Monday, November 17, 2008

Big Thoughts on the Big Three

I asked a friend who works in management at one of the Big Three a basic question about the industry: Why don’t automakers simply slash capacity to cut costs and stay alive? The answer provides a short, succinct analysis of the problems bedeviling the industry:

I think that is what they are trying to do. At least cut production and close factories to stay in line with market demand. The problem is market demand is falling so fast that it has become very difficult to keep up with it. Having said that, automakers still have an incredible amount of fixed costs that don't go away when you shut down production, not to mention the legacy costs of the retirees.

The bottom line is this: there is too much capacity. All the automakers — including the Big Three, the Japanese, and everyone else — currently have a capacity of roughly 20 million cars a year in North America. (That includes Mexico and Canada, but many of those cars end up in the U.S. anyway.)

But the estimated market demand this year in the U.S. is under 12 million and falling fast. At its peak in the late ‘90s the market demand was 17 million. So something has got to give — supply is outpacing demand and this keeps prices low but doesn't allow for profitable growth.

(At some point, somebody should have put some of the profits from trucks and SUV’s back into small cars. But the attitude was we cant compete with the Camry and make money, so we won’t even try. Huge failure.)

Every car company would love to be capacitized right now to run profitably for their market share of 12 million units. But nobody is and that is why you are seeing this huge outflow of cash. Everyone is spending money to support a 20 million capacity and the fixed costs kill you when the market only supports something less than 12 million.

The upside of bankruptcy is that the auto company could reopen all of its labor contracts. The downside is —and it is huge — who would want to buy a car with a warranty from a company in bankruptcy? Plus, all of these clowns are writing editorials claiming that revamping these labor contracts would result in huge savings. Not necessarily so. I've heard that it would not save us that much money over the near term, certainly not enough to warrant filing for bankruptcy.

So it is capacity, man, and the Americans were capacitized to build trucks and Honda was capacitized to build cars. They wanted to build SUV’s and trucks like the Ridgeline, but they weren't a hit — lucky them — so they didn't add to those factories. We wanted to build more small cars, but the Fusion and Focus didn't beat out the Camry and Accord — unlucky us. Now with gas at $2-$3/gallon, that seems like a good mix. Some people will want cars, some will want trucks, some will want SUV’s. And if we close enough factories in this country and capacitize to around 12 million units, we could all start to grow profitably again — everyone. That is why the bailout money is so important.

All these companies want to do is get to the other side of the river with their company still intact. If the American car companies don't get there, when — and not if — the American economy picks up and we start buying cars and trucks again, we can look forward to shipping all of our money to Japan in the form of Toyota profits and get in return some mediocre paying factory jobs in the south. Sounds like a good investment to me to help out the American auto industry.

Oakparkmark also has a strong take on the question of a bailout:

Let's lay out a few facts we can all agree on. First, the auto industry is not responsible for global warming. Consumers are. GM and others are simply responding to the marketplace. Today, you can buy a Ford or Malibu hybrid sedan, and the
Chevy Volt will be revolutionary, but of course, GM will take a loss on each car. That won't help them out of their mess. (People who blame cars for our environmental mess should be reminded that bovine flatulence, caused by a corn-based diet that is unnatural and harmful to the animals, contributes as much methane as all cars. This, of course, is driven by the demand for beef. So the anti-car environazis can get off their high horses unless they're vegetarian.)

Second, most people in this debate are truly clueless about the real issues. Unfortunately that includes almost all of our politicians. With the exception of Michigan's congress-people, who simply do what they're told by the auto industry. If they have any real insight, we'll never know.

Third, the products are fine. A U.S.-built GM vehicle is way better than a Mexican-built VW. The difference in quality between a Buick and a Mercedes in negligible, especially since Mercedes and BMW are in a war to outdo each other with unproducible technologies that nobody wants.

So, what's the real problem? The real problem is, as has been copiously documented over the last several decades, is the corrupt and cloistered executive managements of the respective companies. Also, the fundamental reason for each company's existence leads each to its own destruction.

For example, the purpose of the Ford Motor Company is to keep the Ford family from having to get real jobs. (Again, don't take my word for it. Read the literature.) Their incessant inbreeding with the Firestone family has not led to an imaginative solution to Ford's problems. They simply appoint the least genetically abused family member to work himself to death to keep the family fortune at least somewhat intact.

The purpose of the GM is for the executives to maintain their little club. Anyone who's gotten close to the 14th floor (or whatever it's called these days) knows that the executive culture thrives on being worshiped. I'm not making this up. Micheline Maynard of the New York Times called this out a few years ago, and she's on the money.

Not on the money is the idea that a government bailout will solve something. It won't. It will only prolong the agony. GM and Chrysler are going out of business because they don't make money. A bailout will not change that. GM's been going out of business since 1985, so no one should be surprised that what's happening now. The economic crisis has accelerated the process, but probably not by much.

For those of you who support Obama, I would suggest that you don't want him to get in over his head on an issue he'll never prevail on. I read somewhere that he's interested in appointing a "car czar." A government appointee, subject to all of the political stupidity currently manifesting itself in the press coverage, will never be able to deal with the industry's complexities and nuances. In short, it will be total failure and a total waste of money.

Let GM and Chrysler go bankrupt. Bankruptcy is a process. It allows the companies to stay in business and forces them to make changes. Or die. Death is not a bad thing.

But, savvy investors can see that there's a lot of value in the car companies. They make great (if unimaginative) products. They have outstanding workers in engineering and production (the marketing, however, is awful, and contributes to the problem). There's a market for the cars. There factories to make the cars and dealers to sell them.

The problem is the executives. The auto industry labor movement is a reaction to the executives' culture of corruption and abuse. Today, they can't get the National Guard to shoot at auto workers because it's illegal, not because they don't think it's a good idea. Auto execs will blithely lie, cheat, steal, or even do something unethical so they can continue to squeeze the goose and shoot the golden eggs in their own narcissistically general direction. (These tactics, which are rationalized as being good business practice, always backfire. GM executives are finally in the path of their own collective backfires - the emotional flatulence of all of their customers, past and present, who see through the childish games. Far from controlling their message, they have created a mess that they can't control.) And when the goose is dead, they can walk away rich, fat and drunk on GM executives' wine of choice, Blue Nun. Realistically, you can't deal successfully with a cabal of pathological liars. They've consistently ruined it for everyone else. With the executives out of the picture, all of the other problems can be solved by the intelligent and decent people who are already in place.

But alas, even the New York Times can't get it right, saying, "This goes beyond firing top management, forbidding the payment of dividends to stockholders and putting limits on executive pay — all necessary steps. The government should insist on a complete restructuring of any company it pours billions of public funds into." In the real world, restructuring is handled by top management. Obviously, the company needs a radical restructure. A massive loss of jobs will result whether they go bankrupt or are bailed out. So let's not waste taxpayer money to prolong the inevitable. The war in Iraq already shows that politicians of both parties are eager to initiate destructive and unproductive initiatives using our hard earned dollars. And then point fingers later.
And Sarah Swart weighs in on quality control:
First, Michigan's congresspeople don’t just do what they’re told by the auto industry; they also do what they’re told by Big Labor. They are worse (much worse) than useless—-they are a large part of the problem. And Big Labor priced itself out of work-—is this really a controversy? I remember line workers (or was it tool-and-die folks?) making $48 an hour. Today, BA in hand, I make $19.50 an hour.

Big Labor also contributed Big Money to Obama’s campaign. So I have Big Questions about what comes next-—tho’ I voted for him, and I think it is justifiable to expect great things from him.

Second, GM product is not just fine. My husband has a GM fleet vehicle (Chevy Uplander), and I have a Toyota Echo. We both prefer to drive the Echo.

The van, which he’s had since April 06 and got as a brand-new vehicle, has appalling ergonomics and no storage for anything-—but that’s the least of it. My husband has had repeated problems with the fuel gauge and front end noise. The bearings needed replacement and the CD player has stopped working. His transmission burned out!

A co-worker’s van’s engine (same age) had to be completely replaced, and another went through three sets of bearings in less than six months. All the brakes in the company fleet pulse.

Before the Uplander, my husband had a company Trailblazer (also a brand-new vehicle). Its transmission failed the first time he tried to put it into 4WD, with less than 500 miles on it. His first GM van had headlights that regularly filled with water, which of course shorted out the bulbs.

My husband compares GM products to Microsoft’s: It’s not that they suck, it’s that they’re vacuums.

My Echo, which I bought privately and =used= in 2007—-it’s a 2001-—has had not one single thing go wrong in the time I’ve owned it. Not one. Its interior is beautifully designed (astonishing room for such a small car—-my tall husband appreciates that). It gets 40mpg; it’s a manual. My tiny little auto has literally three times the storage options from the front seat that the Uplander has, and-—little things matter—-the Echo is the one that has a grab handle, above the passenger door.

Third, the argument over global warming isn’t over corporate vs. consumer contributions. It is that humans, in general, are contributing to warming, via demand and behavior and waste and all the rest of it. And if I extend your argument, it would be that we should hold drug dealers blameless because, despite the nature of their product (read great-big gas-guzzling vehicles, or illegal, often dangerous drugs), it is the demand that is the problem, leaving responsible stewardship behind. This is the problem, IMHO, with laissez-faire capitalism!

Have you ever heard Chris Rock doing his response to "Guns don’t kill people, people kill people"? The routine is all about the cost of a bullet.

And last, I have been in favor of a complete restructuring or collapse of the auto industry since I was a kid. So can we take my "demand for beef" (since I truly wasn't buying any) off the table? Using the consumer guilt card, for all that I completely understand (and support) the anger behind it, is not a productive way to wage this argument.

14 comments:

  1. i am reminded that when i worked at discount tire in downtown flint during high school the same people came in repeatedly for flat repairs or problems with their tires. we sold thousands of tires and we had a cast of regulars who alway got flats or got out of round brand new tires.

    $19.50 an hour with a BA versus $48 an hour for a tool maker who could quite possibly get the line going again to make sure that the quota of $20,000 vehicles leave the plant in order to keep a small part of an industry going??

    i don't dispute what you are saying about certain quality issues involving your chevy vehicles.....but it seems odd that every vehicle your husband has had the misfortune of driving for his business has been a piece of junk.

    i have sold many trailblazers over the years and have not heard of these problems ??? maybe we've been fortunate or our customers don't realize they have a problem...same with the uplander we have sold many and to my knowledge have not had these type of problems.......i can recall one couple who complained of a rattle that could not be fixed and GM bought it back even though the rattle was subjective to their hearing.....my first question would be who is in charge of maintaing these vehicles and is regular preventative maintenance performed....yes the hub bearing assembly are delicate and can go bad when encountering mammmoth pot holes such as we have here in Mich not just the uplander but any fwd vehicle.....foreign and domestic....i used to run a repair facility in ann arbor where gm is considered a foreign car....the ford tempo and topaz provided a good living....the hondas ate brakes and half shafts....the volkwagens run forever and never needed anything....the toyotas always needed brakes and half shafts.......but that is just the experience of an old zimmerman alumni with an AA(mott) in hand making about $3 to $80 an hour depending on the day

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  2. I do know that line workers used to earn what your average American would call an obscene amount of money, plus benefits. As a child of a Buick Line worker in Flint in the '70's and early '80's, there was almost nothing that I didn't lack for. Medical, Dental, Mental (And yes, I did take advantage of that. Twice.), Vision (free glasses included), even legal -- if you were a child of a Buick Factory worker, things were wonderful. They've given back a lot of stuff since then, but it's still more than many other Americans think they should get (sub-minimum slave wages, anyone?).

    And while the quality issue has gotten much better, it's still enough of a separation between us and the Asians that GM, Ford and Chrysler looks ugly. For every person willing to go out of their way to defend the quality of GM's cars, there's three or four people willing to go out of their way to brag about how crappy their "American Made Car" was (with at least another person willing to chime in that the better cars are made in Mexico or Canada, natch). And even us defenders have problems with the "Big 3" -- after all, how else do you explain that a 6'4" person hits the roof of a Cavalier/Cobalt when a Korean-made Aveo gives said person plenty of headroom to spare? I can't...not without playing into the critic's hands.

    It wouldn't surprise me to learn that the Bush administration hopes to force bankruptcy onto least one of the "Big 3." It would be a major (if not final) blow onto the Unionized portion of the left, a blow that would actually be popular. It would probably allow for a busting of the Unions at the remaining two (assuming that two are allowed to survive). And it would make the Democrat's job (not just Barak Obama's) that much harder (imagine having to stand by while a major constituency has their world destroyed).

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  4. My husband just retired October 31 after almost 42 years with GM(salaried). He might be a person to pick brains with on all this GM stuff. If you are interested, email me contact info at papertango2005@gmail.com and I will have him get in touch with you. He spend years at Buick City from the startup and then went to the Tech Center in Warren where he was an international planner involved in China, Korea, Mexico and Brazil for the most part. I am having a hard time dealing with him being home after all these years of never seeing him. My anger at the paid press is wearing thin too. Anyways, if you are interested in anything he might input for your stories on GM, let me know. He won't BS ya.

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  5. I am sorry to hear of those who have had a rough go with their GM cars. My husband and I have owned 3 that have been purchased new, over the course of 12 years - and never have we had huge issues that were not the result of normal "wear n' tear". IF we have put 1000 into our 2000 Saturn, I would be surprised.

    That being said - we also have a theory about cars, owners and utilization. Sometimes the make of a car is not matched with the personality of the person - and just like a relationship - it ends in disaster. We have had friends that repeatedly have problems with their cars...repeatedly buy a more expensive brand - and still have problems. They are onto foreign makes now, and guess what - still, the problems persist. Is it the cars...or is it their car and utilization of the car? We have always wondered.

    And, being a shop workers daughter, I always wondered why my dad never made the huge salaries people claim that union workers make. Sure, he had some good years, but we still lived in a ranch, drove mostly used cars and struggled to pay for college. If those jobs were so good - why was my father so determined for us to go to college and be something OTHER than a shop worker? I am not saying salaries are not part of the problem, I just think they tend to be the "fall guy" in the argument.

    (Yes, I realize being from a GM family, I am totally biased. I am ok with that)

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  6. Sarah, I agree with a lot of what you've stated. Most of my life I felt that GM was a gravy train for people who didn't have a college education. At the same time I knew I couldn't work in a production environment as brutal as an auto plant. My brother financed his college education by working in the foundry at Buick. He came home with grit in his teeth. My brother-in-law is a retired GM executive. Then there was my husband Michael who really changed my thinking about the compensation for production workers. I feel that most auto plant workers earn every single cent of their paycheck and retirement benefits. He worked at the Willow Run plant in Ypsilanti for over 20 years (9 of those in the paint booth). He majored in English at UM-Ann Arbor and was awarded scholarships in creative writing. When George Bush was governor of Texas, there was a choice of keeping the GM Arlington plant open versus No. 2 in quality in the nation (Ypsilanti). Guess which one GM kept? Arlington! I probably should have thanked Bush for that, because I wouldn't have met my husband. He was transferred to Truck & Bus in Flint in 1995. By the time a production worker retires after 30 years, their bodies are a mess from the hard labor. In Michael's case, he had to retire on a medical disability, because he had a dizzy spell and fell in front of the line. His friend pulled him to safety so he wasn't crushed. His friend didn't make it to retirement. He died of lung cancer in his 29th year. There was no way to prove that the neurological condition Michael developed in the years before he died was linked to the toxins in his work environment. By the way, I'm not one of those GM widows who has survivor benefits. There's a story behind that (but this story might be interminable for some readers as it is). The silver lining for me is that I'm not quite as freaked out about the likely demise of GM. Michael would never have envisioned that Generous Motors could fail.

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  7. First, I would like to reframe my husband's remarks about Microsoft. (He read my post and had a conniption regarding my mangling of his words, which were:)

    GM is like Microsoft: When they finally make something that doesn't suck, it'll be a vacuum cleaner.

    With that said, my husband is SUCH a car enthusiast, such a careful driver, a constant maintenance mainliner; in his own words, "attentive to their needs"...(women as well as cars, come to think of it)... He has reams of service documentation to back that claim up.

    I am glad that folks out there have different experiences with GM cars--and not surprised. But do not assume that his (and his co-workers') experiences with GM cars lack validity. They are what they are, and exactly as described.

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  8. OH! Tho' I'll grant you that he's probably more of a Chrysler than a GM fan: He was driving a 72 Dodge Charger when I met him (in 1990), and constantly expressed the wish that it was instead a 70 Roadrunner.

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  9. It's fascinating to watch the US auto implosion from an area of the country that does not have a heavy stake in the business (Atlanta). The GM (uplanders, sorry!) and Ford (taurus) plants here are already closed so emotional ties to the issue have been wiped out. So I ask around what people think about a bail-out, or the health of these firms, and there are two comments you hear very often.

    The first is tied to the fact that Delta airlines is based here, and has just emerged from bankruptcy and merged with NW. People say, more or less, 'what is wrong with bankruptcy?' The picture painted is of total shutdown of the car industry and loss of 4.5million jobs. But people here know that is BS. Durring protection, the bulk of Delta's employess worked, suppliers were paid, and we all flew without interruption.
    It is basically a court supervised restructuring of debts and obligations. It forces very hard and responsible decision making, a dose of medicine that, frankly, was necessary for Delta and many view as necessary for US carmakers.

    The second point often raised is to the tune of 'why isn't every global auto firm begging for aid? '. And it is an interesting question. GM and Ford have substantial non-US operations. Virtually every carmaker's sales are in the tank (reference the following http://online.wsj.com/mdc/public/page/2_3022-autosales.html ) You can see there that GM has it tough (-45% reference year-of-year change in sales by manufacturer), but virtually all maufacturers are are facing declines of 20-30%, poor porsche is down 50%). So most here do not care about all the details of quality, unions, management, etc. they bascially view the firms as financially unhealthy and poorly managed, and the natural outcome of that is and always has been, well, bankruptcy.

    And even though I have a boat load of family memebers on big 3 pensions and a fistful actively employed there, I cannot make a good rational argument against these basic points.

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  10. Jim Holbel:

    Good points. There is a couple of points you need to know about, though...

    First: Would you buy a car from a company that had to declare bankruptcy? Yes, bankruptcy today means a chance to remake yourself, but would you trust a car company that had so badly lost the thread that they had to break agreements with workers, suppliers and salespeople to correct themselves?

    Not only that, but usually the first bankruptcy leads to a second or third bankruptcy. A company may recover, but a lesser company usually ends up failing even the smaller, less ambitious hopes. Look at Delta, K-Mart (now Sears/K-mart) and other companies that go through one bankruptcy. Usually the end of a company is either closing down or bought-out by another company.

    So, in essence, a bankruptcy today only means the death throes last longer than before.

    Second: I can tell you what will happen to GM/Ford's employees: The unions will be busted, old workers will be cast out of their jobs, the funds for retirement and medical insurance will be looted, suppliers will be forced to fund the bankruptcy (epsecially Delphi if we're talking GM), and a large portion of America will cheer on this gutting of the last non-impovershed section of the working class.

    Plus don't be surprised if GM gets forced into Chapter 7 (the original definition of Bankruptcy) anyway. Ford can (and should) be saved, as they have a seat on the cluetrain; but I'll believe that when I see it.

    (Cerebus/Chrysler will get bailed out. There we're talking rich investors, not necessarily workers; plus they want to buy cars from China. You watch.)

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  11. I would add that with credit virtually non-existent in the U.S. right now, how exactly would an automaker in bankruptcy get money to survive the recession, which could last five years, let alone grow?

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  12. Mary, I do agree with you about the experience on the line. I remember hearing about people (I think people Gillian knew) who would deliberately and seriously injure themselves so that they did not have to be there. And the noise when you were driving past was unbelievable. It was its own little hell, and no doubt those folks did earn their money. (But Slick, who is to say that my job is not just as important as a tool maker's? Tho' notice that I don't say what exactly it is...LOL)

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  13. sarah,

    i did not mean that your job is unimportant....everyone's job is important to our economy.....my point is that while the wage seems very high for the skilled trades guys, some of them are actually worth every penny.

    unfortunately we have all heard stories or even know some people who are trades or production workers that are not worth the great pay they receive. those are the stories that overshadow the good guys.

    having an education and the paper to back it up is the greatest thing one can have. it is something nobody can ever take away.

    the point i was trying to make is that while the tool maker may or may not have a 4yr degree his skill is just as valuable as someone who has the shingle.

    i ran a repair facility in ann arbor and had a mechanic who worked for me that had two masters degrees and could make more money repairing cars than he could utilizing his degrees....that causes one to ponder many things.

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  14. Picked up my Gloucester MA paper yesterday, and read an article by staff writer Bill Kirk, called "Fate of Detroit's Big 3 Will Trickle Down Locally." I won't go into the details, but the local manufacturer of the cloth used in seats, door panels, and trunks cannot refrain from the following remarks: "After 30 years of dealing with Detroit, I don't think I've ever run into an industry run by a bigger bunch of knuckleheads," "The Big 3 need to reorganize and not get a bailout - let them go Chapter 11," and their executives are "arrogant; they don't listen, and nobody's in one position long enough to learn their job."

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