Auto Industry: “We’re winning with NAFTA.” Seriously?

October 25, 2017

http://www.reuters.com/article/trade-nafta-autos/auto-industry-tells-trump-were-winning-with-nafta-idUSL2N1MZ028

The above-linked article reports on an effort to generate opposition to the Trump administration’s tough stance on the renegotiation of NAFTA.

Auto trade associations representing General Motors Co Toyota Motor Corp, Volkswagen AG, Hyundai Motor Co, Ford Motor Co and nearly every other major automaker, are part of the coalition dubbed “Driving American Jobs” and backing an advertising campaign to convince the White House and voters that the agreement has been crucial in boosting U.S. automotive sector production and jobs.

“We need you to tell your elected officials that you don’t change the game in the middle of a comeback. We’re winning with NAFTA,” the group said on its website.

OK, wait a minute, domestic auto manufacturers, especially GM and Chrysler.  First of all, you’re not “winning.”  You’re barely hanging on, thanks to a taxpayer-funded government bail-out a few years ago, made necessary by the fact that rotten trade deals drove you into bankruptcy.  What American jobs have come back since then were largely driven by the fact that the United Auto Workers, being one of the stakeholders in the bankruptcy process, demanded that it have some say in the location of new plants.  That’s GM.  And Chrysler?  Part of their pathetic “comeback” required them to be sold to Fiat, globally recognized as one of the shoddiest car-makers on earth.

Ford survived without a bailout, a point of pride for that company, but now finds itself struggling with a shortage of capital to modernize its product offerings.  Not a problem for GM and Chrysler who factored that need into the bailout.

No doubt, NAFTA has played a role in propping up the profitability of these companies.  But to suggest that that somehow is a “win” for American workers is ludicrous.

The campaign comes amid rising concern that the Trump administration could opt early next year to withdraw after giving six months notice, a move that could expose automakers to high tariffs who are building trucks in Mexico and impose new tariffs on parts and cars made throughout North America.

This coalition would like you to believe that automakers would have no “plan B” to counteract tariffs.  That they’d have no choice but to continue building in Mexico, forcing consumers to pay the tariffs.  Don’t be ridiculous.  Production would be moved back to the U.S. to avoid the tariffs and the impact on production costs would be largely offset by reductions in shipping an other supply chain costs.  The impact on consumers would be virtually zilch, and the impact on the American labor force would be an upward pressure on wages.

I don’t understand why the Trump administration is even wasting its time with trying to renegotiate this agreement, whose sole purpose was to boost Mexico’s economy, in line with the United Nations’ push to raise living standards in underdeveloped countries.  I suppose to be able to at least say, “we tried.”  But there’s nothing to negotiate.  Just impose the tariffs and watch them work their magic.

 

Advertisements

Per Capita U.S. Auto Sales Declining

January 9, 2016

New vehicle sales were released a couple of days ago.  The headline of the story is that sales set a new record in 2015 – 17.47 million, beating the previous record set in 2000.  It got me wondering.  2000 was fifteen years ago.  Since then, the U.S. population has grown by about 13%.  So the new record should have easily topped the 15-year-old record, right?  Wrong.  It barely beat the 2000 record by only about 100,000 vehicles, or by about 0.6%.

So I couldn’t help but wonder:  is it possible that we’re already beginning to see a decline in the per capita consumption of vehicles in the U.S., which is what the inverse relationship between population density and per capita consumption that I presented in Five Short Blasts would predict?  In Chapter 10 of the book I theorized that the U.S., though much less densely populated than many other nations, had already crossed the threshold where a growing population density begins to erode per capita consumption and, with it, the economy, and that this happened sometime perhaps in the ’50s or ’60s when our population was half of what it is today.

New vehicle sales is one piece of consumer data that’s readily available and not a closely-guarded secret of some market research company.  So it was time to find out how new vehicle sales have changed over time as our population has grown.  I plotted such sales going back to 1968 versus the U.S. population and here’s the result:  auto sales 1968-2015.  The following are some observations about this chart:

  1. New vehicle sales tend to swing up and down pretty wildly, dropping precipitously during recessions and shooting back up during recoveries.
  2. I don’t know what  happened prior to 1968, but it’s clear that between 1968 and 1978, the per capita consumption of new vehicles was rising quickly, jumping 44% to .067 vehicles per person, which is about one vehicle for ever 15 people.
  3. That figure of .067 vehicles per person in 1978, when our population was about a third lower than today, still stands as the record level.  The next peak of per capita consumption of new vehicles in 1986 didn’t quite rise to the same level, reaching 0.66.  The next peak in 2000 – the record that was just broken this year – reached only 0.62 new vehicles per person, well short of the 1978 peak.
  4. This total vehicle sales record set in 2015, when expressed in per capita terms, even misses the 2000 mark by quite a large margin.

Clearly, per capita consumption of new vehicles is in decline, and has been declining since as far back as 1978.  One could argue that 2015 may not be a peak, that vehicle sales have been climbing steadily since 2009 when they reached their lowest level of the entire 1968-2015 period.   The auto industry projects that sales could go higher in 2016.  I think that’s unlikely.  First of all, though 2015 was a record year, the sales rate in December fell to its lowest level since June, and December is typically one of the strongest sales months of the year.  Secondly, 2015 was the sixth consecutive year of sales volume increases, the longest of the 1968-2015 period.  Previously, the longest period of annual sales volume increases was four years, from 1983-1986.  Finally, look at what’s happening in the economy in general beginning in December.  Many economic indicators are now turning negative.  Most would agree that the auto industry’s expectations of a stronger 2016 are a pipe dream.

So just how fast is per capita consumption of new vehicles declining?  To find out, I re-plotted the data beginning with 1978 and had the computer generate a trend line with an equation to describe it.  Here’s the new chart:  auto sales 1978-2015.  Now you can see the clear downward trend.  Of the four different mathematical formulas that could be used to describe the trend – linear, logarithmic, exponential and power – the best fit was a linear equation.  The formula is included in the chart:  f(x) = -.0003x + .06.  (I’ve rounded off the two constants for clarity.)  This means that as our population continues to grow at the same rate – about 1% per year – per capita new vehicle sales will decline by .0003, which is about a 0.5% decline.

Why is this happening?  It’s pretty simple, really.  Most of our population growth is in urban areas where there’s been strong demand for apartment-style housing.  We examined in a recent post how renters are increasingly paying a greater percentage of their incomes on rent.  And people who live in apartments in metropolitan areas face big obstacles when it comes to car ownership – especially the lack and high cost of parking, both at home and at work, not to mention the traffic issues in the cities.  It’s just cost prohibitive to own a car, so many opt for public transportation.  The root cause of this situation, though, is ever-worsening crowding driven by the increase in population density.

Sure, there are many factors that may be at play here but, for each one you can name, I can name another offsetting factor.  Cars are built better and last longer?  Everything about our society pushes people to buy new cars more often – not less.  Cars are less affordable?  Dealers now practically give cars away, with loan durations of six or seven years, when three years was the norm back in ’78.

This decline in the per capita consumption of vehicles is yet another example of the conflict of interest that’s created once a population breaches that critical level and begins to drive down per capita consumption.  If you’re a consumer, it’s in your best interest that the population stabilize or even shrink a bit, increasing your quality of life and enabling you to live in uncrowded conditions where you can enjoy all that life has to offer, including the freedom to own a car and travel at will.  But if you’re General Motors, it’s in your best interest that the population continue to grow because if the population grows by 1% and per capita consumption declines by 0.5%, your total sales volume still increases.  And we saw this happen in 2015.  Sales set a new record in spite of a significant decline in per capita sales.  And so it’s also in the best interests of General Motors to fund candidates who support high rates of immigration.

Immigration-fueled population growth is steadily ruining our quality of life.  Though few really understand why, more and more Americans seem to sense this and it at least partly explains the popularity of the few candidates who at least oppose illegal immigration.

 


American Manufacturing in Crisis

December 8, 2015

On the surface, Friday’s release of the trade deficit figure for the month of October looks like the “same ol’ same ol’.”  The trade deficit came in at $43.9 billion  – about the same level it’s hovered at for years.  You might conclude that our trade situation is stable.  You’d be wrong.  Thanks to falling oil prices and growth in domestic oil production, a steady decline in our deficit in oil has masked an alarming worsening of our balance of trade in manufactured goods.

Look at this chart:  Manf’d Goods Balance of Trade.  In the past five years, while our overall trade deficit has held steady, the trade deficit in manufactured goods has very nearly doubled.  And, as you can see, beginning in 2013 the decline has accelerated.  In the last year, manufactured exports have declined by 8%.  Imports have risen only 1%.

Remember President Obama’s pledge in January, 2010 to double exports within five years?  Take a look at this chart to see just how abysmal his failure to keep that promise has been:  Manf’d exports vs. goal.  Manufactured exports in October were exactly the same as they were in July of 2011.  That’s 4-1/4 years of absolutely zero growth in exports.

Other measures of U.S. manufacturing have shown that sector of the economy to be declining at a double-digit pace.  U.S. manufacturing isn’t just in a recession.  It’s in a full-blown depression.  Only auto sales are keeping it alive at all, and there’s a lot of concern that that’s been propped up with ridiculous, sub-prime lending terms – the kinds of loans that produced a housing market collapse in 2008 that nearly took down the whole economy.  But auto loans never got the same scrutiny.

Last week, GM announced that it will soon begin importing some Buick SUV’s from China.  It’ll be the first imports of Chinese autos and will likely open a flood gate that could devastate American auto manufacturing, an event that would likely lead to total collapse of the manufacturing sector of the economy.

All Americans should be alarmed by what’s happening here – by the damage being done by idiotic trade policy that fails to recognize the harm being done to our economy by overpopulated nations who come to the trading table with nothing to offer but a bloated and hungry labor force, like a plague of locusts descending on a field of crops.


“Cash for Clunkers” an Abysmal Failure

August 27, 2009

 

http://www.reuters.com/article/newsOne/idUSTRE57P5C220090827

When the “cash-for-clunkers” program ran out of funding after only a few days, Congress quickly injected another $2 billion into the program (which was first authorized with funding of $1 billion).  Auto dealers across the nation were hailing it as a huge success.

The intent of the program was two-fold:  to improve the overall mileage of America’s auto fleet by taking old, inefficient gas-guzzlers off the road but, more importantly, to stimulate auto sales and rev up domestic auto manufacturing.  And it did both.  GM added shifts to its Malibu and Cobalt manufacturing plants to replenish depleted stocks, putting 1300 auto workers back to work. 

So the program was a success, right?  700,000 cars and trucks (as reported in the above-linked article) were replaced by more efficient models.  Sales of domestically-produced vehicles were boosted from their recession level lows. 

So why was the program so unceremoniously terminated Monday by an administration that has played fast and loose with cash to boost the economy?  And why am I calling it an abysmal failure?  Because it was eroding our GDP (gross domestic product) at a frightening clip, undoing the effects of other stimulus spending.  More than anything, the Obama administration would like for 3rd quarter GDP to actually show some growth, however modest.  (After all, GDP is the gauge by which the end of the recession will be judged.)  But, if it misses that mark, the blame may very well lie at the feet of the “cash-for-clunkers” program. 

To understand, let’s do some math.  As reported in the linked article, 700,000 vehicles were sold in this program, at a cost to the government of $2.87 billion.  But 80% of these vehicles, or approximately 560,000, were imports.  (This figure doesn’t match the percentages reported in the linked article because some of the sales by GM, Ford and Chrysler were also imports from Mexico or Korea, like the Chevy Aveo imported from Korea.)  If we assume the average value of those imported vehicles to be $17,000, then almost $10 billion worth of vehicles were imported, and every dollar of imports is subtracted from GDP.  (Dollars spent on imports are lost and no longer available to spend in the domestic economy.)  So, for $2.87 billion in taxpayer expenditures, the government managed to reduce GDP by almost $10 billion.  A little of this was offset by boosts in domestic manufacturing, but not much. 

And this $10 billion erosion in GDP took place in the course of only about three weeks.  At that pace, if kept going, the program would have eroded GDP at a quarterly rate of $43 billion.  Actually, the effect upon GDP is doubled when you consider that those imported vehicles could have been produced domestically.  In addition to the subtraction for the imports, an equal amount of domestic business was lost. 

Making matters worse, the share of the “cash-for-clunkers” that went to domestic auto makers fell below the pre-program market share of those manufacturers.  In other words, the program was actually eroding the market share of the big-3, exactly the opposite of what the government – now by far the biggest shareholder in both GM and Chrysler – wanted to have happen. 

Now you can see why the program was terminated without any further calls to keep it going.  As the administration began to evaluate the data and saw that 80% of the money was being used to boost the economies of Japan and Korea (primarily), their response was surely, “Oh, sh#t!”  “This isn’t very smart!”

To its credit, the Obama administration has drawn a line in the sand when it comes to the demise of the manufacturing sector of the American economy – a line that, as owner – it will not allow the domestic auto industry to cross.  But, as owner, they are now also faced with the quandary of how to boost domestic auto sales (and thus the entire economy) within the framework of free trade policy it has inherited.  Now it can see that stimulating auto sales in a way that doesn’t violate trade agreements doesn’t work.  Will it now rely on boosting the quality and competitiveness of American cars?  If it does, it will be ignoring decades of experience that proves that that approach doesn’t work either, as imports will simply match them move-for-move.  Or will it continue to rely on jaw-boning other nations to start importing more American products?  That approach too has been proven a resounding failure.  Sooner or later, either the Obama administration or some subsequent administration must come to the realization that failed trade policy lies at the heart of our economic woes.


New GM Emerges into Same Old Environment

July 12, 2009

http://www.usatoday.com/money/autos/2009-07-10-gm-bankruptcy-friday_N.htm

General Motors emerged from bankruptcy on Friday promising more nimbleness, better products, more customer focus and a return to profitability.  Freed of all its crushing debt, it certainly should find it much easier to make money.  And its image of poor quality and boring cars is largely a hangover from the ’70s and ’80s.  They already have a nice line-up of vehicle offerings with quality on a par with anyone in the world, a line-up that is promised to only get better. 

But so what?  The federal government went to extraordinary lengths to salvage both Chrysler and GM, not primarily to return them to profitability, but to salvage the last vestige of the manufacturing sector of our economy and the jobs that go along with it.  What’s important is not so much a return to profitability for GM, but the restoration of the job-creating sales volume that GM, Ford and Chrysler once enjoyed. 

Unfortunately, the new GM and Chrysler emerge to rejoin Ford in the same marketing environment from whence they came.  GM and Ford build outstanding vehicles (hopefully, Chyrsler will soon join them), but that’s not going to make a bit of difference.  Neither will reduced labor costs or lower debt overhead.  The problem is that Toyota builds great vehicles too.  So does Honda.  And Nissan. And Subaru, Suzuki, Mazda, Kia, Hyundai, Volkswagen, Mercedes, Audi, Porsche, BMW, Jaguar, Land Rover, Saab, Volvo, …  The list can go on and on.  Soon, Chinese manufacturers will be joining the fray.  How can anyone honestly expect that the market share of GM, Ford and Chrysler will do anything but decline as more and more foreign manufacturers get free access to the U.S. market?

It wouldn’t be a problem if American manufacturers were getting access to equivalent foreign markets.  The problem is that there are no equivalent markets.  Most of these foreign brands emanate from countries that are so badly over-populated that their car markets are a mere shell of what we have in America.  In Japan, even the Japanese auto manufacturers have difficulty selling cars because so few people buy them, not because they can’t afford them but because owning a car there is impractical.  There’s no place to park them and the roads are far too congested.  That’s why Japan is famous for its badly overcrowded mass transit system.  It’s the same in Korea.  Germany isn’t much better.  American exports of vehicles to these countries is virtually non-existant, while they export hundreds of thousands of cars to the U.S. every month. 

With all the celebration of GM’s return, there was little notice of the fact that GM plans to lay off another 20,000 workers.  And there will be nothing but more job losses in auto manufacturing as the ever-growing onslaught of foreign manufacturers erodes market share for the domestics.  Nothing will change until the time (if ever)  that our nation’s leadership wakes up to the real underlying problems with our trade policy that make our huge trade deficit and the accompanying loss of jobs unavoidable.  Only when they come to the realization that the experiment in unfettered free trade begun in 1947 with the signing of GATT (the Global Agreement on Tariffs and Trade) has been an abysmal failure for the American economy, wiping out in six decades all the wealth created over the previous 171 years, will there be any chance of putting this economy back on a sound footing.

The new GM has emerged, but into the same old world of dumb U.S. trade policy based on half-baked 18th century theories and politicians lacking the wisdom, will or intestinal fortitude to do anything about it.


Fresh Start for GM, or Another Landmark in Economic Decline?

June 2, 2009

http://www.reuters.com/article/newsOne/idUSN3044658620090602

General Motors filed for bankruptcy yesterday, closing the book on the greatest American manufacturing company in history, as we knew it.  A new GM will emerge, but it will be only a shadow of the company that once was. 

The day was filled with a lot of cheerleading for GM, led by our president, now heavily invested in its success along with his taxpayers, to the tune of $50 billion.  And there were brave faces on display among GM executives in front of the camera, vowing reform and begging consumers not to abandon them.  All spoke of a fresh start and a vision of a new power-house U.S. auto manufacturer, one that will out-compete the foreign competition and win back market share. 

Lost in all the hubbub was the real significance of this event:  that it’s just one more landmark – and a huge one – in the steady deindustrialization of America and the downward spiral of its economy.  GM is just the latest victim of a policy that grants free access to the American market while asking and getting nothing in return – no access to equivalent markets.

Nothing has changed.  The new G.M. will re-emerge into the same environment.  Mounting job losses (to which G.M. has been a big contributor) will continue to be a heavy drag on auto sales.  The market will still be saturated with dozens of foreign brands, free to “dump” cars at below cost with impunity while American brands face a stacked deck in foreign markets that have been emaciated by overpopulation. 

The new G.M. re-emerges with a lower labor cost structure and has been freed of its crushing debt burden.  But it won’t make a bit of difference, except to force the foreign brands to cut their costs as well in order to maintain market share.  The U.S. auto market will simply become even more of a dog-eat-dog world, especially as Chinese brands make their entry. 

Reminiscent of the movie Groundhog Day, in a scene that has played out over and over and over for decades, if not in China then in Japan or Germany, Treasury Secretary Tim Geithner is in Beijing on a jawboning mission, trying to talk his way out of a trade deficit and into a healthy economy.  The effort is laughable and the results predictable.  Geithner will be patted on the head and sent on his way, leaving the Chinese negotiators rolling their eyes and shaking their heads in disbelief at the naivete they had just witnessed. 

Without meaningful action instead of talk by the U.S. to force a balance of trade, GM will be re-emerge as a little fish into a pond full of very hungry predators.  It’s been said that the U.S. doesn’t need and can’t support three separate auto manufacturers any more.  Yet, no one says the same thing about France, a nation one fifth the size of the U.S., with its Renault and Peugeot brands.  No one complains that Germany, a nation one fourth the size of the U.S., has four manufacturers – VW (the company founded by Hitler), Porsche, Mercedes and BMW.  No one complains that Japan, a nation less than half the size of the U.S., has six manufacturers – Toyota, Honda, Nissan, Mitsubishi, Subaru and Mazda.  How many of these companies would thrive without access to the American market, or if Americans’ per capita consumption of vehicles was cut in half, as it is in the emaciated markets of these overpopulated nations? 

No one can say that President Obama hasn’t been aggressive and decisive in tackling our economic implosion but, in the area that matters most – restoring a balance of trade, he’s talked a good game.  He’s chided the rest of the world to rely less on exports and to do more to boost their own economies.  But, though talk and diplomacy may be effective in dealing with other foreign relations issues, it can’t alter basic economic realities like the role of population density in driving global trade imbalances.  Without meaningful action by the  U.S. to address the root cause of our economic melt-down, GM’s bankruptcy is just one more waypoint in our downward spiral, soon to be followed by more – the bankruptcy of Ford, a collapse of domestic auto manufacturing, defaults by states like California, hyperinflation and eventual insolvency of the U.S. as a whole. 

We need action, not talk, and only time will tell if Obama has the courage to act when all of the talk has failed.


GM Recovery Plan Presents Obama with Paradox

May 6, 2009

http://www.freep.com/article/20090505/BUSINESS01/90505076/?imw=Y

The linked article reports on the UAW’s opposition to General Motors’ restructuring plan, which relies heavily on shutting down U.S. plants and outsourcing production to countries like Japan, China, Korea and Mexico.  (In case you’re not aware, Chevy Aveo and Pontiac G3 are already imported from Korea.  GM plans to do much more of this.) 

This presents the Obama administration with quite a paradox.  As the major stakeholder in GM, the government is now responsible for approving or disapproving GM’s plan.  However, given the current climate of extreme trade policy and tax regulations that favor foreign production, no recovery is possible for GM that doesn’t involve outsourcing production, which will dramatically worsen the trade deficit.  But, at the same time, no plan by the government to restore the economy and our nation’s fiscal health is possible if a balance of trade isn’t restored.  So what’s Obama to do? 

My prediction is that he will approve GM’s plan and hope that changes in the trade climate and in tax regulation in the meantime will make their plans to outsource production moot before it ever comes time to implement them.  He’d better hope that’s the way things unfold because, as unemployment rises beyond 10% and climbs into the teens, there’s going to be a real groundswell of anger if people see more jobs being exported. 

As this recession wears on, Obama will find that bank bail-outs, optimism and happy talk of economic “green shoots” won’t restore prosperity.  He’ll eventually have to confront the collision of economic forces that underlies the  ruination of our economy.