Boycott Alabama Now!

December 12, 2008

Readers, here’s a link to a new web site by a retired auto worker.  He put up this site in response to Senator Richard Shelby, senator from Alabama and ranking Republican on the Senate Banking Committee, who with the support of a few other southern senators, killed the assistance plan for the auto industry.  Unless President Bush intervenes by freeing up TARP funds to help the automakers, Senator Shelby may very well have played the role of “Doctor Kevorkian” in assisting the suicide of the American economy. 

Once you get to the site, click on the “take action” tab.  There you will find instructions for contacting Senator Shelby and the Alabama Chamber of Commerce.  I’ve already done so, informing them of my disappointment with Senator Shelby and my support for the boycott. 

It’s time to start exercising our economic clout to punish those who champion the destruction of American jobs and wages.  Please join me in supporting this cause and forward links to your friends and relatives.  Encourage them to support it as well. 


Cutting UAW Wages to Zero Wouldn’t Save Big Three

December 3, 2008
When asked about the possibility of further concessions to help the Big Three automakers during a press conference today, Ron Gettelfinger, president of the UAW (United Auto Workers) responded that they’re willing to help, but pointed out that “our research shows that even if we cut our wages to zero, it wouldn’t save the Big Three.”

As crazy as it sounds, he’s right, and here’s why. UAW wages and benefits account for about 10% of the cost of a GM, Ford or Chrysler vehicle. If their wages were completely eliminated, the immediate effect would be to reduce production costs by 10%, potentially putting the automakers back in the black. However, in order to truly become profitable, the Big Three would need to boost their volume. To do so, they’d have to take advantage of their new profit margin to cut prices or offer discounts to attract buyers. If they did that, here’s what would happen:

  1. Foreign auto exporting nations would simply sell their currency and buy dollars, manipulating the exchange rate in their favor, keeping the price of their vehicles competitive without even needing to cut labor costs.
  2. The U.S. would howl about currency manipulation, of course, but so what? We’ve been doing that for decades and the results – none – have become predictable.
  3. The Big Three will then have to cut prices once again in a desperate but futile bid to hold onto market share, and they’ll find themselves again on the brink of bankruptcy.

What about the foreign-owned domestic plants? They’re already profitable enough that they can afford to simply cut prices and take a little less profit margin but, ultimately, if push came to shove, their foreign owners would be perfectly happy to close those plants and bring “home” (to Japan, Korea and Germany) their manufacturing jobs, placing them once again under the protective umbrella of currency manipulation.

Ultimately, it’s the trade deficit that is destroying the domestic auto industry, just as it’s destroyed every other manufacturing industry in the U.S., from textiles to outboard motors. And it’s impossible to “compete” our way out of a trade deficit with nations like Japan, Korea, China and Germany because the deficit has nothing to do with labor costs or currency valuation. It has everything to do with their badly bloated labor forces and low per capita consumption, the inevitable consequences of being grossly overpopulated. The only remedy in such trade situations is tariffs, designed to compensate the U.S. for their inability to provide us access to equivalent markets.

Americans often complain that our government should be run more like a business. OK, let’s run our trade policy like a business, exiting relationships that don’t yield positive results and putting our trade balance sheet back in the black. Let’s stop being the world’s global trade chumps.


$350 Billion for Citigroup – Not a Penny for the Auto Industry!

November 24, 2008

The double standard and hypocrisy in Washington simply defies belief!  When the domestic auto industry, upon which one out of every ten jobs in America is directly or indirectly dependent, needs a helping hand – a mere $25 billion – to survive the financial crisis, they are forced to appear before Congress for three days of hearings and are berated, belittled, mocked and sent home without a penny – with nothing more than a demand for a “turn-around plan.” 

Then along comes Citigroup.  Without a single congressional hearing or a request for any kind of plan, the government lavishes them with $350 billion!  ($25 billion already given to them, followed by $306 billion to back up their bad debts and another $20 billion injected in the form of capital.)  Not a peep of protest about Citigroup’s corporate jets or excessive executive compensation.  No turn-around plan.  Nothing.  

Add this to the AIG bailout and you have a total of $500 billion for just two companies, twenty times what the entire domestic auto industry has requested.  Yet the government won’t provide a penny to help them.  Obviously, the Big Three would have been much better off going to Citigroup and asking for the money.  Why should Citigroup deny them?  They can pass out money like candy and the government will be there to bail them out, no questions asked! 

The anti-manufacturing bias of the U.S. government is clear.  They force trade policies down our throats designed to destroy our manufacturing base, mock us as “protectionists” when we complain, and subject us to public humiliation when we ask for a little help.  On the other hand, they bow down before the financial industry as though they were gods, regardless of how badly the industry is mismanaged, completely ignoring the fact that they are 100% responsible for the global economic melt-down.

What is the “plan” that Congress wants to see from the auto industry?  The following three-step plan would surely do the trick:

  1. Donate as much money to congressional election campaigns as financial companies have.
  2. Double donations in the following elections.
  3. Double them again.

I’m sure that’d do the trick.

Government Accuses Auto Industry of “Mismanagement?!?!”

November 19, 2008

As I watched the leaders of the domestic auto industry take their beating from the Senate Banking Committee on Tuesday, I couldn’t help being struck by the absurdity of these senators accusing the Big Three of mismanagement. These senators who chided the Detroit execs for making bad decisions are the same people who voted for the Iraq war. These very same senators who accuse the CEOs of mismanaging shareholder funds are the very ones whose policies have ruined America’s economy. These same senators who charge the Big Three with caving in too easily to the demands of the UAW are the same ones who rolled over like submissive puppies when the financial industry came looking for $700 billion and AIG needed $150 billion. They who complain that Detroit doesn’t build cars that people want are the same people who showed callous disregard for the people of New Orleans as they wallowed in muck for months on end following Katrina. These same senators who deride executive compensation packages are themselves lavished with lobbyist gifts and favors while they shrug off single-digit approval ratings. Never has such a level of hypocrisy been on such public display. I wonder how fast these same Senators would be on their knees before China, begging for money were it not for their ability to crank out new money on their own printing press to cover up their screw-ups.

Certainly, the Big Three are not without their faults. But considering that the American car market is sliced and diced into ever-tinier pieces and passed out to every foreign car-maker who comes along, for nothing in return, it’s really quite remarkable that they haven’t lost even more market share and that they’ve survived for as long as they have. If Congress insists on continuing to pursue such destructive, idiotic trade policy, then the least they can do is give the domestic car makers a helping hand.

Frankly, when you look at the performance of the Detroit automakers vs. the performance of Congress, we all may be much better off if we placed the operation of the federal government under the management of the Big Three.

Saving the Domestic Auto Industry: Why and How

November 13, 2008

Why the Domestic Auto Industry Cannot be Allowed to Fail:

The plight of the “Big 3” (GM, Ford and Chrysler) has dominated the news for the last couple of days.  All three are on the verge of bankruptcy.  All three are burning through cash at an incredible rate, the result of sales volume falling far below that necessary to support their infrastructure and legacy costs.  GM stock is now worth less than a 1-1/2 week inventory of the cars it builds. 

There seems to be a consensus that the domestic auto industry cannot be allowed to fail.  Yet, there are those who say “Let them fail.”  “It’s their own fault.  Their labor costs are far too high.  They build gas-guzzling inefficient vehicles.  Who needs them?  The Japanese, Korean and German carmakers can easily meet Americans’ need for vehicles.  Everything else we buy is imported and we get along just fine.  Why should cars be any different?”

Well, first of all, while everything else we buy does seem to be imported, we’re not really getting along fine, are we?  Take a look around.  Check your 401(k) statements.  Read the financial pages.  Our economy is in complete collapse, and the trade deficit is the root cause.  The trade deficit has drained away $9.1 trillion from our economy in the last three decades, and it’s all been financed by selling off American assets, even our homes, through selling mortgage-backed securities to our foreign creditors.  When we ran out of assets to sell them, the whole thing collapsed.

Imagine what would happen if the domestic auto industry collapsed, as it surely would if even one of the Big 3 goes under, taking the supplier base out from under the remaining two.  In a normal year, domestic car sales total about 16 million vehicles.  About half of these (a hair less) is built by the Big 3, about 8 million vehicles.  At an average cost of $25,000 per vehicle, that’s $200 billion per year added to our GDP of about $14 trillion per year.  Take that away, and our GDP falls to $13.8 billion.  Now, import those cars to make up the difference, and our GDP falls to $13.6 billion, because imports are subtracted from GDP.  (Even the government acknowledges that imports are a drag on the economy.)  At the same time, our trade deficit rises to $900 billion per year.  And, of that $200 billion cost of domestic cars, about $140 billion is labor cost.  Eliminate those jobs and, on average, every worker in America will take a pay cut of almost $1,000 per year.  Declining incomes is the real reason that home values are falling.  Take $1,000 per year out of everyone’s incomes and home values will drop another 10% automatically.  Looking for a sure-fire way to finally finish off the American economy?  This is it! 

Regarding the claim that their labor costs are too high, their legacy costs (pensions and health care for their retirees) are extremely high.  But remember, these benefits were promised at a time when domestic auto makers thought they could always count on having the domestic market to themselves, or later thought that free trade would provide them with export markets equivalent to any loss of domestic market.  They were suckered by economists who didn’t understand the real consequences of free trade, which was nothing more than an untested 18th century theory.  But they soon discovered the bind they were in and, since then, they’ve done a great job of working with the unions to slash labor costs and improve productivity. 

And regarding the claim that they only build gas-guzzlers:  they were crowded out of the small car market by imports and forced to specialize on the seqment of the market where they could still make a profit – light trucks and SUVs.  The only reason they build these vehicles is because that’s what Americans wanted.  Every big, gas-guzzling SUV on the road is there because that’s what the owner demanded. 

Now everyone wants fuel efficiency, but the small car market is glutted with overcapacity from all over the world.  The Big 3 simply cannot be cast into that glut and be expected to survive. 

The following article is a good summary of why the domestic auto industry can’t be allowed to fail.,8599,1858702,00.html?xid=feed-rss-netzero

“If GM were to go into a free-fall bankruptcy and didn’t pay its trade debts, then the entire domestic auto industry shuts down,” says Rodriguez. The system — the domestic auto plants and their interconnected group of suppliers — is far bigger than GM. It includes 54 North American manufacturing plants and at least 4,000 so-called Tier 1 suppliers — firms that feed parts and subassemblies directly to those plants. That includes mom-and-pop outfits but also a dozen or so large companies such as Lear, Johnson Controls and GM’s former captive Delphi. Beyond those are thousands of the suppliers’ suppliers.

Although the Detroit Three directly employed about 240,000 people last year, according to the industry-allied Center for Automotive Research (CAR) in Ann Arbor, Mich., the multiplier effect is large, which is typical in manufacturing. Throw in the partsmakers and other suppliers, and you have an additional 974,000 jobs. Together, says CAR, these 1.2 million workers spend enough to keep 1.7 million more people employed. That gets you to 2.9 million jobs tied to the Detroit Three, and even if you discount the figures because of CAR’s allegiance, it’s a big number. Shut down Detroit, and the national unemployment rate heads toward 10% in a hurry.

Even if just one of the Detroit Three — and GM is the most likely, as Ford is in better shape and Chrysler is much smaller — spiraled into a free-fall bankruptcy, the systemic effects, at least initially, would be huge. The whole industry would not be able to build cars in the U.S., because of the lack of parts. “Unlike the airlines or steel, when you look at the automobile industry and the fact that the whole supplier base is connected — to Ford, Chrysler, Toyota — it will have a ripple effect on the entire industry,” says Nicole Y. Lamb-Hale, a bankruptcy expert at the Detroit office of Foley & Lardner, a law firm that represents some GM suppliers.

And consider this:  the tool and die industry, critical to all of manufacturing, not just the auto industry, is utterly dependent on the auto industry for survival.  If the auto industry vanishes, so too will the tool and die makers.  If they go, the entire manufacturing sector of our economy is toast. 

How to Save the Big 3:

There’s no way that any of the Big 3 can survive even six more months without some kind of federal assistance.  And, just as the government is doing with the banks, it makes no sense to use taxpayer money to bail them out without taking a stake in the company.  So the first step is to provide whatever cash is needed to keep them going and take a 90% ownership stake in each.  It’s not such a crazy idea.  As the following article attests, that’s exactly what’s being considered.

Frank’s legislation would carve out a portion of the $700 billion financial rescue program for the Big Three automakers, letting the government take an equity stake in them in exchange for the loans, said Frank’s spokesman, Steven Adamske.

The Treasury could take warrants to share in a portion of future profits and would have to be paid back before any other shareholder. The car companies would face tougher restrictions on awarding pay packages to executives and dividends to their shareholders than the financial companies that get a piece of the original bailout.

Secondly, as I mentioned above, the Big 3 can’t survive in the glutted small car market.  At best, they would become the “Little 3,” not as bad as failing altogether, but not much better.  So the time has come to carve out a sufficient share of the domestic market to assure their survival.  This means that tariffs should immediately be imposed on every Japanese, Korean, German and Mexican car imported into the U.S.  Any tariff structure would help, but the one I proposed in Five Short Blasts, based on population density, would be ideal.  Such a tariff structure would impose a 5% tariff on cars from Mexico (even if they carry a “Big 3” brand), a 25% tariff on cars from Germany, a 40% tariff on Japanese cars and a 55% tariff on Korean cars.  The same tariffs should be applied to imported parts as well.  The result would be an explosion in demand for domestic cars and, within a few short years, the government could begin selling its stake in these companies at at least a 1,000% profit.  And don’t forget the tariff revenue that could be used to offset income taxes, providing a tax break to consumers. 

It’s time to abandon the blind faith that we’ve put in economic theories that pre-date electricity and steam engines, a time when the world’s population was one seventh of today’s and vast regions of the world remained unexplored.  It’s time to evaluate the results of free trade and globalization and make some adjustments to our theories.  The United States will be of little benefit to the global economy if it’s own domestic economy is in shambles, and there’s no hope of correcting the damage done to our economy without restoring a balance of trade.  Of course tariffs will impose severe hardships on nations dependent on exports to support their bloated labor forces, but how else will they be forced to come to grips with the effects of overpopulation?  Why should the U.S. function as a relief valve for their problems?  We’ve tried and it doesn’t work.  A global economy will work when each nation tends to its own problems first instead of looking for someplace to dump them. 


The “Big Three” Sinking Fast – Along with America’s Economy

July 1, 2008

If, while reading some of my more recent posts, you thought I was exaggerating the dire condition of America’s “Big Three” automakers, here’s an article that may change your mind.

The mounting trouble for U.S. automakers has cost them any chance of winning more than partial help from a foreign investor or overseas rival.

Bankers and analysts say Detroit-based automakers could still find partners for limited tie-ups but caution it could prove impossible to find a deep pocket overseas for the cash the U.S. industry could need to ride out the current downturn.

European and Asian automakers are investing in more promising markets and face their own challenges from the rise in prices for fuel and raw materials like steel, analysts say.

The “more promising markets” referenced in that last sentence are, of course, China and India. But that’s all these markets have – promise. They’ll never materialize into the kind of auto market we have in the U.S. because they are far too crowded (especially India) for their citizens to consume vehicles at anywhere near the rate of the U.S. Consequently, if we give them free access to our market, we won’t get access to equivalent markets in return. Their auto production capacity (for export) will overwhelm ours and destroy what is left of our domestic auto industry. Unfortunately for the “Big Three,” even they fail to recognize this. Like the fabled dog that looks into a calm pool and sees another dog with a bone, and drops his to snap at the illusory one, American auto manufacturers surrendered the domestic market and joined the chorus of free trade cheerleaders in the hopes of cashing in on the big, potential, imaginary auto markets of Asia. Have they made money there? Sure, but only a tiny fraction of what they used to make in the U.S., now wiped out by invading hordes of manufacturers from foreign countries who have virtually no market to offer in return for access to ours. Still, the “Big Three” remain free trade cheerleaders, chasing the pot of gold at the end of the Asian rainbow. There is no pot of gold. What they will find is bankruptcy and oblivion.

How bad is it for GM?

With a market capitalization of $6.5 billion, GM is now worth less than a third of Renault SA ($23.7 billion), the French automaker that was spurned when it sought an alliance with GM in 2006.

The leading U.S. automaker is worth just one-fifteenth of Toyota Motor Corp ($99 billion), which overtook GM this year as the global sales leader by volume.

Once seen as a bellwether for the U.S. economy, GM is also in danger of being eclipsed in value by the likes of India’s Tata Motors ($4.4 billion) and Russia’s Avtovaz ($4.6 billion), home of the Lada brand.

$6.5 billion – that’s all it would take to buy General Motors right now, one of America’s biggest corporations. That’s less money than the value of the vehicles they build in one month.

“What’s wrong with GM is it’s too big now. GM is also deep in the red and no one would want to buy it. I can’t think of ways to help it except through restructuring,” said Koji Endo, a Credit Suisse analyst in Tokyo.

Notice that Mr. Endo says nothing about Toyota, the same size as General Motors, being too big. If Mr. Endo can’t think of other ways to help GM besides restructuring, here’s a couple of ideas: 1) Change U.S. trade policy to impose population density-based tariffs on countries like Japan and Korea, and 2) Commit Japan to buying as many vehicles from the U.S. as we buy from them. I wonder if Endo didn’t think of these things or if he thought them but dared not say them.

Capital could come from a foreign sovereign fund, but Pflum said he did not expect it to happen. “The automotive sector has been volatile. It is cyclical. The issue is that in the United States it is not a growth business,” he said.

If the U.S. is such a lousy business, then why don’t Toyota, Honda, Nissan, Lexus, Infiniti, Kia, Hyundai, Mercedes, Volkswagen, Porsche, BMW and the countless others just leave? Oh, wait, I forgot. The auto markets in Japan, Korea and Germany are much worse. Their companies couldn’t survive on just their domestic markets. Luckily for them, there are suckers like the U.S. who happily give away most of their markets.

If foreign car makers step in, they will do it by buying an asset or forming a narrowly defined partnership to contain any potential risks, analysts said.

Italy’s Fiat, for example, wants to build Alfa Romeo cars in North America and has been talking with the three U.S. automakers about using one of their plants.

That could ease the burden of the excess production capacity U.S. automakers have been left with due to dwindling share in their home market and the slump in light truck sales.

You may think that this is good news that more foreign companies want to assemble cars in the U.S. Think again. Those Alfa Romeos will simply take more market share from a domestic company. Selling or renting factory space to Alfa Romeo will accomplish nothing because domestic automakers will have to shut down another factory to compensate for the market share now lost to Alfa Romeo. And Alfa Romeo won’t be designing those cars in the U.S. or procuring the parts domestically. All of that will come from Italy.

Here’s an example. Visit the Detroit area and you will see automotive parts suppliers, suppliers for parts suppliers, and so on, everywhere you go. They’re called “tier one, tier two and tier three suppliers” and so on down the line. Assembly plants are surrounded by parts manufacturers and other industries providing support.

By contrast, I recently drove past a Nissan plant in the middle of nowhere in Mississippi. It was surrounded by empty field. Not a part supplier anywhere in sight. Why? Because most of the parts are funneled in from Japan, along with all of the design and engineering.

So why assemble them in the U.S.? Because cars are mostly empty space. A whole lot more unassembled parts can be fit on a container ship and shipped much more cheaply than finished autos.

Meanwhile, India’s Mahindra & Mahindra is seen as a possible bidder for GM’s Hummer brand, which is on sale. Mahindra is keen to get a foothold in the U.S. market, where it plans to launch its Scorpio SUV next year.

Nice timing, Mahindra. I’m sure those Scorpio SUV’s will really sell like hot cakes in today’s environment. But forget about that. The real question is: isn’t Hummer the maker of vehicles for the military? Do we really want to hand over Hummer production to a country who doesn’t give a rat’s you-know-what about U.S. national security? Do we want Sergeant Smith from the motor pool to have to deal with the same crappy telephone support that American computer and software customers get?

And along with all of these new foreign companies setting up shop in the U.S. will come a new tidal wave of foreign workers, pushing aside U.S. workers in all but the lowest-paying jobs. With workers and the engineering know-how all being imported, the U.S. will finally have lost the intellectual assets and critical mass needed to sustain  or restore the manufacturing sector of our economy. It will be lost forever, rendering the U.S. incapable of ever again meeting the needs of its citizens through domestic manufacturing. We’ll be completely at the mercy of foreign corporations. Essentially, we will have ceased to exist as a country, except in name only. Foreigners will command all of industry and call all the shots. Government will be at their beck and call. You and I will be like poor tourists in our own country, watching it all happen but powerless to do anything about it.

For a long time I have pointed out that our trade deficit is financed by the sell-off of American assets and have asked what will happen when those assets are depleted. As we draw closer to that point, American assets will become ever-more worthless. At that point, their foreign owners will likely shut them down and abandon them in order to stop throwing good money after bad to keep them going. Our economy could grind to a halt and the 1930s would like boom times in comparison. With GM, one of our biggest corporations, now worth only $6.5 billion – about the value of one month’s worth of vehicle production – we may be very near that point.

There’s little time left to act. We badly need the population density-indexed tariff structure laid out in Five Short Blasts if the manufacturing sector of our economy is to have any chance of survival. Indeed, our entire economy is at risk if the last of our manufacturing capacity vanishes.