Posted tagged ‘chrysler’

How Does 56 MPG Sound?

July 4, 2011

The Obama Administration is proposing increased automobile gas mileage standards for 2025.  The number is a whopping 56.2 miles per gallon.  How does that sound to you?

Let me guess.  Does it sound anti-American?  Here’s the Government telling us what to do again.  What’s wrong with the free market.  Why should I have to pay for an expensive new car I like, or be forced buy a puny little one that’s not fun to drive but I can afford?  The Tea Party will almost certainly characterize this proposal in some way as unpatriotic.

Surprisingly the new standards will be in line with those in China, Japan, and Europe (the other three large automobile markets in the world).  Implicit is the potential for “world cars” where American automobile manufacturers could design and develop cars for a market almost 4 times as large as our domestic market.

The other obvious positive will be the reduced demand for gasoline.  This will benefit the individual American’s pocket book and provide a direct shot in the arm for America’s balance of payments through lower oil imports.

These new standards, if adopted, will present a second chance for the Big Three.  As you may remember, when the first challenge came from CAFE standards, the Big Three cried foul. Instead of accepting the challenge and building a fleet of energy efficient cars and trucks, they sort of “cheated”.  They introduced  a few “clunky” small cars and sold them at discounted prices (read at razor thin profit levels).  As a result, their fleet average meet the standards.

There were two undesired consequences.  (1) Americans chose Japanese small cars and the Big Three began their slide from an almost insurmountable market share lead to just one of many suppliers.  (2) Profits for the Big Three tumbled until two of the three were forced to declare bankruptcy.

This time, the Big Three could potentially benefit.  Here is a chance to move the market share game to foreign soil, that is markets in Japan, China, and Europe.

Opportunity used to be the battle cry for American innovation and entrepreneurship.  I wonder whether 56 MPG will strike a similar sound?

What Did They Say?

August 7, 2010

Every so often, you hear a phrase that reflects not original thought but rather a repetition of some talking point. One of the standard conservative lines these days goes something like this… “I can’t back (insert the Democratic candidate’s name) because during the last 4 years the national debt has ballooned and (insert the Democratic candidate’s name) voted for the stimulus, the bank bail out, and the GM/Chrysler take overs. We need to keep Government out of our lives. We need more jobs and less taxes”.

At first this seems like a tough set of charges. Yet probably the simplest response would be, “yes, that’s correct, and I am proud of it”.

When things get really screwed up with the economy, the position of last resort is the Government. A Republican Administration got the country into this round of financial mess and did little or nothing to manage the economy during the run up to the housing bubble burst. Short of seeing another depression, Government had to act. In doing so, more billions were unavoidably added to the national debt. A national debt that had doubled during the George W Bush years with little or nothing to show for this spending (unless you count Iraq, Afghanistan, Katrina, Abu Ghraib, and Guantanamo as sound US investments).

Probably the hardest to understand of conservative criticism is the stimulus program. Most economists find fault with Obama’s stimulus because they say it was not big enough. If there was no stimulus, the jobs and economy situation today would be far worse and tax revenues would be lower. The debt might be just as large due to the weaker economy. Conservative usually say “oh, we would have cut taxes as a way to stimulate the economy” and guess what, lower taxes would, yes, also increase the debt.

So you are left with “what did they say” again.

What Do You Expect?

July 19, 2010

A Government watchdog agency issued a report Friday that claimed the bail out of GM and Chrysler failed to take in account the economic impact of allowing GM and Chrysler to shed so many of their dealerships. The report stated that, as a result, there were a lot of lost jobs that have not been replaced. California Republican Congressman, Darrel Issa, could not resist adding that this report just goes to show what you get when Government intervenes with the private sector.

Not mentioned in the report or Issa’s comments is the simple observation that had the Government not intervened, GM and Chrysler would have surely failed and there would have been no work for any of GM’s 6000 dealerships and not just the 600 that were closed. There was also no mention that Toyota sells as many cars as GM with only 1200 dealers. And of course, it was not mentioned that few who have visited GM or Chrysler dealerships, can point to having had a pleasant experience.

Congressman Issa is far less interested in facts than in slinging mud and hoping it sticks. The auto industry, warts and all, is the single largest source of employment in America. Bailing out GM and Chrysler should not only have been expected, it should have been demanded. Share holders for both companies lost their investments, top management in both companies were replaced, and both companies got new owners and new boards.  Not your usual bailout.

In return, jobs have been saved and tax revenues preserved. What is it about this that Congressman Issa really does not like?

Vision and Leadership

August 7, 2009

It is August and the wheels of government are turning slowly. The great “to do” about nothing ended yesterday when Sonia Sotomayor was confirmed as a Supreme Court Justice.  Health care reform legislation is banging around with the public only slightly more informed about what the new reform might look like. And we are being told that the Stimulus is working (albeit slowly) but unemployment is still rising. GM and Chrysler are functioning again, and the big banks look like they will survive if not flourish. What is there to worry about?

In the last election, Americans voted decidedly to reject the Republicans and George W Bush years of divisiveness and abject foolishness in foreign policy. President Obama promised a much brighter and more promising future. As time passes, however, Americans will forget George W Bush and will focus on whether they think the future is really more promising. It should be clear that if Republicans offer that promise convincingly, they will do well in future elections.

The rock and the hard place facing President Obama is that he can not have it both ways. He can’t promise a better future and stick with the notion of bipartisanship. Why? The answer is that there is nothing in it for Republicans, or so they think.

Obama must set out clearly his vision and use his Presidential leadership tools to get these visions enacted into law. Continually seeking consensus and worse bipartisanship, is a prescription for a stalemate (root cause, campaign financing via special interests). President Obama must be prepared to demonstrate the courage to enact his vision, and to require Americans to pay for it. If the vision is a good one, after the grousing that always takes place around taxes, growth will return and Americans will see the wisdom of Obama’s vision.

And what if the future does not get brighter?   Democrats and President Obama will lose.  And, this is a very distinct possibility since the American economy has been so terribly whopped with math, science, and engineering being replaced by sociology and even less descriptive studies. Look around and tell me where the engines that will drive national wealth creation lie?

We had 8 years of the Republican laissez faire style of free enterprise and what we got in return was an explosive growth of the financial services sector at the same time there was a mass exodus of manufacturing jobs. We had a sharp increase in college and university attendance with graduates obtaining useless education and huge debts. We had a holiday from common sense where we over built houses and then decided to practically pay people to live in them.

Now tell me again there is not room for a brighter vision of the future and the courage to make it happen?

The Missed Opportunity

June 13, 2009

With the bankruptcy of General Motors and Chrysler, many lessons about the world of business have been laid before Americans. I wonder how many have been looking and listening, and what observations have been made?

While it is true that both GM and Chrysler’s past leaders made strategically flawed decisions (most all are traceable to their relationship with the UAW), it takes two parties to make a bad labor deal. Seen from the past, one could say the union fought and won concessions from companies that would not have otherwise shared the profits of their labor. Anyone familiar with the automotive leaders over the past 50 years would agree that these upstanding individuals would much prefer to have paid higher dividends and higher bonuses.

The problem these companies faced is clearer now then when the conditions initially arose. Simply stated, today many other car companies can make excellent cars and trucks at costs below Big Three levels (Ford too). What should have been recognized by both union and management was that versus competition, dramatic shifts in the “labor cost per vehicle” needed to be made and that former standards were no longer justified in view of the competitive realities.  For too long we have heard the rhetoric that American made is better, or that foreign Government X is providing special help to Car Company Y. The fact is that American cars and trucks are only as good as others and not better. The automobile industry is a global one now.

The critical parameter is “labor cost per vehicle” and not “labor cost per hour”. For labor cost we must include all relevant costs such as wages, hours actually worked, pensions, and benefits (including retirement ones). So union contract provisions that prevent layoffs, restrict hours worked, or call for a “jobs bank” must be factored into the “labor cost per vehicle”. Without the possibility of reducing labor cost, and especially so when periodic slow downs occur in the economy, the Big Three have been at a substantial cost penalty against their world competition.

Layoffs just do not happen without consequences. The auto workers have lives and families and obligations. Once laid off, college education for their children, or maybe even the mortgage for their home, is much more difficult to cover. How can this situation be prevented?

Unfortunately there is no magic formula that can invent a business that only gets better over time and never experience a decline or stiff competition. It is more natural to expect stiff competition and to view competition as a challenge, and against this challenge grow to get even better. What can be done, however, is to enable a labor(union)-management relationship that possesses the optimum vision and ability to accept and deal with reality.

What do you think the situation might be now if the UAW in 1990 had accepted the same reality (projection of the auto industry) that other economist saw? Would they have negotiated with management to reduce labor cost per vehicle in good times? Would the UAW have taken an active part in skill training for its members (so they could do their current jobs better or if laid off, could find good new jobs)? Would the UAW have begun an education campaign to ground their members that foreign auto manufacturers (including those already building cars in North America) could do the same job as American workers at the same or higher quality and at a lower cost (and challenged their members to study more and contribute to continuous improvement projects on the job)?

Management could have also pressed for these recognitions, but did not. Management could have made much more prudent decisions on investments and cash flow.  And even more important, management could have held their line organization accountable for decisions and results. But they did not.

On one level, the automotive industry is very simple. Today one can make a car in Korea, sell it in America with a warranty that is longer than available from the Big Three, and at a lower price. The Big Three can do the same, and reverse the tables, if the UAW and management decided to work together. If they do not, we may be shortly down to the Big One and then to the Big Zero.

Bond Holders Crime?

May 14, 2009

In the past few days, there has been a replay of the last days of Chrysler before it sank into Chapter 11. The alleged culprit this time? Yes, the very same, the bond holders. They simply want their money back.

GM’s reorganization plan (as well as the Government’s) foresees something more like 30 cents or less on the dollar. For the individual bond holder (Mr or Mrs Everyday), this is simply robbery. For large banks and funds, it depends. For those who hold bonds purchased at face value or close to it, there is a case, in my opinion, that something like 70 cents is far more fair. There are, however, speculators amongst the bond holders who bought bonds already at distressed prices. This latter group clearly bought in expecting a large return and knowing the inherent risk. For them I would see little sympathy.

The bond holders, however, are not responsible for GM or Chrysler’s problems in any way. Both companies came begging for money and readily offer secured and unsecured bonds paying attractive interest rates. The automotive companies’ problems are a result of disastrous (and totally foolish) agreements with the UAW and for their own first class poor strategic management. But that is neither here or there, the end is coming.

In a just world, bankruptcy officials would consider the quality of the asset and the asset holders investment in deciding how much, if anything, they would get in cash or equity in the new GM. With respect to the Union, the standard ought to be what is necessary to compete fairly with Toyota and Honda (like same wages, benefits, and work rules) and for retirees, pension and benefits similar to like industries.

Those who are thinking about supporting the “card check” or Employee Free Choice Act legislation, they had better stop and see what unions out of control can bring.

Taking One For The Team

April 30, 2009

Today is the deadline.  Chrysler’s stakeholders have to agree to a restructuring plan or a threatened Chapter 11 will occur.  There appears to be a good chance that the name Chrysler and its brands will survive although under totally new ownership.  The final hours, however, could hold surprises.

The unknowns are whether the hedge funds who hold about 30% of Chrysler’s debt will agree to a haircut.  The large banks have already agreed to steep cuts in their loans and the same is expected of the Hedge Funds.  If they do not then a Chapter 11 proceeding will take place and most likely, the hedge funds will be order to take less.  The Chrysler “phoenix” will then rise again.

There are several troubling aspects of this deal.

First, the UAW, who shares in the responsibility for the Chrysler mess, will become the majority stock owner of Chrysler.  While a certain amount of common stock was certainly due the union in return for healthcare and other concessions, a majority position makes you wonder why, and whether there will be room for an independent management team to run the company?

Second, Fiat is suppose to take a 30% share of the company, take the overall management lead, and in return infuse new models significantly boosting Chrysler’s position in fuel efficient automobiles.  But Fiat?  This is a company well known over the years for small, technically sound automobiles that do not sell all that well in a protected market like Italy.  It was only a few years back that GM almost bought a near bankrupt Fiat.  And yes, Fiat is said to be the new managing partner.

Third, the transition of Chrysler’s model line up from its present heavy, low gas milage, truck/SUV dominated one to a much more fuel efficient line up will require a lot of money.  Where will it come from?  I am pretty sure you will not find the Banks in a hurry and hedge funds will certainly take a lot of coaxing.  I wonder whether Uncle Sam will be asked to throw more money into the pit?

For the Big Three team, however, there is a framework now upon which they could expect UAW and debt concessions.  The UAW will ultimately need to offer the same deal to both Ford and GM, and it will be difficult for the debt holders to say no.   Chrysler will soon have a new CEO and management team and their workers will have a chance to continue with less rich, but still very good jobs.  The former Chrysler owners and senior management have taken one for the team.