Michigan Throwing in the Towel

April 16, 2009

http://www.freep.com/article/20090415/BUSINESS06/904150404

Today it was announced that unemployment in the state of Michigan jumped to 12.6% in March, the worst in the nation.  Bankruptcy is now almost a sure thing for General Motors.  For Chrysler, it’s more than a sure thing.  It might as well have happened yesterday and there will be no reorganization.  They’ll go straight to liquidation.

Against this backdrop comes this report from “Michigan Future, Inc.”, an Ann Arbor based think tank.  (See the above link.)  The following paragraph is of special interest:

“The decline in autos is part of an irreversible new reality that manufacturing is no longer a sustainable source of high-paid jobs,” the report from the Ann Arbor think tank Michigan Future Inc. states. “The world has changed fundamentally. We either adjust to the changes or we will continue to get poorer compared to the nation.”

“Manufacturing is no longer a source of high-paying jobs.”  I guess somebody forgot to tell China, Germany, Japan, South Korea, Taiwan, Ireland and every other nation that has built a high standard of living using manufacturing as its back-bone.  These are all nations where manufacturing workers are very well paid and receive benefits that are as good or better than any in the U.S. 

So what’s the solution proposed by “Michigan Future, Inc.”?  They want Michigan to become a “knowledge-based economy,” employing the following strategy:

• Build a culture that highly values learning, an entrepreneurial spirit and being welcoming to all.

• Create places where talent wants to live by making public investments.

• Increase public investments in higher education.

• Transform teaching and learning so that it’s aligned with the realities of a globalized world.

In other words, we’re going to retrain everyone to do something else.  We’re going to pump them full of the kind of “knowledge” that the global community so desires.  Have you done your knowledge-shopping today? 

Knowledge is useless unless it’s put to work – primarily for making things.  Oh, sure, I suppose we could train more people to be economists, teaching them 18th century economic theories and other “knowledge” that is now a proven failure.  Or we could train more MBAs to run more hedge funds, operate more off-the-books accounting schemes and design more investment vehicles like mortgage-backed assets and credit default swaps. 

But what “Michigan Future, Inc.” probably has in mind is more software developers.  No doubt, we need people to do the coding that makes our computers work.  For example, consider the period at the end of this sentence.  It took some sophisticated programming to make that dot appear on your screen.  But nobody thinks about everything else that was involved.  What about the sprawling, multi-billion dollar, computer-controlled chemical complex that was required to make the acrylo-butadiene-styrene plastic that went into making that particular key on your keyboard?  Or the injection molding plant that shaped that plastic into the key?  Or how about the enormous boiler and steam turbine required to move the electrons from my keyboard to your display? 

Let’s go back to the subject of auto manufacturing.  Low tech stuff, right?  High school dropouts bolting stuff together, right?  Is that what you think?  Think again.  Think about huge factories crammed full of computer-controlled robotic equipment, and the people trained to design, build and maintain those robots.  Think about the engineering skills and computer applications involved in designing the chassis to crush perfectly in a collision, absorbing the impact while protecting the occupants.  Or just think about the bolts themselves:  the heavy equipment involved in mining iron ore, the steel mill required to turn that ore into raw steel wire or bars, the maching equipment required to turn that bar stock into fasteners with hex heads and perfect thread patterns.  Now think about the engineering and manufacturing that went into making all of that equipment.  Doesn’t sound so simple now, does it? 

Manufacturing is an absolutely essential ingredient to a healthy economy and a high standard of living.  The demise of manufacturing in the U.S. goes a long way toward explaining the steady decline in our standard of living.  The only knowledge that’s in short supply in Michigan and the U.S. in general is the knowledge of the role that misguided trade policy has played in exporting our manufacturing jobs to nations that fully appreciate the value of manufacturing. 

 


The Sell-Off of America: With Ownership Comes Control

December 10, 2008

Free trade cheerleaders casually dismiss concerns about a trade deficit. “No need to worry,” they reassure us. “All that money is reinvested back in America!” With a patronizing smile on their faces, they pat us on the head and send us off like little children, too unsophisticated to understand the complexities of trade and globalization. They are very much like the accountants at Enron.

 What they’re talking about is the way in which the trade deficit is financed. Yes, all that money returns to America because, ultimately, America is the only place where dollars can be spent. So those dollars come back to purchase various investments, of which there are several kinds: U.S. treasuries, stocks and bonds in publicly traded companies, equity in private companies, and direct investment in the construction of factories and other facilities. The latter category is the only one that actually creates jobs, and such investments are quite small. The vast majority is spent on treasuries, stocks and bonds. In effect, we are selling off American assets to finance the trade deficit.

In the past, I’ve warned of a sinister consequence of this sell-off. (See “The United States Corporation.”) With ownership comes control. As an ever-greater percentage of America falls under foreign ownership, our owners gain more control over our companies and our public policy. I think we’re seeing a perfect example of the latter playing out in the debate over the auto industry rescue plan.

Isn’t it interesting that all of the foreign auto manufacturers have concentrated their assembly plants in the Southeastern states? Every time a new plant is proposed, every state has competed vigorously for the business, yet they end up in a Southeastern state without fail. Is it mere coincidence that they have located where the “Big Three” are not? They knew that by relentlessly attacking the American market with more and more brands, while virtually barring the export of American cars to their own markets, GM, Ford and Chrysler would eventually be driven to the point of needing the government’s help. Now that that time has arrived, we can see how their strategy is paying off with the influence they’re exerting through their block of southern senators, preventing any rescue of the domestic automakers. A whole block of senators, bought and paid for by Japanese, Korean and German automakers, has been turned against the best interests of the American economy, workers and taxpayers in a clever plan to destroy the industry and achieve total market domination.

Take away the Big Three and watch what happens to wages in those foreign plants as millions of additional workers are unleashed to compete for those jobs. Take away the competition of GM, Ford and Chrysler and watch the price of foreign cars soar. And with unemployment high back home, there will be great political pressure to shut down American operations and bring those jobs back.

If they successfully block the rescue of the domestic auto industry, Senator Richard Shelby of Alabama and his fellow stooges of the foreign automakers may be remembered as the traitors who kicked the American economy off the cliff and drove us into the 2nd Great Depression. But, of course, they’ll be hailed as the heroes of free trade and globalization.


GM Betrayed Consumers? Or Vice Versa?

December 9, 2008

http://www.reuters.com/article/newsOne/idUSTRE4B738W20081208

Hoping that some humble pie might grease the skids for the auto rescue plan in congress, GM has purchased full-page ads in which it basically throws itself at the mercy of voters, hoping to blunt some of the criticism of the deal. 

General Motors Corp on Monday unveiled an unusually frank advertisement acknowledging it had “disappointed” and sometimes even “betrayed” American consumers as it lobbies to clinch the federal aid it needs to stay afloat into next month.

“While we’re still the U.S. sales leader, we acknowledge we have disappointed you,” the ad said. “At times we violated your trust by letting our quality fall below industry standards and our designs became lackluster.”

The unsigned open letter, entitled “GM’s Commitment to the American People” ran in the trade journal Automotive News, which is widely read by industry executives, lobbyists and other insiders.

“We have proliferated our brands and dealer network to the point where we lost adequate focus on the core U.S. market,” the ad said. “We also biased our product mix toward pick-up trucks and SUVs.”

Frankly, this makes me sick.  Has GM made some mistakes?  Of course.  Every company does.  So do the foreign automakers.  But let’s look at the facts.  Did GM’s quality fall behind?  Yes, back in the ’70s, they produced some pretty poor vehicles.  The Vega and Chevette come to mind.  But people forget that, at the same time, the offerings coming out of Japan were little better.  Now GM’s quality is world class.  The Buick brand is at the top of the heap.  Yet, the “poor quality” image remains.  Meanwhile, Mercedes is still perceived as a top quality brand in spite of its quality ratings sinking to rock bottom.

Back in ’75, wanting something cheap and fuel efficient, I eschewed the Vega and Pinto offerings and bought a new Toyota Corolla.  It ran great and got great gas mileage.  But it required a complete tune-up every 15,000 miles and, in spite of being professionally rust-proofed when it was brand new, it literally rusted out from beneath me by the time it was six years old.  I swore I’d never buy another.  More recently, Toyota had a terrible problem with engines burning up early due to undersized oil passages.  Yet there was barely a whisper of  it in the press and Toyota’s “quality” image was left untarnished. 

Have GM’s designs become “lack-luster?”  Yes, you could say that about some models.  But no one would call a Corvette or any Cadillac “lackluster.”  And Corvette outperforms virtually any other sports car on the market at half the price of many of them.  I don’t think anyone would call the Pontiac G6, the Pontiac Solstice, the Saturn Sky, the Saturn Aura or  the Chevy Malibu “lackluster.”  And the quality of these cars is the equal of anything coming out of Japan.

Did they “proliferate” their dealer network?  Sure, back when they had the majority of the domestic market, at a time when customer service was considered paramount and even people in small towns wanted the convenience of having a dealer nearby. 

Did they “bias their product mix toward pickups and SUVs?”  Sure, as more and more foreign competitors gobbled up share in the small car market, they were forced to retreat into the market segment where they could still make a profit.  And while they are criticized for building gas-guzzlers, there is little acknowledgement of the fact that this is exactly what many American consumers wanted and still want to this day, now that gas prices are falling again.  In the meantime, where is the criticism of Toyota, Nissan, Mercedes and BMW for building their own gas-guzzling SUVs?  Where is the criticism of Porsche for building the ridiculous Cayenne SUV?  Where is the criticism of Kia and Hyundai for jumping on the bandwagon? 

Did GM “proliferate” the number of brands?  No.  It had a lot of brands, but they were all acquired back in the first half of the 20th century.  Oldsmobile is gone.  GM did introduce the Saturn brand in an attempt to re-establish itself in the small car market while setting up a lower cost wage structure.  What good has it done them?  They don’t get a bit of credit for this enormous effort to build smaller, more fuel efficient cars with lower labor cost.

Regarding the issue of fuel efficiency, GM is criticized for not getting ahead of the curve by introducing more fuel efficent vehicles.  It’s not as though they haven’t tried.  But fuel efficient cars are disproportionately bought by younger buyers and, among this demographic, it’s not “hip” to buy American.  (It’s probably not “hip” to use the word “hip” either, but that’s about as “hip” as I can get!)  The Chevy Cobalt gets 37 mpg, better than the Honda Fit (and a nicer car as well) but does anyone buy them?  Nope.  They don’t show up in “tuner” magazines.  Much cooler to drive a Fit.  My son drives a Pontiac Sunfire that he bought new in 2004 for $11,000 and gets 37 mpg on the highway, but Pontiac finally killed the Sunfire when sales fell flat.  My 2001 Buick Regal, with a 240 hp supercharged V6 gets over 30 mpg on the highway.  But are any young people buying these cars?  Are you kidding me?  A “gas-gazzling American car?”  Eewww!  Not cool! 

Granted, Toyota hit a home run with its Prius hybrid, leap-frogging all others in fuel efficiency.  But in 2010, Chevy will introduce the Volt, a hybrid that can run for forty miles without burning a drop of gas.  GM didn’t embark on this enormous development project because they were forced into it.  They did it on their own.  They take heat for dropping the EV-1 prototype vehicle because market research showed that they couldn’t sell it at the price needed to recover the cost.  But where is Toyota’s electric vehicle?  Where is Nissan’s?  Where’s Mercedes’?  Is anyone criticizing them for being slow to go electric? 

Sure GM has made mistakes, its biggest being its opposition to increasing CAFE mileage standards.  But come on.  That’s not why they’re struggling.  First of all, they’re not the ones who destroyed the economy with the sub-prime mortgage mess.  Secondly,  GM, Ford and Chrysler are all struggling to hold onto market share because the domestic market has been watered down by dozens of foreign brands.  Spread that market evenly across all those brands and it’s a miracle that the domestics have done as well as they have.  Finally, they’re battling an image problem that may have been well-deserved at one time but is now as about as archaic as some of the knowledge of the auto industry on display at the senate hearings. 

Maybe now, with our economy on the brink of complete collapse, it’s time to drop our double standards and our anti-American car bias and give the Big Three a second look.  There are a lot of Americans with the attitude that “I’d never buy an American car under any circumstances.”  If those folks are looking for someone to blame for the domestic auto industry’s ills, maybe  a mirror would be a good place to start.


Chrysler’s Demise Only Days Away

October 17, 2008

http://www.reuters.com/article/newsOne/idUSTRE49G20220081017?sp=true

In November of last year (see my 2008 Predictions), I wrote the following:

Long Shot Prediction:  Either Chrysler will be broken up and sold off (and thus cease to exist) to raise capital for Cerberus or Ford will declare bankruptcy. 

Believe me, I take no delight in taking credit for yet another accurate prediction.  It’s this very kind of thing I was warning of when I wrote Five Short Blasts.  But it seems that the demise of Chrysler is now only days away.  The link above is an article reporting on “merger” talks Chrysler is having with Renault and GM.  What’s not reported in this article are details that are covered by the local media here in the Detroit area:

  1. GM is pushing to close this deal by the end of the month.  So too is JP Morgan Chase, one of GM’s financial backers.
  2. This really won’t be a merger.  Cerberus wants to dump Chrysler at any cost.  GM wants the Jeep brand and will maybe keep a couple of other models, like their mini-vans.  Other than that, GM plans to completely shut down Chrysler and eliminate all those jobs.  Basically, they see it as an opportunity to eliminate a competitor and enhance their own sales in the process. 

So we’re looking at the loss of at least 100,000 jobs and the elimination of what was once one of the biggest, proudest, premier companies in our nation’s history.  It’s the end of the line for an iconic brand and a long line of historic vehicles that were often on the forefront of automotive innovation.  The day that the merger happens will be a sad, sad day for American manufacturing and the American economy – one more big step in America’s downward spiral.

I was hoping this day would never come, that they could hold off just long enough for our nation to wake up from its globalization delusion.  But it appears that, if that day ever comes, it will be too late for Chrysler and, unfortunately, it may come too late for Ford and GM as well.  In the words of Don McLean, “bye, bye Miss American Pie.”