Friday, December 12, 2008

On Bailout Failure...How Ideology is killing America

If anything, the failure of the auto bailout compromise in the Senate yesterday is emblematic of what have brought America to the point of handing over cash to private enterprise in a last gasp attempt to save capitalism: ideology trumping common sense. Of course, while I sympathize with the AP view that an absence of leadership in Washington due to a very unpopular outgoing president, that view while sympathetic to the White House, masks another fact: the White House created this monster- the ideologues and their web of followings that control congressional republicans and who will sacrifice everything for their disruptive ideology except power. Get thus -- more than the a third of the votes against (14 out of 35) came from Democrats and Republicans hailing from southern states (Bunning, Burr, Chambliss, Cochran, Corker, DeMint, Hutchinson, Isakson, Lincoln, McConnell, Sessions, Shelby, Vitter, Wicker). Much of this southern opposition can be explained by labor politics. The South is mostly anti-union, and southern GOPers last night blamed the United Auto Workers for the collapse. Also, don’t forget that foreign automakers have plants in the South: BMW is in South Carolina; Mercedes is in Alabama; and Toyota, among other places, is in Alabama, Kentucky, Mississippi, and Texas.

Of course, note this: if this bail out like the financial bail had come before the presidential election many of the republican ideologues now pontificating will for power and political convenience vote for it in order to avoid voters reprimand and loss of power from states say like Ohio and Missouri which were must win then. Of course, curious observers one to know why the ideological purists that caved in to Paulson demands for $700bn in October are suddenly reinvigorated when it comes to mere $14bn (less than 2%) for auto makers that directly saves jobs of the midst of the worst economic crisis we have seen in decades. When it comes to saving their buddies and contributors on Wall Street of course these Southern Senatorial wingnuts have no problems with that, but bailing out the companies that employ "evil union workers" that only demand a fair shake from the pie where the execs that milk the economy eat from is a taboo for these bunkums.

But this is a two-far: for one it is a great way for the newly thinned down GOP caucus to bare its fangs and deliver its revenge to those bold voters of Ohio and their union machine...and of course, a pay for their corporate dreams of union busting. The compromise on the table, gave everyone an headcut (in the words of Speaker Pelosi) except the ideological right which were unwilling to compromise at all. The democrats caved in to the White House to the consternation of the left to allow the money to come from the clean energy fund already appropriated, while the language that was used to appease the left to compel the companies to meet California's higher fuel standards (itself a compromise over withdrawing a suit against the state by GM and Chrysler) was even deleted in the Senate Version.

Still not satisfied, the GOP ideologues pushed the Corker plan (big ups to him- at least he tried and was truthful on Bloomberg on the role of politics) which in my opinion makes perfect sense except for one (the one which eventually became a sticking point). The plan called for:

    • It would have required the two firms closest to bankruptcy, General Motors and Chrysler, to reduce their debt by two-thirds. Bondholders would have “plenty of incentive to make sure that the debt is reduced by two-thirds” or risk losing even more if the firms go into Chapter 11, where their bonds might be further discounted, Corker said. “We’re going to force them into bankruptcy if they don’t do this,” he said bluntly.

    • He also would have required that the Voluntary Employee Benefit Association, the entity created by the car firms and the UAW to handle retiree health care benefits, accept stock in lieu of half the cash payments due. The carmakers had agreed to fund VEBA but can no longer afford to do so. “If a company goes bankrupt, these future payments are never going to happen anyway,” he said.

    • Finally, Corker’s bill would have forced the UAW to lower its members’ wages to the level of employees at Honda and the other foreign-owned car manufacturers operating in the United States

It makes no sense to pay someone in the boondocks of Tennessee as someone in the big city of Detroit the same thing and even Corker recognized that fact when asked on Bloomberg this morning. For one the union already conceded to eliminate the job bank and receive partial stock payments in their pension and trust funds, which in itself is a huge win for the companies...but the ideologues persisted on their union busting move until the plan failed. Curiously, these same Senators were not pushing for auto czar or that Detroit executives themselves take a cut and eliminate unprofitable dealers- details by itself that are more likely to cut costs for Detroit than wage cuts which is a mere 10% of costs for these companies. Why even keep the current Detroit executive? Well, no leadership from the bunkums on that one! You bet.

For all said and done, it appears George Bush is the one that is most pissed off now, that his own Senators humiliated him, as he appears to be on the precipice of making an even bigger error by giving these monies without the minimum compromises discussed above: especially the hair cut for bond holders that will ensure the long term viability of these firms. While they are at it- EU is giving billions to its auto firms, American southern states are bailing out VW, BMW and Honda with $3bn, and Japan is considering some money for her auto makers. "Good lucky!". Of course, largely missing from these bail out talks is how Detroit will actually get into the business of making reliable, well designed and fuel efficient vehicles of the future. That I guess is beyond the congress' pay grade!
As commentator Zakaria said, this bail out makes sense when viewed against potential job losses. In his words: "The best argument for the bailout is that it is the most cost-effective jobs program that the government can run in the short term. Spending on infrastructure to create jobs will take months, maybe years. However, keeping the Big Three afloat will keep hundreds of thousands of jobs in place quickly and easily. It's true the companies will eventually go bankrupt but by then hopefully the economy can withstand it. "

The failure of the bail out legislation is emblematic of the poison and toxicity of unbriddled partisanship of the past decades, that reached new heights under George Bush. Gone are the years when a Democratic Speaker can reach some form of compromise on taxes with President Reagan, or Bill Clinton could work republicans to pass welfare reform. What we have now is a legislature intensely crippled by ideology from acting on big issues and solving big problems. Shame!

Wednesday, December 03, 2008

Technology on the cheap…Critiquing GM's Restructuring Plan

So GM wants to cut Saab, Pontiac and Saturn lose? If you ask me, just another bone headed decision by Detroit. It is also reported that Hummer is going- well, what took so long? In any case, it is beyond me why GM wants to cut lose the 3 of its most reliable and upcoming labels. Saab is based off in Sweden and is the only GM label known for its high performance, green reputation. Pontiac has a storied past- but an ignominous immediate past- it is not past salvaging. Saturn is getting better, as is evident in the new cars they have on the line. Definitely with superior exterior design and bold looks that should form the template for the renewed GM. Well, why them then?

Just another proof that Detroit is out of touch. Instead of cutting labels like Opel, Buick, Cadillac, GMC, Chevrolet and those dinosaurs perenially sold to populations that have known better times and is fast dying: GM is hanging on to these labels hoping to be revived on the back of their loyal customers (again, who are ageing and are less likely to drive). The truth is - as opposed to what DC and the MSM will want you to believe: GM problems did not start in the 90s when it pointedly refused to make fuel efficient cars; GM problems began in the 70s when it could not compete on quality and reliability with the Japanese auto makers. The irony is that European and South Korean car companies had the same hole- but they all nearly fixed it. VW and BMW once had a reputation for making over engineered and hardly reliable, and expensive to maintain vehicles- but that has changed. European automakers that could not change their ways- sold to China, and yes, India. South Korean companies like Hyundai have caught up with Detroit and left them in the sand when it comes to making Autos that last. Indeed, the net effect was that the brand quality of American cars was rubbished- which put them at competetive loss. Hence a decision on which brands to keep should not be based off what sells best now - at least not only. It also must be based on the brands whose reputation will be easier to build and enhance. The reputation of mainstream GM labels like Buick, Chevrolet, GMC and Cadillac is simply not pretty , and that is a reality; it will take more than making fuel efficient cars to enhance those labels overtime. In fact, it will take decades of making good cars - a time luxury GM simply do no have or cannot afford. GM will do a aweful lot better by keeping those labels that are not more closely aligned with the bad cars of the past- something like starting fresh. In doing so, GM can keep one or two of these dinosaurs- Chevrolet makes sense given its volume.

However, one man's loss is another man's gain. Countries waiting to take the technological/industrial leap into the auto making class can benefit from GM impending firesale. Mexico, Brazil, Dubai (UAE), South Africa, China and India - perhaps Russia will be great buyers for these three labels, and can most leverage on the advantages I have summarized above-especially abroad. Not only do the companies in these countries have the cash on hand (C'mon Sheikh Carlos Slim), they also play host to some of GM's more efficient auto assembly(without the legacy costs) that can come with the sale. If the companies in these countries buy the three labels for sale, one can see a scenario where the three labels can form a strong Auto company with Saturn catering to the entry level, Saab to the mid/family level as well as off roading capabilities (sucking in Hummer under its name) and perhaps some snow mobile, industrial/defense vehicle capability to deleverage it from the cyclical consumer auto business, while Pontiac can cater to the high end becoming somewhat the Lexus of the acquirer.

For Saturn a smart acquirer can scrap that Ion- an Altima wannabe that wanna make me puke, and instead make slim, small autos in the light of the Toyota Fit: small, stylish and efficient designed for students, women and the city dwellers. The newly designed Saturn Vue should adequately cater to those in need of more room and bold style…along with a hybrid/flex fuel model should deliver the Green required. Saturn should also include in its plan to launch a truly four car family size sedan that go head to head with the Accord and Camry- especially in Africa, S. America and Asia. Only price and reliability leverage coupled with design and fuel efficiency can deliver on that promise however. The Saturn Sky should be moved to the Saab Stable as the flagship sports car performance vehicle for that label. For Saab, the target buyer is the young, suave and saavy male- in need of performance and style. Hence, going head to head with BMW and VW is the goal. Saab has a lot going for it naturally, it just happens to be owned by the wrong guys. Smaller autos for the European market to ape the new saturn small car with the Saab label should also be a commercial success. Making Saab Trucks & SUVs for the North American markets, along with a dint of Hummer from Mexico should also help enhance the margin and reputation of the label as the muscle label of the brands. The new Pontiac should concentrate on making luxury cross overs, sport cars and perhaps a limousine. Of all the labels, this will be the mos difficult turn around to execute given the gradual but deep depreciation in the Pontiac brand undertaken by GM in the last 40 years- similar to what Ford did to Jaguar. But it can be done, provided it is kept small and focused. Consumers are fickle and have short memories.

Key Points for a would be acquirer: 1. Create Brand distinction for the various labels: Saturn (Entry Level- Stylish & Efficient); Saab (Mid-Level/Off Road - High Performance); Pontiac (High End - Luxury & Green). Keep the brands narrow, make no more than 3 vehicles per label and avoid cross-competetion amongst them. 2. Build plants in low wage, low regulation markets (stay off North America); utilize latest technologies to the hilt 3. Leverage Swedish national pride in Saab to get and use free R & D Dollars from their semi-socialist government; 70% of R & D for the firm can be done in that European country for free. 4. Concentrate on building a flat supplier and dealer base and 5. Quality is a must and by utilizing the least number of differing parts i.e. share parts you can enhance quality and cost. 6. Exploit the virgin markets of Africa, Asia and S. America for not just suppliers, but also assembly lines and final end user market. 7. Marketing Innovation: Instead of building inventories with the hope consumer with buy, a new marketing model that allows consumer to factory order after in city test dirving can be a win-win and introduce some suave to an industry that is getting stale.


Saturn: New Fit/Small Car, Saturn Vue, Saturn Sedan

Saab: Saab Mid-Size, Saab Convertible/Sports Car (old Saturn Sky), Hummer (include trucks, SUV & off road cars)

Pontiac: Mid size Luxury, Limousine, Luxury SUV


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