Friday, November 21, 2008

The Insider Speaks

A reader going by the unfortunate name of Sable Pelt, an obvious insider at one of the Big Three, has been providing some great commentary on the need for a bailout of the auto industry. Even if you disagree with him, it's worth a read. Because he's emailing his thoughts directly too me, I'll provide an excerpt below and you can find the full email in the comment section of this post:

"People can't stand the thought of somebody getting paid $70/hour to properly seat a head gasket. What they don't understand is that $70/hr represents their total pay package - not take home pay. A big chunk of that is benefits and most of that is healthcare. Those costs have gone up like mad in the past few years so shame on the UAW for covering that but it is not the UAW's fault that healthcare has gone up so much. Plus, and I can speak from some experience, I would ask any of those clowns to spend a day in an auto plant shooting rivets and ask them if $15/hr. as a new hire or even $35/hr (estimated take home before taxes is maybe $70K) for a 30 yr. person is worth it. I think it is, those jobs are tough!"

7 comments:

  1. Let me first say that I agree with Gordo - $25B is a drop in the bucket compared to the $700B that Wall Street got and frankly, they still don't know what to do with. That was passed without barely a whisper from Congress. Henry Paulson, said he didn't want to tap into the $700B because it would set a bad precedent - in other words the Bush Admin. got this money for Wall Street and they want to use it as they see fit - no strings attached. So why is the Automaker LOAN different. I don't know but my opinion is the American public doesn't understand banking and monetary policy and therefore are happy to let someone else figure it out for them, however, the American public does think they understand the car business and therefore have formed very strong opinions on their fate. Sadly, I believe some of these senators may have had a Chevy Vega back in the day and are still mad about it.
    OK, so that is the simple answer - it's not much money and it is a huge piece of the American economy, so in the name of employment make the loans. But I understand that is not very compelling and unless I worked in a GM plant I'd want to know more.
    So the question on the table seems to be: how did we get here and will we be wasting our money bailing these guys out because they can't be profitable like the foreign companies can.
    How did we get to the point that we are burning through so much cash that we'll be out of business in months? This issue has been years in the making and while some of it can be blamed on the management, some of it is just the harsh realities of the market. We made a lot of money on trucks and SUVs, we did not make much (or any) money selling small cars. That isn't for lack of trying, we have designed and proposed numerous small cars in the 90's to compete with the Toyotas and Hondas, but the market equation never worked - they cost more to produce than we could sell them for. Two issues here to discuss, at the time the American public equated small cars with economy cars - I.e. you couldn't set the price high, and two, the labor agreements that were in place then did not have the two tiered wage scale that was agreed upon in last year's deal, and add to that health care and legacy costs (pensions) and the American blue collar equation was more expensive. Nonetheless, within the last 5 years, the American car companies all built small and midsize cars to compete with the Japanese and have done a pretty good job with them - Fusion, Focus, Malibu, etc... The Ford's are equal to or surpass the Japanese rivals on quality and I think the gas mileage for all of the cars in this class is virtually the same. So we all compete in this class, but we don't make much money on these cars. (The Japanese gov't covers health care, they subsidize their auto industry, they are a younger company and don't have legacy costs (retirees) to support, they employ temporary workers at their plants and can lay them off easily and quickly.
    So enter the change in gas prices. Gas spikes and suddenly that SUV the American public has enjoyed for 10 years - because they did buy them, we didn't make anybody buy those cars, is a gas guzzler and an awful vehicle. Suddenly we have a HUGE shift away from the vehicles that make money to the vehicles that don't. We immediately ramped up our production of cars and ramped down our production of trucks. We also speed up our plans to bring some of our very successful European small cars to the US market. So many of these plans were already in place in anticipation of a steady ramp up of fuel prices. However, what happened was a immediate spike in fuel prices and an immediate shift in market demand. No company in the world could withstand that given our product mix. We have more capacity for trucks than cars, Toyota has more for cars than trucks, same for Honda. They were poised to take advantage of a major shift in demand - we were not. Car sales went up for everyone during that time - more so for Toyota - but they make more on their sales than we do. So why is our cost structure higher? Mainly the issues I mentioned above, health care costs (we can't affect the cost of health care in America), pensions (the car industry helped build a middle class and they all live in FLA now), CAFE - or lack of a real energy policy, etc.... For a reasonably balanced article on many of the issues facing the US auto industry read Jerry Flint's article in Forbes on 11/19 - he does a better job talking about some of these issues than I do. One thing he doesn't talk about and I want to mention is our country's energy policy. Particularly a gas tax. If some of these same lawmakers had had the gumptions to propose a gas tax that would slowly increase over a number of years topping off at say $4/gallon. We would have changed our consumption dramatically by changing behavior. And it would have given the car companies time to shift their product mix to get in line with demand and we all could have prospered. Instead the free market Bush Admin let the oil companies rake in record and obscene profits at the expense of the American consumer and the American industrial base.
    So gas prices spike and profits are hurt by dwindling truck and SUV sales, but everyone is surviving and retooling their plants to shift to more cars ahead of the original schedule. We can do that. Now enter the liquidity crisis and ALL sales grind to a halt. 20%, 30%, 50% each month. All the while, our fixed costs remain - plants are open, paychecks are sent, healthcare is covered. The cuts have been deep and difficult but these changes can't be made overnight. No company in the world could keep up with the volatility that has affected the American car makers.
    That is how we got here - what to do now. Cut capacity for one. The plants that serve the US market (ford, gm, Honda, Toyota etc..) have capacity for 20 million units, the best yr. for car sales was 1999 and that was 18 million. The current projections for 2009 is much less than 12 million. So everyone needs to cut their capacity to get in line with demand (I.e. cut their costs). Everyone is already doing that - closing plants, cutting headcount, cutting benefits, pay, you name it. It is so serious here, you can't even imagine.
    Next, line up pay scales to be competitive - this was done in the last contract signed with the UAW and we will start seeing the benefit in 2010.
    Next, level the playing field with foreign competitors - take away gov't incentives to build Honda and Toyota plants - we didn't get those incentives. The southern caucus is lobbying against the big 3 right now to not give us these loans while ignoring the fact that their states (and our taxpayer $) paid Honda and Toyota HUGE sums of money to build plants in their states - I'm glad we helped them out! Stop currency manipulation in foreign countries to affect the cost of imports, help with an energy policy and R&D for fuel economy improvements like all other countries do, charge the same tariffs on imported vehicles as other countries charge for ours. Seriously, read Jerry Flint's article - it's good. The free marketers in this country hold our US companies to that standard - sink or swim but without any help from us, and that is fine, but we should hold competitors to the same standard. If we did we would see a very different situation than we do now.
    Finally, you've got to have the product people want. And I think that when the economy turns the corner in 2009 if we're lucky and 2010 more likely, Ford will have that, GM - if they cuts some lines, and Chrysler - who knows. It would be a shame if we let our manufacturing base crumble now and not be able to take advantage of the upside that will occur. When the auto industry turns around and all the US economy gets out of it is some overtime for $15/hr. workers at foreign plants in the south - because Bush wants to break the unions and is happy to see the US autos go bankrupt - that will be a sad day.

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  2. That was fantastic. One minor point: I seem to remember GM getting a lot of tax breaks, etc., from the state of Michigan and the various cities like Flint where plants were located. I'm not sure of this, but it wouldn't surprise me. Although I doubt it measured up to the massive breaks states like Alabama gave to Mercedes.

    I think since the Dems have endorsed a bailout, and Obama has as well, with certain conditions, the bailout will happen in Jan. or Feb. I think right now the Dems in Congress have to look tough because the public is inexplicably against this. I know there are more elaborate reasons why, but I think the opposition boils down to class warfare. Even liberals hate the fact that shoprats who never went to college can make a decent wage for working a crappy, soul-sapping job. I think there's a lot of elitism built into the opposition.

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  3. In regards to why the public has it out for GM right now--I think it's more than simple class warfare. People hate the rich and they hate the shop rats for the same reason: they have job security (or the perception of job security). They have health care. They have pensions. Everyone else is losing it all.

    Plus, GM fought against higher emission standards, fought against universal health care (I wonder what would help them more--a $25B loan or universal health insurance which would erase most of that additional $2,000 on each car that roles off the line?). They've been on the wrong side of every fight since about 1979 and Americans love it when the big guy gets kicked in the balls in the final scene. They deserve it.

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  4. That is a good point, those tax breaks aren't exclusively given in the south and aren't exclusively given to the foreign plants. However, they were not awarded back in the old days when most of those US plants were built, in fact, the US companies often had to pay for infrastructure modifications that municipalities freely give away now to get a plant. And, nowadays when tax breaks are considered for one of the big 3, it is often related to what plant to save - not what one to build. That is, we need to close one plant - we have one in Atlanta and one in St. Paul - who wants to keep a plant more. So that can be a good deal, but the net cost of closing a plant and getting a tax break on another doesn't compare with the breaks given to build a new plant.

    Regarding your comment on elitism, I think you are exactly right. People can't stand the thought of somebody getting paid $70/hour to properly seat a head gasket. What they don't understand is that $70/hr represents their total pay package - not take home pay. A big chunk of that is benefits and most of that is healthcare. Those costs have gone up like mad in the past few years so shame on the UAW for covering that but it is not the UAW's fault that healthcare has gone up so much. Plus, and I can speak from some experience, I would ask any of those clowns to spend a day in an auto plant shooting rivets and ask them if $15/hr. as a new hire or even $35/hr (est... take home before taxes - maybe $70K) for a 30 yr. person is worth it. I think it is, those jobs are tough!!

    Also, you are also right about the fact that the package will eventually get approved. They are posturing now. And I believe that taking the corporate jet the other day was a massive PR blunder, but the lawmakers insistence on pounding them for it and asking them "will you sell the plane you arrived on today and fly home coach" was equally ridiculous. We are talking about the future of manufacturing in America and our Industrial base.

    Can't we come up with a better question than that!

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  5. This may be off topic, but with all this talk of the big 3 going under, what mostly concerns me is that if they do go under, will there be any industry left that's made in the U.S.?

    Granted many big 3 factories are foreign, but I really hate to think that manufacturing is leaving this country. I hate to think this country is dependent on China or Mexico for production. Wouldn't we want to keep factories in the U.S. at any cost?

    We were ready for WWII because we could convert our big 3 factories to build warcraft, etc. I feel we have lost that strength to the dollar. If we kept the big 3 alive under the war budget, perhaps they'd have a chance to survive???

    I can't say I'm for the bail out or not, I just hate to see the lack of manufacturing here in the U.S. I think we are weaker because of it.

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  6. As a citizen, I get madder and madder about this bailout proposal, so I can’t promise that this post will be completely rational. And I will grant you, I do not understand banking and monetary policy. But I hope that I have already made a point, not about the Vegas of old, but about the GM product of today – see my lengthy post elsewhere on this web site. My FEAR about this bailout is that we will get the same old crap out of it, at least from GM.

    My question is, Where the heck is/was the long-term planning? Have we not all known forever that oil is a) a limited resource and b) damaging to the environment when burned? Having been raised in a company town, I was of course trained to see that perspective as girly and foolish. Didn’t you just sigh and roll your eyes when you read it?

    When did the Big Three FIRST experience a noticeable dip in sales, and WHY? I don't just feel anger at the Big Three, I feel absolute fury. Is it actually plausible to plead that no one could have foreseen what just happened?

    Gordie is quite correct in his assertion about subsidies, and OakParkMark is correct in asserting, elsewhere on these pages, that the corruption and greed of the executives is jaw-dropping. If the Big Three take it on the chin because they are seen as no better than the banking executives who STILL took huge bonuses and had huge parties AFTER their bailout – and who were as confused by public outrage over it as the Big Three are by the feeling stirred up by their private jets to DC – well, so be it. Is it elitism to feel like the uber-wealthy are utterly out of touch?

    And it’s not just the uber-wealthy, of course, it’s also our federal government. "The Japanese government covers health care," and that is such a huge contributor. In this country we have let the AMA and other lobbies dictate our federal policy regarding nationalizing health care. We swallow whole the nonsense from paid PR firms that our health care quality would suffer if we went that route. I have lived in a country with nationalized health care. Don’t try to feed me that bull.

    So here’s some elitism for you: The best drugs were always available from stoner shop rats – if they were willing to spare any – and we all know it. The number of bars (read: adult and teenage alcoholics, wife beaters, child beaters – I knew LOTS of any and all of these) is the subject of jokey commentary on flintexpats. If the job is so bad that you have to be altered to do it, then why preserve it?

    Maybe keeping the automakers alive is exactly what we as a country deserve. Let them keep feeding us the mythology of Hummers and 4WD trucks, and let them keep pleading that the price spike took them completely by surprise. Poor babies.

    Now, I know that hundreds of thousands of average Joes would be hurt if these companies were shuttered. But is that really what would happen - or is a bankruptcy filing likely? And might this prompt Flint to, at last, look outside GM in shaping its future?

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  7. Sarah, I applaud your desire to be rational. Can I take lessons? But seriously folks, I was probably a bit harsh on the auto executives in my earlier post. I defended product quality, and that would not have happened without good (or better) leadership.

    I think I, and perhaps some others, are looking at the current crisis through our outdated understanding of how the car companies operate. I spent a lot of time in factories in the 80s, when the execs were clueless and greedy and the shop rats were stoned. In middle management, the idea was to do as little as possible. Most of the actual work of running the companies seemed to fall to the young fast-trackers.

    It's clear that the industry is working on the things Americans want them to work on. They are a bit behind schedule, but the path forward looks pretty good. There's a great story in the New York Times today about Bill Ford, who says that the automakers are doing a lousy job of articulating that message. He's absolutely right. PBS interviewed Rick Wagoner last week and he couldn't give a compelling answer to save his life. Later, they did a story on a new GM plant in Lansing. The story was a great endorsement of what GM is doing right. Interestingly, it looks like PBS found this story on their own. That is, GM PR is incapable of using the media to their advantage, or the media don't trust GM PR to do anything but blow hot air.

    I think everyone wants to vent, to finally get off their chest the lousy experience they had with their 1984 Chrysler, or whatever. Including the politicians.

    So, the politicians are looking good making the executives look bad. But it looks like the industry will get their loans, and in the long run, its probably a good thing.

    If the Big Three go under, the valuable assets will be picked up by foreign companies who will use them to make and sell cars in the US. The problem with this is that all the profits go overseas, and we have to depend on Japan and Germany to supply our national defense with vehicles.

    So, we're all waiting to hear the auto industry plan to spend the loan money Hopefully, the executives will not consider that process to be too undignified.

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