Part 2 of Socialism on the March... by Mr. Z

Socialism on the March in Obama's U.S., Part 2

The Downfall of the U.S. Automobile Industry

It is expected that auto sales, worldwide, will drop by 8% this year. Last year, we sold approximately 58 million cars, but forecasters say we will only sell 53 million this year, though we are set up to produce a whopping 20 million more! At the same time, factories are generally only profitable if the load factor is at least 80%. What happened is that every company thought that they should have a wide array of cars to offer if they wanted to be competitive. This was a worldwide management problem in the making for many years, and the bursting of the bubble was a moment most experts expected. In addition, most companies, particularly in the U.S., used their capacity to build up a huge stock of cars, visible at any car dealership in the U.S., some of which built up (or felt they had to build up if they wanted to keep their contract with the car company) an inventory of 2,000 cars or more of each type.

Well, the bubble burst. Car companies worldwide are struggling - but not at equal levels. Generally, those companies which listened to the customer and applied prudent management methods are in better shape than the others. In Europe, that included Volkswagen/Porsche (since they are about to become one company), in the U.S., that included Ford. That is not an accident, and we had predicted that for a long time. Since the main objective of this article is to concentrate on the U.S. and how the crisis is handled here, the European situation shall only be touched on briefly and as it is related to the U.S., and the Asian situation shall not be considered at all except to say that it resembles the European situation.

Volkswagen, with its main brands Audi, Seat and Skoda, is by far the most successful manufacturer, filing a profit even now when everybody else is in the red. They have the right mix of cars covering all categories and producing what customers want. Ford Germany is well managed and is one of the beneficiaries of the Wrecking Program in Germany (for which VW is the largest beneficiary). Opel, the German subsidiary of GM, was not well managed in connection with the parent company, which sucked off any cash reserves and forced the subsidiary to assign all their patents to GM and then have them pay if they wanted to use them, just to name two problematic examples. Opel is in big trouble and is contemplating German Government subsidies or being bought by a third party, while the parent company doesn't do anything to assist its subsidiary. The two contenders for Opel's acquisition are FIAT, the large Italian car company, and Magna, an Austrian/Canadian automotive supplier, which also has experience with the assembly of cars which they do under contract for Porsche and VW. FIAT has been a weak company for a long time, building cars which had the reputation of being well shaped but which fell apart after a short while. The new Chief, Marchionne, has brought the company back on a reasonable track, but the level of debt is extremely high.

The problem in the U.S. was home made and predictable. Only Ford was reasonably well managed and, consequently, despite problems in the economy, it maintains acceptable sales and remains without the need for "bail-out" funds. GM has been badly managed for many years, not looking out for what customers want, and completely sleeping relative to future trends. And for Chrysler, the "dream marriage" with Daimler-Benz didn't live up to its promises since it hasn't improved the market share substantially. Ultimately, Daimler retreated and declared the cooperation a failure. The bottom line for the U.S. car companies can really be summarized as follows: (1) The customers who wanted a low-price and well functioning car selected Japanese or Korean cars. (2) The customers who wanted high quality cars chose Germany. (3) The remainder bought U.S. cars, particularly as long as the fuel price was still reasonably low.

But there are two more factors which had an influence: (1) The unions, particularly the UAW union, whose outrageous contracts cost the car companies the highest compensations and benefit packages worldwide. Each GM car is burdened with something like $3,000 for such costs - something which had to be compensated for somehow. The design went cheap, and the quality went down - two factors which are crucial to customer satisfaction. That must be compared to factories of Japanese and German companies in the U.S. which work with much less burden and far more successfully. (2) The system with dealerships and how many cars they have to take in stock is a deadly position - it causes huge inventory costs and is sensitive to any movement of the market, as is proven very clearly in the current situation.

Here comes the crucial question: How much should the government help, if any, to bail the companies out of their situations? Let's put this into perspective: If a company is in trouble because of a market problem or a management problem, the situation can only be solved from the inside out. It may require a temporary bridge loan, but other than that, the company must solve its own problems. The normal way of doing so is through a complete reorganization, if need be, with the help of temporary bankruptcy proceedings, because it provides them with the possibility (or need) for substantial reorganization and the possibility to renegotiate all contracts, including those with the unions. Many large and small companies have done that quite successfully, including some of the large airlines. A bail-out will not force the issues and has the tendency to provide some bandaids but not solve the real problems.

The approach by the European conservative governments (in Germany particularly the conservative party, the CDU, and the centrist party, FDP, which at this point is not part of the government, supports the non-intervention policy, and promotes, by-the-way, tax reductions to stimulate the economy!) during this economic crisis is to avoid government intervention, while the socialists cry for more intervention, and the communists (in Germany, DIE LINKE) want outright nationalization in order to protect the union workers. The approach here in the U.S. was similar to Germany's conservative government's until the Obama government came in. All of a sudden, everybody needs to be "bailed out". Everybody, really? No, it appears that this applies only to companies which have union labor. Since the unions were one of the largest single contributors to Obama's campaign, it's pay-back time.

So, here is what has happened: Obama basically assumed control over GM and Chrysler, and, his "Automobile Czar" Rattner (the one, who is under investigation for bribery in the amount of $1 million, and who has been in the investment business, which hardly qualifies him from directing the automobile industry), undertook the following actions (simplified to make the point): (1) Fire the CEO of GM and ultimately force them into actions similar to Chrysler. (2) Fire the management of Chrysler, give the unions a majority share in Chrysler (basically have the unions run the company), compensate debt holders with 29 cents to the dollar (the unions get 80), force Chrysler to enter into a contract with unimpressively-managed FIAT (which would give FIAT 30% or so of the shares and a seat or two on the Board), reconstitute the Board (3 members of the union, 3 of the government, one or two for FIAT), and, most recently, cut the marketing expenses of Chrysler by 50% (which shows how deeply the government has intervened). The biggest beneficiary of these actions are the unions which had to make only minor concessions to create an appearance of appropriateness.

Now, this can only be called nationalization in the true sense of communism (this goes beyond socialism). This is government run industry, run by people who have absolutely no idea about the subject. How could anybody think that government bureaucrats are better qualified to run complex industrial companies than properly trained managers? They've taken control of crucial industries and are doing all they can to protect unions and their outrageous contracts.

To top it all off, Obama forces Chrysler to partner with FIAT. Where is this coming from? Had any of you seen exhibited the typical business model for this type of situation which includes competing proposals? Maybe, just maybe, there was a contribution somewhere to the Obama organization? Bizarre. Also, I don't know whether FIAT would even bring the necessary knowledge with it to deal with related problems. As said above, FIAT is up to its nose in debt, has not much international experience, and has applied for participation in GM's Opel in Germany (seen above) - so it has its plate full, more than full. And then there are two more factors: With all due respect to FIAT, the obviously well-run Daimler tried to partner with Chrysler and failed, and then there is the "Italian factor" relative to management capabilities of which (or the absence of which) this author cansing a song from his own experience.

Bottom line: The U.S. administration is handling all of this wrong. The characteristics of their actions indicate a strong march toward communism, with actions which eerily resemble those taken by Hugo Chavez in Venezuela with catastrophic results for that country, or by the GDR (East Germany) with equally disastrous results in their attempt to create a "planned economy" through nationalized companies. And, as in those countries, it is to be suspected that these actions are lastly oriented toward paying back the unions which have been so instrumental (by a token of $1 billion) in having Obama elected. To the peril of an enormously important business in America, our automobile industry.