Monday, May 18, 2009

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.


The Merry Widow said...

obama is a totalitarian, and he has been moving at lightening speed to destroy and undermine this country. Along with the dhimmicrats...

"Bye, bye, Miss American Pie..."
G*D bless and MARANATHA!


Always On Watch said...

China is becoming the auto epicenter:

America's auto titans are dismantling their global empires. But across the Pacific, it's as if the global economic forces that have pummeled Detroit never struck. Chinese auto sales are up, and this year China is projected to displace Japan as the world's largest car producer.

Now, the auto world is buzzing that China's auto industry may try to pick up the pieces of Detroit -- at a bargain.

Chinese companies have tried to dampen speculation, issuing regulatory filings that deny bids to buy Ford's Volvo or General Motor's Saab. But there's little doubt among analysts that Chinese automakers are interested in the United States and that Detroit's automakers are interested in them.

Buying up iconic brands such as Hummer or Saturn could supply Chinese automakers with the technological expertise to help them leapfrog past long-established competitors, said Kelly Sims Gallagher, a lecturer at Harvard University's Kennedy School of Government, who wrote a book on Chinese automakers.
BHO has stated that we must curb up China's buying up our debt. But if things continue as they are, China will become the largest manufacturer and seller of automobiles, worldwide.

And what about quality control? China doesn't have a good track record on that one!

Anonymous said...

Lets face facts. The next President of the USA had better be prepared to throw these new companies under the bus on day 1 of his administration. And the Unions are going to be out on their asses screaming "revolution!"

Then, let THEM try it!

Anonymous said...

There may not be a more complex topic for discussion than the automotive industry. Government interference only makes the subject more complicated. Every decision a businessman makes has an associated cost; we often refer to that as the cost of doing business. I am reminded in that line from the movie, “The Right Stuff” when an astronaut turns to a project engineer and says, “No bucks … no Buck Rogers.” Business costs include labor, and it is generally held that if you want a quality product, you have to have a quality work force—but another point of view is that a quality product results from quality engineering. The automotive work force isn’t skilled labor in the sense of an automotive mechanic. They are drones, trained to take a tire from a cart, and place it on the vehicle. How much skill does that take? And yet, we are paying tire monkeys phenomenal sums of money, and calling them skilled labor in order to justify the costs. This is purely nonsense.

What is missing here, I believe, is responsible decision making by the corporate officers. They should be willing to pay a man a decent day’s wage, for a decent day’s work. It is fair to negotiate the cost of labor in the same way companies negotiate the price of tires from their suppliers … but if the supplier began charging exorbitant prices for tires, the company would be out looking for a cheaper product. This doesn’t happen with labor, and the reason for this is that labor unions have become part of the entitlement mentality in this (and other) socialist countries. And by the way, there is no human being on the face of this planet … including professional athletes, who deserve a multi-million dollar compensation package; stockholders should place limitations on executive bonuses.

Automotive industries should be providing quality vehicles at competitive prices, but even that concept is relative. Unions of unskilled workers are not shafting the automotive companies, they’re shafting the consumers; I remember purchasing a brand new Ford Torino in 1968 for $2,800.00. The car lasted fifteen years. Even if you adjust that figure to today’s costs, it would still be a good deal. But what consumers pay for vehicles today is outrageous.

I believe the fault resides primarily with the business owners; they lack the courage to make tough decisions that will lower their costs and retail prices, and address the perception of consumers. I think the solution posed by Mr. Z is the correct one. First, remove government from things they know nothing about. Second, force these inefficient companies into bankruptcy court. Third, renegotiate labor costs pursuant to my definition of their worth; a fair price for doing the work of drones, vice mechanics. Fourth, stockholders fire the board of directors and CEOs and find people who understand that business is “economic war.” And finally, I think consumers should absolutely refuse to purchase any automobile made in America until these problems are squared-away. I know … fat chance.

shoprat said...

As I said on my own blog, we in Michigan killed the goose that laid the golden egg. It was greed from top to bottom.

Anonymous said...

The handwriting was on the wall a long time ago. The US car manufactures let the rest take it away from them without even trying.
This all started during that first gas shortage when everyone was making smaller more gas efficient cars but not Detroit.

Z said...

Mustang, I don't believe ANYBODY is worth those athlete/CEO compensation packages, either...NOBODY deserves that. When someone cures all cancer, I'll reconsider my stance.
(or, when the Lakers win the NBA finals this year...heh heh! KIDDING! Again, I was rooting for the Celtics for the second time in my whole life!)

Stockholders AND Corporate execs failed. What kind of people sit back and watch executives who are supposed to answer to them give themselves multi million dollar packages? It's NUTS.

It's time to educate the stock holders to PAY ATTENTION...and vote OUT the greedy. Or actually compensate only graded on the progress/success of the company that year.

Unions have to get off their high horses, too.........the gravy train's over.

pollywell said...

GO MR Z!!!! of course, no one in the MSM has the courage to state the union's role in this government interference.

Deborah on the Bayside said...

All together now -- you know the tune: "Look for the union label..."

Z said...

thanks, Pollywell..the union issue is one of the most critical issues of this gov' a very negative way.

Deborah...remember when that was a GOOD THING? Or, at least, nonpolitical (early) me thought so!!

I'm hearing tons of dealerships have been given their walking papers....

If anybody wants a 2008 new car, you can get an awful good buy.

the country's falling apart...hey, obama voters; how's that workin' for ya?

Always On Watch said...

I don't believe ANYBODY is worth those athlete/CEO compensation packages, either.Of course, the vast majority of us can choose not to patronize sports events. We can't say the same about getting an automobile.

I have categorically refused to buy a brand new car, for a number of reasons, not the least of which is the outrageous sticker price, particularly for a product which doesn't last as well in many ways as the cars of yore did.

The past several months, we have seen that many new cars have not sold off the dealers' lots. But the lesson learned is not to reduce manufacturing costs by the companies' dealing with the corporate greed. By and large, your local mechanic isn't raking it in; those toward or at the top are.

I often wonder what Henry Ford would say about the cars of today and the practices of the Big Three.

Z said...

Always On Watch, it seems to be that Americans aren't great at learning from experience.
Mr. Z's has wanted to write a book for years based on taking the best from different countries, seeing why and how it works, and how others could apply it.

beamish said...

Why shouldn't CEOs get their fat bonuses?

They did, after all, get the government to absorb their company's losses.

::ducking tomatoes::

Elmers Brother said...

Sweden didn't bail out SAAB. We'll have to see how that works out considering it's part of GM.

AOW, what's difficult is finding a used car. I just purchased a used truck and most of the cars on the lot were from the new car lot, parked in the used car lot to give what I thought was an appearance of many used cars for sale.

Z said...

good point, Beamish! will be interesting to see what happens to SAAB. One of us should keep an eye on that because the msm won't if things go better for SAAB without bailouts.

I still say a lot of the problems we're having today are people perceptions of the economy.
It's difficult to consider buying a car of a share of stock or hiring someone new for your company when GLOOM and DOOM is in the air.

Elmers Brother said...

Gloom and doom was the only way to sell it to the American people.

Z said...

Obama's middle name is GLOOM AND DOOM. OH, wait, SORRY, it's HUSSEIN, how silly of me. OH, that's the SAME THING.......

we're falling apart. And we'd better wake up FAST.

Zack R said...

It's a hideous situation, but clarified beautifully by Mr. Z. Also great side analysis from Mustang and others here. My only quibble would be with the critique of GM, which in my view actually has begun producing cars of extreme quality, such as the Cadillac CTS-- a masterpiece across the board which rightfully won Car of the Year from Motor Trend last year. Alas, it was too late to help GM buck the myriad trends such as Big Unionism which have rotted the company from within, as explained by Mr. Z.