Why I still say NO to the Automaker’s Bailout?

Posted by on November 21, 2008 9:43 pm
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It seems like a very simple question, doesn’t it? Well, I’ve been wrestiling with the best way for me to explain why I feel the US Automakers are: First, taking a bad rap for the value perception of their cars, and Second they are in serious need of replacing.

I think I’ve hit on it and let me give this a try by working from a hypothetical situation where in a galaxy far away two Auto Makers are allowed to experiment over a long period of time. One Automaker pays his workers on the average $74.00 per hour and the other pays $ 48.00 per hour including workmans’ compensation, vacation time, sick time, health insurance.

Both Companies are assured that they can sell all their cars at the same price (this galaxy I just made up does not believe in making price fixing against the law) and they are assured that they will both sell the exact number of vehicles every year for 10 years.

Both Companies are going to have the best supply chain and will not have a significant difference, other than the difference in design and styling and the subsequent cost of components. But in general their raw materials will be on the average the same.

Efficiency will be allowed to change based on the labor contracts that are applied to the conversion of raw materials into sellable finished goods.

Figure 1: Break Even Point Analysis

All of this is shown in figure 1 the Break Even Analysis for each company, at the end of the first year. The fixed costs, at the bottom of the charts are identical. The revenues (the solid white line) are identical. The Variable costs have two parts. The first part, the raw materials, they are all identical. The second part, the efficiency and labor costs (the effect of the labor contracts, process control and flexibility, quality assurance, etc.) are allowed to vary (that’s the dashed white line). The green area between the two lines is the PROFIT left after all the bills are paid.

What advantage does the low cost producer have over the high cost producer, especially in the automotive industry? Since the automotive industry is cyclical everyone, including our two companies in the galaxy far away have to store cash in the good times, to survive the lean times. So the first order of business for our two companies is to hoard cash till they can survive the average downturn in the industry. Let’s call it 28 months, just a bit over two years on the average. This is a purely made up number. So, if our companies burn $1billion per month, they must stock up $28 billion just for the next down turn.

The second order of business is to fund the Research and Development budgets to ensure we have the best cars, with the best and most reliable technology. Which of the two producers do you think is going to be able to do that sooner? Obviously the Low Cost Producer.

The third order of business is to fund the Styling research and the Focus groups to tell us exactly which of our many designs are the best to bring out. This is truly a competitive advantage when you consider the “value perception” of the consumer. Who will be able to fund this function first? Again, the first to fund this competitive advantage is the Low Cost Producer.

After that there are a myriad of projects, and programs both for the automotive departments, but also for the labor force. Programs that help all grow in the company and contribute further to the great efficiency gains that keep companies afloat, and allow other’s to sink.

I’ve received a few comments that put the blame on the management team at Chrysler, Ford and General Motors for not making cars that the consumers want. The most common comparison is the Honda versus the Malibu; let me throw in there the Ford Taurus just for fun. The complaint is that the US automakers cannot produce a car with the engineering of Honda, Toyota, Nissan, not even the upstart Hyundai. The blame is placed on lack of engineering and effort. Some go further to say that BMW, Daimler Benz and the other European car makers (all subsidized by their governments because alone they could not make it) pay as much as the American Autoworkers get paid, and they are doing fine and are better perceived than the US Car makers.

If it was all so perfect in Europe, why is it that they come to the US in search of lower operating costs? Could it be that they too [the European Automakers] understand the difference between being the low cost and the high cost producer? And, they are seeking the lowering of their costs and the improvement of their efficiencies?

In my opinion, the Automotive Industry in the United States is being held hostage by the Labor Unions who have forgotten the old credo “only fat pigs go to slaughter”. If your greed, such as people claimed it was on Wall Street prior to the end of September, gets the best of you, you will lose, period, end of sentence. Right now the labor costs are completely out of control and the efficiency in the country where we have the best efficiency in just about every industry (dollars of input compared to dollars of output), in the Auto industry we are far behind foreign companies building cars here in the United States with the same workforce, just a different labor contract.

Wake up America, the problem is that the greed we fear in Wall Street is in a small group of Union Halls choking the living blood of the Auto industry. The worst part is that I do not blame the Unions. Their job is to ask for the moon and a silver platter and fight for the right things, the needed things, the things that protect workers. However, the unions involved, and not all I might add, have forgotten the nature of bargaining in good faith and for the goodness of all involved.

In the late 40’s during the conversion from war time production to the consumer production, then the 50’s and 60’s the Unions could ask for whatever they wanted, Detroit just produced more cars and supplied the world’s automotive needs. In the 70’s things started to change as Japan came up to speed, and then beat us in the quality war and in the 80’s taught us Quality Control. In the 80’s is when Detroit should have figured it out and stood up to the Unions and Government and said that the easy years of no competition were completely over. It was time for Detroit to remember the lessons taught by Henry Ford, “be the lowest cost producer”.

Detroit [the CEO’s and all the “C” level management] did not do what they knew they had to do, and that’s when the beginning of the end for Detroit’s dominance over the automotive industry started. Iacocca had some success for a while, then he lost his bearings. Ford and GM laughed at little Chrysler. Now all three need to come up with a plan to survive, and they do not have a clue.

The Volt is not going to be the Mini Van of the 80 and the SUV of the 90’s. The hybrid is not enough for Ford and Chrysler and they are far behind the curve against Honda and Toyota who’ve had hybrids on the road for several years. Poor management is the cause of all of this. Poor labor cost management is the culprit here. Allowing runaway labor costs, pension costs, health costs, and the total benefit package is what’s killing Detroit, because the guys who invented the industry in 1908, have allowed themselves to become the high cost producers in the world.

The more they spend on labor and conversion costs, the less they have for R&D and Styling and alternate technologies research. In the end, the low cost producer is also the one that makes the best luxury car for the money.

I still say NO to the Automotive Industry Bailout. They won’t change and I repeat myself but I must, to continue to do the same thing and expect different results, is the definition of insanity according to none other than Albert Einstein.

Respectfully Submitted,
The Lee’s Summit Conservative.

2 responses to Why I still say NO to the Automaker’s Bailout?

  1. Emory Mayne November 23rd, 2008 at 2:46 am

    A few thoughts, on these insightful points;

    I think the fact that foreign manufacturers are locating to The United States has less to do with non organized labor costs, than it has to do with assembling in the market you intend to sell. Clearly the reverse is true of Ford and GM, who manufacture vehicles within the EU, and where costs and regulation is higher, and more stringent. Also, if cheaper un-organized labor is the major pre-requisite, then leading manufacturers would head to straight to Africa, India, and China – by-passing the US, and shuttering Stuttgart, Yokohama, and Birmingham.

    Both Ford and GM enjoy huge success in Europe, and have significantly better offerings within a much more diversified line. So, to say that European and Asian manufactures come to the US for cheaper labor, again, does not hold water. BMW assembled the Z3, and now assemble their X series exclusively in Spartanburg, SC. They export all sheet metal and drive trains from Germany via air craft, and then import the finished product back into the EU, or other World destinations via Sea going ‘car carriers.’ Drop of a batch of 3 series, and pick up a batch of X series – no empty ships plying the Worlds waters.

    There are also the capacity issues with all manufacturers, whether that is transportation of product, or tapping a native labor resource. How many automobile factories can be successfully operated with the confines of a single geographic area? It makes business sense to locate in the US – with its infrastructure, market size, political stability, and an existing skilled labor base.

    There are two ways of leveling the labor playing field between foreign assemblers, and domestic manufacturers. You can A.) Eliminate American labor, and reduce the salaries of thousands of Americans in the process, or B.) Insist that foreign assemblers open their American operations to American labor, and advance the salaries of those employed in the United States. Either option levels the field, but only one option maintains and promotes American communities – I for one do not want to see American families in the American auto industry having the unsustainable standard of living of a Tata, or Chery worker.

    Labor is not the issue with GM, Ford and Chrysler. Management is the issue with the domestics. Like I said, Ford and GM have no problem building and selling the products in other markets – they have a problem selling crap here in the US.

    Take a quick look at the Chevrolet website, and find their US offerings. Impala, Malibu, Aveo, and Cobalt – all 4 of which are absolute crap. They offer 6 SUVs or cross-over type vehicles, and 3 large trucks – none of which are either fuel efficient or appealing.

    Ford is almost identical in their mix; they offer 4 sedans of various sizes, and 7 SUVs or cross-overs, and 5 trucks.

    Chrysler has a better line, but lack a compact, and would not even bother having you look at Dodge. Dodge already look they have given up on everything other than trucks – and all of those are inefficient.

    I have higher faith in Chrysler and Ford producing desirable products than Chevy and have no faith what so ever in Dodge.

    Your cost benefit analysis is accurate, but you offer maintain that lowering fixed costs are the pre eminent issue to GMs or Fords future success. Clearly, management has been on the wrong track when they sell at a unit loss – but make it up by volume? I mean Ray Charles can see that writing on the wall. I believe a balanced approach of sustainable cost, on a level playing field and increased unit revenue is the answer. They cannot increase revenue with the crap they are selling (no matter the cost.) and must re-think their entire business model. BUT first, they must start building desirable cars, of a much higher quality than they are offering domestically. They could assemble the Ford Mondeo, of Vauxhall Vectra as a bridge.

    I am, like you, moving toward opposing a bail-out for the same reasons you are. I don’t see them ever changing. I am hedging for them because of labor, as opposed to hedging against them for it. A fixed cost is after all a fixed cost, and we need to fix the labor cost by lifting other salaries and wages up, not tearing our organized labor down.

    Given many Americans hold a revulsion to Unions, yet give unquestioned support for Management – no matter how many private Jets they maintain or how crappy their products are – I do not see that foreign assemblers being organized any time soon. Pro and Anti-Unionism has become engrained in our political debate, and unfortunately, like our political debate is poisoned our common American interests, this will leave the future of automobile legacy in doubt with or without a ‘bail-out.’

    Union cost is the ‘out’ of the American automobile manufacturers – and has been ever since our products became undesirable. There never was a problem with unions in the days of fin, or muscle, or cheap energy. In fact there was never a problem with our product either.

    Thanks,

    E.

  2. Paul_Z November 23rd, 2008 at 9:57 pm

    Emory,

    A Great post and thank you.

    Just to clarify, I was not being so simplistic as to think that labor is the end all and be all that suddenly saves the Automotive Industry in Detroit. What I’m saying is that whatever plan they come up with, I’ll evaluate against the low cost [NOT cheap junk] producer model.

    If I see that GM (I truly agree with your belief there), more likely Ford and Chrysler can make the change.

    Perhaps the real answer to all of this, is for Congress to come up with a way to do a Chapter 11 modification and allow the 3 Automakers to open negotiations and see what they can do, without actually going into Bankruptcy… I’m going to have to ponder that and see if it makes sense upon further thinking

    Again, E, thanks for your comments!

    Paul
    The Lee’s Summit Conservative