) is a hydrocarbon, meaning that it is made up of hydrogen and carbon.  When a hydrocarbon fuel burns completely, the oxygen in the air combines with the hydrogen to form water (H₂O) and with the carbon to form carbon dioxide (CO₂).  If the burning is not complete, then some of the carbon atoms only combine with one oxygen atom rather than two, to form carbon monoxide (CO), a highly poisonous gas.  Phrased differently, carbon dioxide is formed from burning gasoline or Diesel.  It’s the chemistry that determines that, so the 16 (and counting) states saying that they are only trying to clean up their air is just a smokescreen (pun intended) for going around federal law to set fuel economy standards.  Why is this bad?  Because all of the automakers spend many millions of dollars every year to navigate the extremely complex fuel economy rules.  Believe me, it is way more complex than anybody who has never worked in government could ever imagine.  Now multiply that by perhaps 50.

I want to know the criteria for the selection of the car czar.  Since many in Congress admitted in the hearings that they know nothing about running a car company, what makes them think they know how to pick somebody to oversee the auto industry?  What are the qualifications?  I think they would want somebody with non-automotive manufacturing experience, perhaps a turn-around specialist.  I’ve heard the name Jack Welch thrown around.  Jack would likely be a good choice, but DC doesn’t work that way.  Likely, it will be a politician owed a favor or perhaps a politician out of favor, considering how DC views Detroit.  Detroit is the USA’s Siberia, after all.  But can Sarah Palin see Detroit from her house?  Personally, I’d like to nominate John Engler, former Michigan governor, for the post.  Engler is the President & CEO of the National Association of Manufacturers, so he knows all about the issues facing the manufacturers in this country.  He is also a politician, so he knows how get things done in the political world.  He has all of the skills and experience that will be needed in this job, assuming it will exist in the final version of the loan legislation.

If the feds force bankruptcy, they better understand that Chapter 11 (reorganization with court supervision) really means Chapter 7 (liquidation) in this case.  Consumer research has already shown that D3 sales have been hurt by the mere talk of bankruptcy.  Bankruptcy generally works to help a company restructure in a safe environment.  Cars are different.  Besides your home, you will likely never make a bigger purchase than a car.  People keep cars for at least 2 years, sometime much longer.  Be honest - would you make that kind of financial commitment to a company that you’re not sure will be around to honor the warranty?  Make no mistake about this - bankruptcy in this case means the companies go out of business.  What would be better is for Congress to allow all of the bankruptcy rules and protections to apply without a formal declaration and filing of bankruptcy.

The UAW last year negotiated lower wages for all new employees (½ of the prevailing rate), and agreed to buyouts of many existing, higher wage employees.  They also agreed to help take many of the obligations for benefits off the D3 books, and last week agreed to a longer time frame to fund those obligations, saving the D3 precious cash.  Experts agree that when those changes are fully implemented, D3 wages & benefits will be roughly the same as the transplants.  The UAW has also agreed to suspend the jobs bank immediately.  The UAW has come to the table and has given much more than most people realize.  The only part left is in the area of work rules.  The UAW contract contains many different job classifications that are simply out of date.  Supervisors need to have the flexibility to assign workers wherever they are needed, but they don’t presently have that ability.  So while the cost of the workers is now competitive, the D3 are forced to have too many workers.  This should be addressed and fixed.

I have also addressed the situation of the CEOs of the D3 previously, and you can read my thoughts on that as well.  I think that limitations on pay and bonuses are perfectly fair, if the taxpayers’ money goes to help these companies.

The D3 need the taxpayers’ help, and they are going to have to live with whatever restrictions Congress dreams up if they want to survive.  Congress needs to be careful and understand what they’re doing, because they are hardly the example of fiscal expertise.  The D3 might be guilty of mismanagement, but DC certainly is.

Today, Alan Mulally, CEO of Ford, made the following statement to the Senate Committee on Banking, Housing and Urban Affairs:

Mr. Chairman, Senator Shelby and members of the Committee. Thank you for the opportunity to share Ford’s plan. We appreciate the valid concerns raised by Congress about the future viability of the industry. We hope that our submission and today’s testimony will help instill confidence in Ford’s commitment to change, including our accountability and shared sacrifice during this difficult economic period.

On Tuesday, Ford Motor Company submitted to your Committee our comprehensive business plan, which details the company’s path to profitability through an acceleration of our aggressive restructuring actions and the introduction of more high-quality, safe and fuel-efficient vehicles – including a broader range of hybrid-electric vehicles and the introduction of advanced plug-in hybrids and full electric vehicles.

In addition to our plan, we are also here today to request support for the industry. In the near-term, Ford does not require access to a government bridge loan. However, we request a credit line of $9 billion as a critical backstop or safeguard against worsening conditions as we drive transformational change in our company.

One Plan: Beginning earlier this decade, we recognized the challenges the domestic auto industry faced and began implementing a disciplined global business plan to completely transform Ford, to improve our efficiency, cut costs and champion innovation. Our plan builds on the success we have seen in the past two years by accelerating the development of our new products that customers want and value. Our plan is anchored by four key priorities:

• Aggressively restructure to operate profitably at the current demand and changing model mix;
• Accelerate development of new products our customers want and value;
• Finance our plan and improve our balance sheet; and
• Work together effectively as one team, leveraging our global assets.

One Goal: Our team and plan is dedicated and focused on delivering profitable growth for all. While market, economic and business conditions recently have deteriorated worldwide at a rate never before seen, we have made substantial progress since we launched our plan in late 2006:

• We obtained financing by going to the markets in December 2006 to raise $23.5 billion in liquidity, consisting of $18.5 billion of senior secured debt and credit facilities, substantially secured by all of our domestic assets, and $5 billion of unsecured convertible debt.

• We have implemented our strategy to simplify our brand structure. As a result, we sold Aston Martin, Jaguar, Land Rover and the majority of our ownership of Mazda, and we’re considering our options for Volvo. We have divested other non-core assets. These sales have also helped our overall liquidity and generated $3.7 billion in additional capital to re-invest in the business.

• To achieve maximum efficiency, we will have reduced our North American operating costs by more than $5 billion between year end 2005 and 2008.

• We have taken painful downsizing actions to match capacity and market share in North America, including closing 17 plants and downsizing by 12,000 salaried employees and 44,000 hourly employees.

Ford is committed to building a sustainable future for the benefit of all Americans, and we believe Ford is on the right path to achieve this vision. I know the Members of the Committee have had an opportunity to review our plans over the last two days, so I will highlight new details about Ford’s future plans and forecasts:

• Ford’s plan calls for an investment of approximately $14 billion in the U.S. on advanced technologies and products to improve fuel efficiency during the next seven years.

• Based on current business planning assumptions – including U.S. industry sales for 2009, 2010 and 2011 of 12.5 million units, 14.5 million units and 15.5 million units, respectively – Ford expects both our overall and our North American automotive business pre-tax results to be breakeven or profitable in 2011.

• As part of a continuing focus on building the Ford brand, we are exploring strategic options for Volvo Car Corporation, including the possible sale of the Sweden-based premium automaker. The strategic review is in line with a broad range of actions we are taking to focus on the Ford brand and ensure we have the resources to fund our plan. Since 2007, Ford has sold Aston Martin, Jaguar, Land Rover and the majority of its stake in Mazda.

• Half of the Ford, Lincoln and Mercury light-duty nameplates by 2010 will qualify as “Advanced Technology Vehicles” under the U.S. Energy Independence and Security Act – increasing to 75 percent in 2011 and more than 90 percent in 2014. We have included these projects in our application to the Department of Energy for loans under that Act and we hope to receive $5 billion in direct loans by 2011 to support Ford’s investment in advanced technologies and products.

• From our largest light duty trucks to our smallest cars, Ford will improve the fuel economy of our fleet an average of 14 percent for 2009 models, 26 percent for 2012 models and 36 percent for 2015 models – compared with the fuel economy of its 2005 fleet. Overall, we expect to achieve cumulative gasoline fuel savings from advanced technology vehicles of 16 billion gallons from 2005 to 2015.

• Next month at the North American International Auto Show in Detroit, we will discuss in detail Ford’s accelerated vehicle electrification plan, which includes bringing a family of hybrids, plug-in hybrids and battery electric vehicles to market by 2012. The work will include partnering with battery and powertrain systems suppliers to deliver a full battery electric vehicle (BEV) in a van-type vehicle for commercial fleet use in 2010 and a BEV sedan in 2011. We will develop these vehicles in a manner that enables it to reduce costs and ultimately make BEVs more affordable for consumers.

• The 2007 UAW-Ford labor agreement resulted in significant progress being made in reducing the company’s total labor cost. Given the present economic crisis and its impact upon the automotive industry, however, we are presently engaged in discussions with the UAW with the objective to further reduce our cost structure and eliminate the remaining labor cost gap that exists between Ford and the transplants.

• As previously announced, Ford plans two additional plant closures this quarter and four additional plant closures between 2009 and 2011. We have announced our intent to close or sell what will be four remaining ACH plants. And we will continue to aggressively match manufacturing capacity to real demand.

• Ford will continue to work to reduce its dealer and supplier base to increase efficiency and promote mutual profitability. By year end, we estimate we will have 3,790 U.S. dealers, a reduction of 606 dealers overall – or 14 percent from year-end 2005 – including a reduction of 16 percent in large markets. In addition, Ford has been able to reduce the number of production suppliers eligible for major sourcing from 3,400 in 2004 to approximately 1,600 today, a reduction of 53 percent. We eventually plan to further reduce the number of suppliers eligible for major sourcing to 750.

• After reducing our workforce by 50 percent in just three years, we are also canceling all bonuses and merit increases for North America salaried employees – including top management – in 2009. And should Ford need to access funds from a potential government bridge loan, I will work for a salary of $1 a year – as a sign of my confidence in the company’s transformation plan and future.

• We are moving ahead with plans we announced this summer to leverage the company’s global product strengths and bring more small, fuel-efficient vehicles to the U.S. The plan includes delivering best-in-class or among the best fuel economy with every new vehicle introduced. We are also introducing industry-leading, fuel-saving EcoBoost engines and doubling the number and volume of hybrid vehicles.

• This product acceleration will result in a balanced product portfolio with a complete family of small, medium and large cars, utilities and trucks. And we are increasing our investment in cars and crossovers from approximately 60 percent in 2007 to 80 percent of our total product investment in 2010.

Our plan is working, but there is clearly more to do – something that is increasingly difficult in this tough economic climate. That is why we are seeking access to a $9 billion bridge loan, even though we hope to complete our transformation without accessing any of these funds.

Despite the serious global economic downturn, Ford does not anticipate a liquidity crisis in 2009 – barring a bankruptcy by one of our domestic competitors or a more severe economic downturn that would further cripple automotive sales and create additional cash challenges.

In particular, the collapse of one or both of our domestic competitors would threaten Ford because we have 80 percent overlap in supplier networks and nearly 25 percent of Ford’s top dealers also own GM and Chrysler franchises.

The impact of a bankruptcy also reaches beyond Ford and the U.S. auto industry. It would cause further stress to our domestic banking industry and private retirement systems. Goldman Sachs estimates the impact at up to $1 trillion.

We also believe effective restructuring involves a broader dialogue with all our stakeholders. President-elect Obama has indicated an interest in such a discussion. There are a number of complicated questions that will need to be considered, for example:

• How do we create a dealer body that meets market demand and is profitable for all?
• How do we develop a healthy and viable supplier base?
• How do we work with the UAW to ensure that our cost structure is competitive with the foreign transplants?
• How do we address the significant debt obligation of the domestic industry?

We are prepared to work together with this Committee and all of the parties to address these critical issues as part of our plan.

Ford has a comprehensive transformation plan that will ensure our future viability – as evidenced by our profitability in the first quarter of 2008. While we clearly still have much more to do, I am more convinced than ever that we have the right plan that will create a viable Ford going forward and position us for profitable growth.

Thank you.

Well, the Detroit 3 have turned in their homework on time.  That used to count for something, but I’m not sure it does any longer.  Congress, specifically the Republicans, seems to have decided that they should make an example of of the D3.  They are obviously a bunch of mismanaged dinosaurs run by a group of idiots.  If you subscribe to this line of “reasoning”, ask yourself this, “How likely is it that all 3 of these extremely large publicly held (except for Chrysler only recently) companies, would all make the same mistakes and never be able to make good, sound business decisions for the last 30+ years?”  I’m no mathematician, but the odds against that seem very long.  I addressed some of the reasons for this situation last week, but they include 1. our nation’s lack of coherent trade, energy and health care policy, 2. uncompetitive union contracts and 3. yes, management mistakes.  Any one or even two of these would have put the D3 in a bad, but not deadly, position.  All 3, combined with the current credit crisis, has pushed an industry that was turning away from the abyss over the cliff.  The latter 2 of the 3 reasons above were addressed before this crisis hit (Ford turned a profit in the 1st quarter this year, in fact).  All of the D3 negotiated “breakthrough” contracts with the UAW in 2007, making a big difference to their bottom lines, mostly by moving the burden of health care to the UAW itself.  Ford and Chrysler also brought in new management from the outside.  Alan Mulally of Ford, in particular, has made all of the right moves since he came on board 2 years ago.  He and Bob Nardelli of Chrysler are exactly what the so-called experts have been saying in the media for the last few weeks.  They’ve said, “Go outside your inbred company and hire some proven managers that are not beholden to the old ways of doing things.  Maybe you could learn a thing or 2 from the Japanese companies as well”  Alan Mulally left a 30+ year career at Boeing to take over as CEO of Ford 2 years ago.  He is credited for turning Boeing around from his position in charge of the commercial aircraft division - the largest part of Boeing.  He understands manufacturing and unions in a large corporation.  Bob Nardelli spent almost 30 years at General Electric and was 1 of 3 “finalists” to succeed Jack Welch when Jack retired in 2000.  He left GE and became CEO of Home Depot.  Under his watch, Home Depot doubled sales and profits in 5 years.  By the way, both Ford and Chrysler also have recruited highly visible and successful executives from the darling of the media, Toyota.  Jim Farley is presently VP of Marketing at Ford, while Jim Press is co-president of Chrysler.

I’ve been told by some (see comments on the previous article), including a certain lawyer that I know, that if a company is losing money, and it is unable to cut its costs to make money - it should just go out of business.  That’s what happens to other businesses, right?  The lawyer pointed to their law firm, which had to close its doors recently.  This example is both right and wrong.  It’s right for the obvious reasons.  Capitalism works.  Free markets work.  The strong survive.  Economic Darwinism weeds out the weak, so the strong remain, etc, etc.  The example is also wrong because the US auto market is far from pure capitalism.  In what other industry are the companies told what they can sell, what features they will offer, where they can sell and whom they will hire?  None that I know of.  State and federal laws govern their relationships with dealers and the unions, so they have limited ability to change this situation without negotiating and paying a LOT of money.

Toyota and the other foreign makers live within these same regulations, so why aren’t they asking for a loan to save them?  Partly because they ARE foreign.  Their home markets have high fuel prices and are crowded - conditions which make the sale of small cars easy and profitable.  The US is just the opposite: cheap gas and wide open spaces.  Think it’s a coincidence that our home market automakers make the large vehicles?  Also, the home markets of the foreign automakers actively support them by supporting R&D and in other ways.

The UAW is blamed for a big part of Detroit’s problems, but is that really true?  For a long time, the UAW has burdened the D3 with high wages, high benefits, restrictive work rules and strikes to get what they want.  Federal law prohibits the companies from “busting” the union, so the D3 have to deal with them.  They can’t simply fire workers who strike or, in some cases, don’t even show up for work.  Recently, however, the UAW has agreed to lower wages and benefits so that when they take full effect, the UAW costs will be only slightly higher than the “transplants.”  The main source of labor disadvantage, however, is the work rules.  While the cost of a UAW employee now approaches those of the transplants, the remaining issue is that the work rules force the D3 to have too many employees.  This is the last source of disadvantage that must be addressed.  The UAW, to its credit, announced today that it will reopen negotiations with the D3.  The jobs bank and the work rules should be the 1st items on the agenda.

Will the D3 get their loans?  Should they?  As I sit in my kitchen typing this, CNN is saying that there doesn’t appear to be enough votes in Congress.  They also say that 61% of the public don’t support the loans.  The lack of information in both the public and in Congress is astounding.  I worry for our future as an industrial power.  The ramifications are truly frightening.

Senator Carl Levin, D-MI, testified this morning on the dire need for the bridge LOANS (not bailout) that the D3 need.  Here are some comments from the senator.  Note that he corroborates the point I made regarding the unlevel playing field with respect to foreign governments aiding their domestic manufacturing, especially automakers.  The rest of this article is a quote from Senator Levin’s office:

Immediate support is needed to shore up our automotive manufacturing sector and to preserve the more than 2.5 million jobs directly and indirectly linked to the U.S. auto industry. This morning, I testified in front of the House Financial Services Committee to emphasize the need for Congress to take swift action on behalf of our nation’s automakers. Standing idly by as the financial crisis decimates our domestic manufacturing capabilities and pulls our fragile economy further into recession is unacceptable.

Throughout the world, the dire financial crisis continues to spur governments to provide assistance to their manufacturing industries, which are not able to obtain the credit they so vitally need to continue operations. Both Germany and the European Union are studying the possibility of providing support for their automotive industries. Australia has provided more than $4 billion in funding for its vehicle manufacturers.  Automotive manufacturers in China are already voicing their expectation of financial assistance from their government as well. “The Chinese government will undoubtedly support us,” says She Cairong, general manager of JAC
Motors, a Chinese automobile manufacturer. This quote appeared in a New York Times article this morning, highlighting China’s consideration of a plan to provide assistance to its domestic automobile companies.

The spotlight is now focused on Congress, which is considering the possibility of rescuing the industry from an economic downturn not of its own making. President-elect Obama has called the U.S. auto industry “the
backbone of American manufacturing” and said that the failure of our domestic automakers would be “a disaster” for our economy. President Bush, Speaker Pelosi, and both the Majority and Minority Leaders of the Senate agree that bridge loans for our domestic automakers are necessary at this time. I will continue to work with my colleagues in the Senate and the Congressional Leadership to come up with a plan that would provide auto manufacturers with the bridge loans they need to weather this financial storm.

You can read the transcript of my testimony before the House Financial Services Committee by clicking on the following link: [http://levin.senate.gov/newsroom/release.cfm?id=305099]. During these difficult times, I am doing everything within my power to convince the Congress to provide the bridge loans for the domestic auto industry that the President, the President-elect and the leaders from both houses of Congress support.
Sincerely,
Carl Levin

There have been many in the last few weeks who have openly cheered the impending collapse of the Detroit 3 (D3) and have stated that we would all be better off if they simply went away and left us all alone.  One of the more prominent has been an opinion piece in Saturday’s Wall Street Journal, written by David Yermack, a finance professor at New York University.  Among other points, he states, “Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.”  Mr. Yermack’s piece is so full of inaccuracies that it would be difficult to list them all.  But I think it would be helpful to discuss with real facts, what’s going on here.

How did the D3 get into this situation?  The reasons are long and varied, but the talking heads will tell you that bad products and resistance to fuel economy standards.  Let’s talk about each of these.

Products While I will never say that the D3 haven’t made more than their share of bonehead decisions and bad cars, most of that is in the past.  Today, although Chrysler lags, GM’s and Ford’s quality is every bit as good as anybody else’s.  While measuring vehicle quality is much more complicated than it may seem, J.D. Power publishes a report called the “Initial Quality Study” (IQS) each year.  It is widely regarded as the most definitive study of vehicle quality.  So what does JDP say?  While the top 5 spots are indeed occupied by foreign brands, most of the remaining spots rated better than average are American brands.  J.D. Power rates 16 brands better than average - 7 American, 4 European, 4 Japanese and 1 Korean.  But there are so many more American brands, you say, so that means nothing.  OK, what about those worse than average?  There are 20 worse than average - 6 American, 6 European, 7 Japanese and 1 Korean.  54% of the American brands are better than average, compared to 50% of Korean, 40% of European and 36% of Japanese.  Even if you include GM’s and Ford’s foreign brands in their totals, 47% of the American brands are better than average - still better than the Japanese manufacturers.  The same details by manufacturer are in the table below.  As for individual nameplates, Power rated the Chevrolet Malibu the highest-quality midsize sedan.  Both the Malibu and Ford Fusion scored better than the Honda Accord and Toyota Camry.  In the compact car segment, the top 2 cars are Japanese, but so are the bottom 2.  In large pickups, Power rated the Chevy Silverado the highest quality, ahead of the Toyota Tundra.  The Nissan Titan was last.  While there are nuances to all of this, and you can make statistics say whatever you want, this shows that it is absolutely incorrect to say that “foreign” cars are any better than American.

Maybe you don’t know about JD Power, and don’t care what they say.  OK, how about Consumer Reports?  Consumer Reports recently found that “Ford’s reliability is now on par with good Japanese automakers.”  Notice they said “good Japanese automakers.”  That means that it is just as wrong to say that all Japanese cars are good as it is to say that all American cars are bad.  You can get a bad Japanese car or a good one - the same as American cars.

The D3 are also no less efficient in their operations than the foreign makers.  According to the 2008 Harbour Report (again, the most respected study of manufacturing efficiency), the D3 “nearly erased the productivity deficit against their Japan-based competitors, despite declining production and shrinking market share.”  Chrysler’s labor hours per vehicle are equal to Toyota, GM recorded its 15th consecutive improvement, and Ford reduced its labor content per vehicle by 3.7%, despite producing 6% fewer vehicles than in 2006.  Ron Harbour stated, “Improving productivity in the face of lower production is a huge accomplishment, especially with the pressures created by rising gas prices.”  So, apparently, manufacturing efficiency isn’t the issue, either.

OK, but they build only gas-guzzling behemoths, right?  Wrong.  This one will surely surprise you (it surprised me when I looked up the figures).  In nearly every vehicle category, a D3 product has the best fuel economy.  Without boring you with lots of numbers and details, just look at this table:

Fuel Economy Standards This topic is tied up with overall government regulation and policy, so I will include those in this discussion.  The Corporate Average Fuel Economy (CAFE) legislation was enacted in the aftermath of the first energy crisis as a way to reduce our dependence on foreign oil.  We imported 35% of our oil in 1974, and this has increased to over 65% today.  The problems with CAFE are numerous, but for purposes of this discussion, I will focus on one.  CAFE takes a laudable goal - reducing our use and import of oil - and places its burden upon the manufacturers, not the consumers.  Auto manufacturers are forced to sell the more economical vehicles in sufficient numbers to offset the sale of the less economical vehicles.  But what if consumers don’t want the more economical vehicles?  Tough.  CAFE says you have to average a certain level of fuel economy regardless of what the consumers want.  Until this past summer, almost nobody wanted the vehicles with higher MPG, because gas has been so cheap - the cheapest in the industrial world.  The home markets of the foreign automakers place heavy taxes on gas to encourage the purchase of fuel-efficient vehicles.  Our government tells the producers what to sell.  Because of this difference, the foreign automakers have a built-in advantage.  They make smaller, more efficient vehicles for their home markets, because that’s what the consumers want there.  They have developed the expertise in small vehicles for many years.  Consumers also want smaller cars there because their home markets have less parking and have tighter roads.  US consumers want a vehicle that is comfortable to drive several hundred miles or more on vacation.  Our society is simply different that those others, and so therefore are our automakers.  Back to gas prices, though.  Do you think it’s a coincidence that sales of small cars went from 16.6% of the US market in 2007 to 23.9% this past spring (May - July)?  Hardly.  Consumers bought the more fuel-efficient vehicles because it made sense for them.  CAFE, by keeping fuel prices low, actually encourages more consumption and therefore defeats the purpose.  If we as a society want to use less fuel, CAFE is the exact opposite way to accomplish it.  The summer of 2008 saw a major and sudden shift to more fuel-efficient vehicles for those needing to buy a new vehicle and a marked reduction in driving for everybody.  This proves that they way to reduce consumption is to raise the price.  This is classic (and simple) supply and demand.  Our government needs to scrap CAFE because it simply doesn’t work.  Such disparate sources as the National Center for Policy Analysis and Popular Mechanics agree. The better and more effective solution is a higher gas tax, either a $/gallon or a floor on prices (which is used in Europe).

The other part of the government’s role in this mess is in trade policy.  The home markets of the foreign makers, especially Japan and Korea, actively support their industries, especially the auto industry.  They do this through trade barriers and the funding of collaborative research.  The trade barriers have a two-pronged effect.  First, there is no real opportunity for foreign makers to penetrate these markets in any significant numbers, regardless of how good the products are.  This results in the second issue.  Their closed home market provides unreasonable profits that they plow back into new and better products, processes and factories.  While I am a strong proponent of free trade, the rest of the world is using us (and our free-market nature) to take advantage of us.  Fair trade is a better policy unless and until the rest of the world joins us on the free trade side.  The US government should immediately change our policy to be reciprocal with all of our trading partners.  We should exactly match any and all trade barriers placed upon our products overseas.  If they relax their barriers, so would we.  It’s time we stopped being the world’s punching bag and started supporting our home industries - of all varieties.

Tax policy is also part of the equation here.  The Tax Code allows a write-off for SUVs that weigh over 6000 lbs.  This is a provision that was intended to allow farmers and other businesses to afford to buy new trucks for their businesses.  Including the 6000-lb. floor was intended to make sure people weren’t buying the vehicles for personal use.  then came the monster luxury SUVs.  People (and their accountants) quickly figured out that they could buy an Excursion or a Hummer and write off the whole thing in the year of purchase, saving them thousands.  Like CAFE, Congress made a law that had good intentions, but had bad side effects.

OK, now what?

So given all that, what should we do now?  Are the talking heads right, would we be better off without the D3?  It depends upon your definition of “better”.  The Center for Automotive Research (CAR) in Ann Arbor, Michigan published a study earlier this month that examines the doomsday scenario that so many would be happy to see.  I wrote about that study a week ago, but here is the summary in a nutshell.  If the D3 were to shut their doors tomorrow, the US economy would lose 3 MILLION jobs in the first year - “only” 240,000 of which are direct employees of the D3.  Why?  The auto industry has one of the largest economic multipliers in the US economy (this means that each automotive job supports more spin-off jobs than those in other industries).  Some of those 3 million lost jobs would be offset eventually by other automakers and some employees finding new work, but it would still be 1.8 million after 3 years.  The total loss of tax revenue for the government would be $156 billion over 3 years.  Doesn’t that sound a little better than the $25 loan that the D3 are requesting?  The auto industry is somewhat a victim of over-regulation and misconception and supports 3 million jobs.  The loan would include significant oversight.  This sounds better than a $700+ billion blank check for a financial services sector that is largely a victim of its own greed?

Lastly, we cannot forget national security in these dangerous times.  Our manufacturing base will be vital in the case of a future war.  Should we depend on foreign companies to supply us with tanks, planes and other needs in the event of war?  Or should we do all we can to keep that kind of expertise here at home?  The Detroit automakers converted their factories to producing war materials in World War II.  Without them, the outcome may have been very different.

The Detroit 3 have made their share of mistakes, but the present situation is not completely of their own doing.  The government should place whatever reasonable restrictions are necessary, but we cannot let our auto industry die.  They’ll take our way of life and our standard of living with them.

The recent stock market decline, mortgage / credit crisis and gas price increase (the recent decline notwithstanding) have had a dramatic effect on the auto industry and the “Detroit 3″ in particular.  Total industry sales fell 32% in October to 838,592 - the lowest level in 25 years.  General Motors’ sales were down 45%, Chrysler’s 35% and Ford 32% - overall the D3 were down over 250,000 units for the month or 39%.  They have met with congressional leaders asking for a cash infusion of up to $50 billion - yes, with a “B”.  It may take the form of low-interest loans, a government “investment” or a simple bailout a la Wall Street’s.  GMAC may convert itself into a bank to be eligible for part of the $700+ billion bailout.  GM and Chrysler’s parent, Cerberus, have been discussing a GM takeover of Chrysler.  Desperate times, indeed, are apparently calling for desperate measures.  Many voices from around the country have been critical of any help from the government.  At first, many in Congress and the Bush administration voiced the opinion that Detroit’s failed decisions should not be rewarded with taxpayer money.  When businesses make bad decisions, that can and should lead to that business’s failure, the thinking goes.  That’s capitalism.  Sometimes it doesn’t seem right, and sometimes it hurts.  But capitalism results in the most efficient allocation of scarce resources, and it works, ultimately, to the benefit of our society.

But what happens if the economy isn’t pure capitalism?  What if the government, in the interest of society, regulates this business and forces its costs higher?  What if the government policies lead to the evaporation of the credit that is required for its industry to function?  What if the government’s lack of an energy policy has led consumers to value gas-guzzling behemoths until a gas shock makes the bottom fall out?  What if the government’s lack of a coherent trade policy allows foreign competitors to have an unnatural advantage over the domestic industry?  Then the government must acknowledge its complicity in the situation and do something about it.

“Too big to fail” is a phrase we have heard often in the last few months.  AIG, Lehman Brothers (what happened to Shearson?)  and others were bailed out recently using this logic.  Some seem to think that GM, Ford and Chrysler are not too big to fail.  The reasons are too numerous to go into here, but include the lack of a trade policy mentioned above, and our national attitudes of “Who cares?” and “Whatever.”

The Center for Automotive Research (CAR) in Ann Arbor, Michigan published a study on Election Day called, “The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers”.  They looked at 2 scenarios: 1. the impact of all 3 domestic automakers ceasing operations in the U.S. and 2. a 50% reduction in all production and employment in the U.S.  CAR states that, given current circumstances, one of these scenarios is “probable” in the next 12 months.  The impact of either of the scenarios is devastating to the U.S. economy, as not only would the domestic automakers suffer, but so would the foreign makers.  The domestic supply base would crumble without the domestics as customers, so they would also be unable to supply the foreign makers here in the US.  Domestic production would fall to ZERO, and all of the nation’s auto needs would have to be supplied by imports.  Production of the foreign automakers would recover by the third year, and would make up for about 20% of the domestic makers’ lost production.

Scenario 1 results in a loss of 3 million jobs in the US in the first year, recovering somewhat to a loss of “only” 1.8 million in the third year.  This includes all supplier and “spin off” employment.  In economic terms, the cumulative effect for the 3 years studied would be a loss of $400 billion in personal income and a loss of $156 billion in tax revenue.  Scenario 2’s numbers are hardly encouraging either.  The year 1 job loss is 2.5 million, recovering to 1 million in  year 3.  The personal income loss totals $275 billion and the tax revenue loss is $108 billion for the three years.

Think that’s bad?  The study only considers the direct impact to the US economy.  A permanent contraction of the US auto industry would impact the Canadian and Mexican industries also, which would result in further negative effects to the U.S.  The failure of any of the D3 would also place a huge burden on the government in the form of pension plan failures that would have to be absorbed by the Pension Benefit Guarantee Corporation also.

Given all of this, it is naive to think that you will not be affected by the failure of any major part of the domestic auto industry.  The $50 billion mentioned at the beginning of this article seems like chump change compared to what the government will be forced to do if any of them fail.  The auto industry has the biggest multiplier effect of any industry in the nation.  The job losses may not be yours or your family or your neighbor - but they might be, even if none of you work in Detroit or for the auto industry.

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