Taking the Taxpayers out of General Motors

Ruggles – 12/26/2012

What many stockholders and taxpayers had feared, had Mitt Romney won the recent Presidential election, is coming true anyway. The taxpayers (U. S. Treasury) are quickly being taken out of their remaining General Motors ownership BEFORE the positive impact of the many new and exciting redesigned GM products to be introduced in the next few months can have the chance to boost retained earnings and share price. Waiting another 18 to 24 months could reduce or eliminate the loss that will be taken on the original taxpayer investment.

Honda as Japan's Exemplar

...Make where you sell, and that's not Japan...

For a while the impact on the auto industry of 3/11 – the earthquake and tsunami – and then the Thai flood garnered headlines. Lately the headlines in Japan have been politics, politics, and more politics. First there was the US election and the leadership transition in China – Japan's #2 and #1 trading partners. Then there are the upcoming elections in Japan and Korea. These have embroiled the auto industry, too, because of the attempt of various parties in China and Japan to wave the nationalist flag, with much of the fallout hitting bilateral Japan-China auto trade. All this has pushed more mundane news – the transition of the domestic Japanese auto industry – out of the headlines.

So here are two snippets, both using Honda as a foil, though these are more general issues.

Understanding the Mortgage Crisis

By David Ruggles

Preface: The following is the culmination of over 4 years of research. At one time I thought the mortgage crisis was due to “an unholy alliance between RW and LW forces. That was before I discovered that during the bubble period only 15% of mortgages and equity lines of credit (ELOCs) were made by Community Reinvestment Act lenders, and of those, only a small percentage were actual CRA loans. Further, according to the Federal Reserve study on the matter, those CRA loans have performed better than the overall mortgage loan market. The “fall back” position of the Republican Party when faced with the actual facts is to say, “There is certainly plenty of blame to go around.” This seems to be an attempt to equally apportion blame to both parties when it is clear that RW ideology is what caused the problem regardless of whether it was practiced by Republicans or the very few Democrats involved, Bill Clinton or Larry Summers, to name a couple.

I know it is RW orthodoxy to believe that Fannie Mae and Freddie Mac played a large role. The two Government Sponsored Enterprises (GSEs) were guilty of excessive lobbying, misstating their balance sheet based in a rather complicated legal case, and excessive executive compensation. But for those who want to know the truth and read further it will become clear that that Fannie and Freddie were victims of what RW ideology unleashed, not perpetrators. Had I seen “The Warning” earlier, I would have come to my conclusion earlier. As it was, I watched hours of Congressional testimony, the most entertaining being when Congress got again Hank Greenburg, retired CEO of AIG in front of them. So I studied AIG and Joe Cassano, head of AIG’s London Financial Products division. Then came, “All the Devils are Here,” by Bethany McLean and Joseph Nocera. I later waded through the highly partisan “Financial Crisis Inquiry Report” published by the panel entrusted to analyze the mortgage crisis. I then got my hands on the Federal Reserve documents issued by the Minneapolis Federal Reserve, link provided.

What Is The Mortgage Crisis? –

In short, the Mortgage Crisis is what is stymying the U.S. economy.

Why site assembly in Mexico?

...tariffs are 0% on vehicles shipped from Mexico...

Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest. So while VW has operations in Mexico, here I focus on the Japan angle, because I'm teaching a course on the Japanese economy.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it's not a priori a natural choice.

Will GM Again Go Bankrupt?

...there's not a shred of data to support BK Round II...

I've received an email making the rounds claiming General Motors is destined for bankruptcy before the end of Obama II. I've now heard the same pronouncement from several other directions. However, just because someone thinks that government support during GM's bankruptcy process was wrong does not mean it hasn't worked. I won't address any specific claim, in part because none that I have encountered looked at GM's sales data, much less perused their financial reports. It is though appropriate to ask what leads a firm towards bankruptcy, and whether there's evidence GM is heading that way.

The New Romney on GM

...loan guarantees would have given all the gains to Wall Street...

David and I blogged in 2009 and then many times since on the so-called auto bailouts. (Since when is bankruptcy a bailout? -- there were no winners, all lost something.) From the start we noted that the vertical structure of the industry -- suppliers, assemblers, dealers -- was central, because GM's failure would have taken them all down. This is not a trivial issue: suppliers employ between 2 and 3 people for every "automotive" worker, and dealerships employ fully as many as all of manufacturing. In 2009 all were teetering on the edge of bankruptcy. Without normal financial markets that would have meant Chapter 7 dissolution, not Chapter 11 restructuring. And let's not forget that the whole industry is woven together in a complex pattern. Most cars are sold today by dealership groups; your GM dealer is also a Toyota dealer. In the strained market of 2008-9, the failure of one would have led banks to foreclose on the other in a rush for repayment. And the supplier to GM is also a supplier to Toyota and to BMW. They would have no more been able than GM to make cars -- or even get repair parts to keep the service bays of their dealers generating revenue. Even in the Great Depression of the 1930s there was never a complete collapse.

Mitt Romney's father may have once been the CEO of American Motors [for those without long memories, the Jeep portion of the old AMC continues to mint money, and to keep Toledo Ohio afloat], but that doesn't mean the son inherited a deep knowledge of the industry. Mitt is ignorant of (or chooses to ignore) this complex structure,

GM and the Upcoming Presidential Election

by David Ruggles

Amid the political turmoil of election season the rescue of the domestic auto industry by the George W. Bush administration and the Obama Administration is certainly a political football. The President and the Democrats have to defend the fact that the “rescue” wasn’t done perfectly, although a debate rages over exactly what those imperfections might be and who is responsible for them. Many Republicans are sticking to their position that the domestic auto industry should have been allowed to liquidate and eventually reform, although that logic doesn’t play well in the key “swing states” Ohio and Michigan. Governor Romney was adamantly against the “bailout” saying “Let Detroit go Bankrupt” and declaring that “a bail out would insure their failure.” Of course, this is all confused by Romney’s attempt in the Republican debates to actually take credit for the rescue saying, “They took my advice.” (His campaign has repeatedly declined comment when asked to clarify their candidate’s position on the issue.)

It also seems to ignore the fact that in the case of liquidation, there would have obviously been a huge cost dropped on the various states for unemployment compensation, a ripple impact through the banking system, chaos in the supplier base, and a disruption of military procurement. The ultimate result could have been a true Depression. Most pragmatic politicians wouldn’t have taken the risk, despite rhetoric to the contrary.

The Upcoming Fiscal Cliff

By David Ruggles, originally published in Auto Finance News

The upcoming “fiscal cliff,” as it’s known in investment circles, is the proverbial “sword of Damocles” hanging over the head of the world economy. Somewhere, Grover Norquist is smiling, while the global economy hangs in the balance. When the country’s two political parties couldn’t agree on a deficit-reduction package ― which the Republicans held as hostage to approving an increase of the country’s debt ceiling a year ago, according to Senate Minority Leader Mitch McConnell ― the two parties entered into a sort of “death pact” known as sequestration. Both parties agreed to concessions previously deemed unpalatable to force them into an agreement before the end of 2012. The concessions have the potential to bring catastrophic impact to the U.S. economy and, hence, to the global economy.

Energy Self-Sufficiency: A Realistic Goal or a Pipe Dream?

By Gal Luft for the International Global Security Network

Western publics seem to believe that energy self-sufficiency is an ideal response to those who attempt to wield the ‘energy weapon’. I argue, however, that no state will be able to achieve full energy independence, let alone avoid future spikes in prices, in an economically globalized world.

The desire for self-sufficiency has always been a common trait of human society. After all, no one likes to be dependent upon others, especially for vital commodities and services. From a geopolitical perspective, this sentiment is arguably at its strongest when it comes to energy. The Arab Oil Embargo, Russia’s gas supply cutoffs to Europe and Venezuela’s and Iran’s threats to use the ‘oil weapon’ have all reinforced importing nations’ urge for energy self-sufficiency. No country is more preoccupied with this than the United States, where for the past four decades achieving energy self-sufficiency has been the mainstay of Washington’s energy policy. The only difference between Republicans and Democrats is that the former emphasize supply side solutions (‘Drill Baby Drill’) whereas the latter call for an ‘oil diet’ that uses less oil through taxation or increased fuel economy standards. The result is that the overwhelming majority of Americans believe that energy self-sufficiency will improve national security, alleviate the debt and budget crisis and yield lower and more stable gasoline prices. This worldview is based on myths and poor understanding of how the modern global energy market actually works. True energy security requires both uninterrupted energy supply and affordable prices. In today’s globalized world, energy self-sufficiency guarantees neither.

Is self-sufficiency really possible?

Industry Churn: Clout and Overcapacity

New turmoil dominates today's [July's?] news. First, there is the not-quite-yet announced linkup between PSA and GM. Fiat-Chrysler claims to be looking for an alliance partner. So we are seeing a resurrection of the idea that a modern auto manufacturer needs a bigger scale than these already large firms have—call it the mantra of "clout."

A second piece of news is that Subaru (Fuji Heavy Industries) is withdrawing from the "kei" (minicar) segment in Japan, leaving three players, Suzuki, Daihatsu and the faltering Mitsubishi. Meanwhile, there are rumors of plant closings in the EU. This represents another long-standing industry mantra, "overcapacity."

In Japan, the 30-odd manufacturers present in the 1950s shrank to 11 by 1966, with new entry Honda offset by the acquisition of Prince by Nissan. Now in Japan little changed until the 1990s, but since then Toyota took over Hino, Isuzu, Daihatsu and now has exerted control though not full ownership over Subaru (Fuji Heavy). Renault took over Nissan, Volvo took over Nissan Diesel, and Mercedes took over Fuso, the truck portion of Mitsubishi. Honda remains fiercely independent, while Mazda and Mitsubishi failed to turn themselves around in alliances with Ford and Chrysler/Daimler, respectively. Suzuki is presently unwinding an abortive alliance with Volkswagen.

Confusing? Yes! And it's not just Japan. In Europe brands such as Simca disappeared in the 1970s, along with the remnants of other firms; a few have mutated, with Mini shifting to BMW, Land Rover and Jaguar to the Indian firm Tata, and Rover to a Chinese firm. VW has gobbled up a range of makers, from SEAT and Skoda to Audi and Porsche. Of course the US has seen all sorts of drama, too.

But that hasn't necessarily meant fewer players, at the national level. To give one example, Toyota, Honda and Nissan all have plants in the UK, and the number of models expanded. While many words have been spilled on overcapacity at the pan-European level, there's a puzzling disconnect: aren't there also therefore too many brands and models in the market? "Lean" manufacturing and common platforms, and now manufacturing design standards [off the top of my head I'm not sure there's standard jargon] allow firms to make multiple (and sometimes quite different) models in the same plant. There is still however an association between plants and models, or at least size-based market segments.

This is from an old draft that somehow remained "unpublished". For the moment I will leave it merely as an observation that these multiple levels of analysis haven't been integrated, and that the received wisdom is almost surely comprised of mutually inconsistent elements. I've still got some slogging and blogging to go on these topics...

Mike Smitka

Auto Bailout Redux: Warren Buffett

...it was Bush who bailed out GM -- Obama forced it into bankruptcy...

Steve Rattner's blog points out a February 27th CNBS interview with Warren Buffet that affirms what David Ruggles and I have argued from the start on our Autos and Economics blog, and reiterated here: that the alternative to the government provision of DIP financing for an orderly Chapter 11 restructuring of GM and Chrysler (as though bankruptcy is a bailout!) was a catastrophic dissolution via Chapter 7 ("close your doors forever" bankruptcy). As Buffett notes, capital markets weren't functioning, and there were no sources of working capital for firms seeking Chapter 11. Indeed, he himself told one of those firms "no" -- and unlike banks, he was not constrained by liquidity concerns and depleted capital. Rather, everyone was hunkered down, and clearly uninterested in what a priori was a very risky venture.

Now it's not as though the reorganization was perfect; lots of dealers had their franchises yanked, which neither lowered operating costs at GM nor improved their sales. That seems to have resulted from the input of a consultant who had worked for NADA (the National Auto Dealers Association). Of course every dealer wishes for one less competitor, but that's a tension with every franchise system: what's good for the franchisor is not always good for the franchisee. With hindsight there might have been wiggle room on other terms and conditions. But it's hard to fault what was done from a real-time perspective. Indeed, the speed with which the Chapter 11 restructuring was consummated should give creditors in other bankruptcies, who often shell out staggering legal fees for years on end, food for thought. And speed was critical to the revival of GM and Chrysler, and for keeping suppliers and the rest of the domestic auto industry afloat.

Let me close with a personal reflection. We will continue to quibble over the appropriate role of government in our society. We will always find fault, too, because by and large government is engaged in providing services that can't be quantified or for which market prices aren't available -- economists and environmental scientists can construct models to delimit how much less pollution is worth, but that's a far cry from trying to figure out how much a gallon of milk is worth.

Overall, however, I've always been impressed with the service orientation of those in the public sector, from local school teachers (the biggest component of Leviathan, and certainly not in it for the money!) to individuals such as Mr. Rattner (who incurred a pile of legal bills for the privilege of serving). Kudos! -- our society would be poorer without them

Mike Smitka
An essentially identical post is at the US and Economics blog.
My apologies if this shows up at an odd time; I may have forgotten to hit "publish" after writing it, or else went back to edit it without realizing I had to re-publish it.

Europe's Troubles: BMW postscript

...my quick analysis suggests no European OEM will weather the coming storm without taking on a fearful amount of water...

According to an August 16^th Bloomberg post on BMW, discounting is rampant in the German market, while sales are not responding. (According to a friend who has worked in Europe, this phenomenon of phantom sales goes back decades, rediscovered in each recession given that the careers of analysts and reporters of the industry seldom span multiple downturns.) Now I visited BMW's plant in Spartanburg, South Carolina in January 2012; it was running flat out and adding capacity, because the models produced there are global hits, with the majority of output exported. My back-of-the-envelope calculations suggest that plant is about 1/5^th of BMW's global output, given capacity additions in China.

Of course a big slice of those exports go to Europe, which is in recession; overall the region accounts for 30% of BMW's sales. The elimination of the "block exemption" in late 2003 removed restrictions that limited the ability of dealerships to sell cross-border; German stores now compete with those in Italy. As long as the euro lasts, troubles in one large market now spill over to the rest of Europe. [And if the euro doesn't last ... but that's my premise.] Meanwhile growth has slowed in the BRICs, which account for 25% of sales.

So while the European near-luxury makers are more diversified than Peugeot, Renault or Fiat, they too remain vulnerable.

And then there's the massive VW empire, 10 brands including a full range of trucks, and a solid sales base in most markets except the US and Japan -- and it is now targeting the US aggressively. However, with a market share of just over 4%, its footprint simply isn't large enough to generate sufficient profits to offset weaknesses elsewhere (and with a new plant, depreciation looms large, good for cashflow but not the bottom line). To analyze how the firm will weather the looming European meltdown would require piecing together these operations. Analysis is further hampered by the lack of geographic data in the stock analyst reports I've scanned. They may be the best immunized -- but I can't make a case one way or the other.

...Mike Smitka...

Addendum: Pending blog post I spent over an hour discussing the European industry with a retired senior Detroit 3 executive whose career included multiple postings to Europe. He helped point out variations across firms and markets, a level of detail beyond my experience or ability to quickly [this is a blog!] research. More once I hit a comfortable rhythm with my teaching overload this fall, and add nuance to my analysis of Europe.

GM and the Upcoming Presidential Election

Ruggles – September 2012

Amid the political turmoil of election season the rescue of the domestic auto industry by the George W. Bush administration and the Obama Administration is certainly a political football. The President and the Democrats have to defend the fact that the “rescue” wasn’t done perfectly, although a debate rages over exactly what those imperfections might be and who is responsible for them. Many Republicans are sticking to their position that the domestic auto industry should have been allowed to liquidate and eventually reform, although that logic doesn’t play well in the key “swing states” Ohio and Michigan. Governor Romney was adamantly against the “bailout” saying “Let Detroit go Bankrupt” and declaring that “a bail out would insure their failure.” Of course, this is all confused by Romney’s attempt in the Republican debates to actually take credit for the rescue saying, “They took my advice.” (His campaign has repeatedly declined comment when asked to clarify their candidate’s position on the issue.)

It also seems to ignore the fact that in the case of liquidation, there would have obviously been a huge cost dropped on the various states for unemployment compensation, a ripple impact through the banking system, chaos in the supplier base, and a disruption of military procurement. The ultimate result could have been a true Depression. Most pragmatic politicians wouldn’t have taken the risk, despite rhetoric to the contrary.

Some of the criticism leveled at supporters of the auto manufacturer rescue is based on the fact that if GM stock were liquidated today, based on its current value which is down a third since its’ IPO date, the taxpayers would sustain a loss in the tens of billions of dollars, which is entirely true. Of course, no one has calculated the cost of NOT doing the rescue, a calculation which would have to be based on speculation and would be subject to considerable argument.

Another issue rarely heard has to do with the billions of dollars of pension liabilities that would have been dropped on the Pension Benefit Guarantee Corporation. While a close estimate of that financial burden is not available, a comparison is. When United Airlines dropped their pension liabilities on the PBGC about 8 years ago as a part of their Chapter 11 bankruptcy, the amount was $6.6 billion. While this is technically an insurance fund, the obligation for pension obligations abrogated by liquidating OEMs and suppliers in the case of an auto industry liquidation would have easily run into the tens of billions of dollars, rendering the fund insolvent. This would have either landed on the back of taxpayers or pension checks would have ceased for many retired Americans. The impact on the psyche of the country and on consumption in the economy can only be imagined.

In the meantime, President Obama and Governor Romney and their political parties have both been banned from GM properties until after the election. There will be no political grandstanding on bailed out automaker facilities! Imagine banning the person who represents one of your largest stockholders, without whom you would not exist.

The two automakers have also refused to furnish vehicles for the national political conventions. It’s a smart move for GM and Chrysler to stay away from politics when possible. After all, they want to sell vehicles to both Republicans and Democrats.

While things are somewhat different for Chrysler now that FIAT has bought out the Federal Government’s stake, are GM executives hedging their bets in case President Obama loses in November? While it hasn’t been talked about a lot, it has occurred to more than a few GM stockholders (myself included) what would happen if Romney is elected and immediately dumps all of the government’s stock in General Motors. This would certainly be devastating for the stock price, but what does Romney have to lose? He could claim to have relieved of GM of its Government Motors moniker, while hurting millions of private stockholders. He could blame the losses on the previous administration, and move on. If reelected, it is a given that President Obama would hold on to the GM stock, selling small amounts at a time to maintain the stock price, while hoping the improving economy would further bolster the value of the taxpayer’s stock.

It is also a given that President Obama’s role in the restructuring in the domestic auto industry gives him a serious advantage in the November election. It is hard to imagine Ohio and Michigan going Republican. And without those two states, the road to the White House becomes a near impossible journey. And if GM shareholders across the country get wind of Romney’s intent to dump the taxpayer’s GM stock at once, it could impact the way people vote in other closely contested states.

The Industry in the face of the Euro's (partial) demise

...Eurxit and beyond...

The Euro as currently configured is not sustainable, from both an economic and from a political perspective. Spain cannot possibly deflate its way back to balance, and 20% overall unemployment and 50% youth unemployment is not politically tolerable. The only way out – forcing German banks to write off their Spanish debt now, matched by stimulus sufficient to turn Germany into a net importer – is not on the policy horizon, though in due course German banks will in fact have to write down debt.

If Spain falls, so will other parts of the Euro zone. Greece of course, and Portugal, and Ireland but not Italy? – I'm not euro-centric and don't know enough to create my own list. I assume France, Spain, Benelux, Austria and Finland will remain. To highlight issues, however, it is sufficient to focus on Spain.

The Euro exit process – I've seen the term "Grexit" used for the likely initial case – is not clear-cut. I would hope that central bankers and pan-European financial institutions are (quietly) working on possible scenarios. If so, in our leak-prone world, they really have been quiet. At the moment, a sensible assumption might be a three years of chaos in those exiting, since there seems to be no planning to support a quick and clean break (cf. the 1997 Asian Financial Crisis). In the interim, those remaining on the Euro would face a corresponding period of deep recession. Then would come two years of recovery that would leave economies below peak, followed by an era of more gradual reconstruction. The total: five lean years, less than what drove Israel to Egypt, but potentially just as devastating to the European heartland.

Not all auto firms are equal. For several – Fiat, Peugeot and Renault – Europe dominates their operations. So far VW appears exceptional, because its German sales base has escaped the current crisis and it is larger outside Europe. Then there are BMW and Mercedes, in the upper segment of the market, about which I know little, and so will hazard no guesses.

Other firms have a footprint in Europe, but are not dominated by what happens there: Fordwerke and Opel are but one part of the global operations of Ford and GM. Europe is peripheral for Toyota, Nissan, Honda and Hyundai. Their parent companies may or may not decide to tough things out – GM will have the hardest time –but unlike Euro-centric firms they have the option of exiting. That would matter if both Ford and Opel/GM leave the market, but otherwise would not remove enough capacity to change the equation.

Then there are automotive suppliers, the larger of which have substantial bases in the Americas and Asia, but still have their core in the Euro zone. My sense from visiting suppliers on a regular basis is that they've done a good job of geographic rebalance, to the benefit of firms headquartered in Europe and the detriment of those headquartered in the US. Asian suppliers are on average relatively weaker in Europe, and so will be less affected. Catastrophic failure of any of the large European suppliers would be catastrophic to the industry, the equivalent of Lehman Brothers in the financial world. Renault would (quietly) cheer the failure of PSA or Opel. All would lose in a meltdown of the supplier base.

Shifting gears from firms to geography, Eurxit (pardon the neologism) would bring a large devaluation to Spain. That is most obvious relative to the Euro; imports from Germany and France [Grance? Framany? – the new Europe will need new jargon] would be much more expensive. However, I would also expect the (new) peso to depreciate relative to currencies in peripheral Europe, since Hungary, the UK, Russia and Turkey already reflect a more sustainable level relative to the Euro.

If it could avoid collapse during the transition, Seat as a local firm (albeit also a VW subsidiary) would benefit from a large shift in relative prices that would improve its strategic position. It could become a true value brand in Europe, with increased exports and (due to the higher cost of imports) would have a near-unassailable position in its home market. Seat might still be Skoda's poorer brother, but its place in the VW family would be more secure. Now the labor cost component of local [Spanish] assembly is modest, and many parts and components are imported, muting the initial benefit. Over the space of a few years, however, local content would rise and with it the peso component of the cost base.

In contrast, firms remaining in the Euro cost base would see their export markets shrink, and the burden of the zone's excess capacity is already heavy. Who has deep pockets? VW, yes, but (potentially) Ford, Opel, Toyota, Nissan, Honda and Hyundai. Chrysler isn't big enough to fully balance Fiat, nor Nissan to balance Renault. Absent government intervention, it is hard to imagine all of these small firms surviving five lean years. In addition, GM's pockets aren't deep; Ford is still rebuilding its balance sheet. Eurxit won't help the US economy and it won't help China, so won't help either firm. So it is conceivable that one of them would exit. It is almost inevitable that the European market would witness multiple bailouts, given a greater political sensitivity to unemployment than in the US. This would be to the detriment of VW, and to any of the branch operations of US and Asian-based firms that remain.

This is my first pass at the implications of Eurxit. Additional differentiation would come from breaking down market shares of individual firms between Eurxit and Euro countries; who is strong in the Mediterranean periphery, and hence more vulnerable? Who has the weakest balance sheet among OEMs and among suppliers? On which side of the divide will Italy lie? Who has a stronger base in the non-euro periphery (Turkey, Hungary, Poland, Russia) and so may be better positioned to pick up pieces of the market via exports?

We can always hope for a miracle European unity, that France and Germany can act as one. So far the fear factor is failing to force fraternity. The initial Eurxit – Grexit? – may change that, but my hunch is that by the time it will be too late.

Finally, this places a fundamental strategic choice in front of firms not irrevocably committed to Europe: do you marshal resources for a long and expensive slog there, or do you prepare to retreat and instead concentrate on the Western Hemisphere and Asia? Even with a reconfigured "euro" divide Europe will remain on average prosperous, and with a population larger than the US will remain potentially profitable. But is every current participant willing to wait until 2018 to realize that potential?

...Mike Smitka...

The REAL Reason Recovery is Slow

...from Auto Finance News...

2012 June 2012 was a huge news month. The 2012 Presidential campaign is always good for news, the Miami Heat won the NBA Championship, we had fires and storms, and the Supreme Court issued to important rulings on the Arizona illegal immigration legislation and the Federal health care reform bill commonly known as ObamaCare. Lost in all of this was a report released by the Federal Reserve Bank which dealt with the issue I believe is the real reason for the slow recovery. It’s not taxes. It’s not regulation.

The Federal Reserve report that shows a decline of almost 40% in household net worth from 2007 to 2010. In that time span American’s household wealth dropped to a level not seen since 1992, mostly driven by the precipitous drop in home values due to the bursting of the housing bubble. Eighteen years of gains were wiped out.

The new data comes from the Fed’s Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families. Families with incomes in the middle 60 percent of the population lost a larger share of their wealth over the three-year period than the wealthiest and poorest families. This is typically the group that drives consumption in our economy. Given the scale of this loss of household net worth and in the face of other headwinds like the European debt crisis, it is a wonder we have had the recovery we have had.

Unless one belongs to what some call the “Field of Dreams School of Economics”, (If you build it they will come), one probably believes that the country’s recovery is stymied by weak demand. This Federal Reserve report quantifies the reason for that weak demand.

In the midst of the current Presidential election we haven’t heard much from either candidate on the subject. Mitt Romney seems to want to hasten the foreclosures and subsequent sales to get deficiencies established so the “bottom” can be reached. I’m not sure that carries favorable political resonance but he said as much during a recent interview. Romney regularly states he thinks that it is taxes, threat of taxes, and regulation holding the economy back, not the evaporation of household wealth. But he can gravitate from being a “supply sider” to a “demand sider” in the blink of an eye.

President Obama has offered up some measures to help keep people in their homes, like the Home Affordable Refinancing Plan (HARP). While HARP and other programs carry positive humanitarian considerations, they might be helping to extend the problem. Unfortunately, it won’t be good for the country if we use the high point of the bubble, 2004 – 2007 as our economic benchmark. The consumption of that era was based on many Americans using their home equity as an ATM machine. A return to those days would mean we would be on the edge of another disaster.

Until consumers feel confident and “wealthy” enough to begin robust consumption, recovery will continue to inch along despite immense pent up demand. Real recovery depends on home values.

The complete report can be found at the link: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

PS: For more on the impact of this sort of decline in wealth, readers might look at the following post on a survey of "balance sheet recessions." As far as I know -- I happened to be at an early presentation of his in Tokyo in 1992 -- the term was coined by Richard Koo. The blog entry which provides a non-technical overview of this survey is HERE.

Mike Smitka

...see the companion blog usandeconomics.blogspot.com on RomneyCare...

Bad News for Toyota? – the Detroit 3 are Back

...the Detroit 3 are returning to the midsized-car segment...

I'm tossing out back issues of Automotive News to try to fit into a corner office with more windows but less shelf space. I know, crocodile tears for this academic with his shelf-filling collection of books and journals. Anway, one headline caught my eye: "What can save the Detroit 3? Cars!" [a John K. Teahen, Jr. editorial from Sept 18, 2006, p 16].

The context was the near-exit of GM, Ford and Chrysler from the car market, which decreased monotonically from 89% of their sales in 1965 to 35% in 2005, while (correspondingly) trucks went from 11% to 65%. Now admittedly trucks were incredibly profitable on a unit basis, while small cars were a necessary evil, intrinsically unprofitable but needed for CAFE (the Corporate Average Fuel Economy mandate). But the decline at the Detroit 3 was disproportionate to the shift towards light trucks in the over US market.

One point is that ambitious designers, engineers, and senior managers all want to be associated with halo the ka-chenk of good bottom-line vehicles. Teahen argued that the Chevy Impala remained a potential money-earner, with hoped-for sales a bit above the 296,000 of 2006. In fact, on a platform basis, output was higher – 500K – reflecting the multiplication of nameplates that were in fact the same basic car, but the implication of the editorial was that it wasn't making much money. And even with the shift of the overall vehicle market towards light trucks, such sales pale besides the 1-plus-million mark hit of 1965. GM wasn't putting its heavy hitters on car projects.

I've argued before on this blog that Toyota lavishes undue attention on the Prius and on the Lexus marque, again reflecting the status of these projects within the company as a whole. Reputedly Toyota's working to correct that bias, devoting more effort to the 2012 version launched in December 2011. Time will tell if it is better executed and better selling.

Today, however, the Detroit 3 are a factor. They have very different cost structures, with the removal of the millstone of legacy costs from around their neck, a function of the aging of workers "retired" under pre-2007 restructurings, the impact of the VEBA and (for GM and Chrysler) additional costs shed under bankruptcy. Labor is no longer a fixed cost. They thus no longer need to maximize revenue [which for you economics junkies is also implied by the low marginal price of labor]. Instead they can aim to make money from cars. We see that in reduced incentives, reduced fleet sales -- that is, higher prices -- and a normalization of residuals. (I can't speak of leases -- I lack knowledge and suspect that option continues to suffer from the aftershocks of the financial upheaval of 2008-9.)

What does that imply for those who remain focused on cars, particularly Toyota, Honda, and Nissan? On the one hand, they ought to benefit from less discounting. On the other hand, they are hurt by reinvigorated Detroit 3 products. The latter, I believe, dominates: from Toyota's perspective, they have two new, heavy-weight competitors in GM and Ford (and in some product categories, a 3rd in Chrysler), and while Hyundai has been around for a while, sales of the Sonata are only now such as to represent a major slice of the mid-size segment of the Camry and the Accord. If you've become a bit sloppy dare I say arrogant? the sudden appearance of new competitors can be very painful.

My prediction thus is that Toyota (and Honda) will resort to greater discounts and higher fleet sales. That should be good news for new car buyers. (Car renters will have greater choice, but price may not budge much, better residuals will work against higher initial acquisition costs for Enterprise and their rivals.) But since Toyota relies on exports from high-yen Japan for Lexus and (to a lesser extent) the Prius, they've taken a major hit to profits on that front. I'll leave it to financial analysts to pour over segment results of the major players, particularly Toyota, to see if the new competition means their US profits take a hit as well.

Mike Smitka

comments welcome, here or via email!

Reverse Import Deja Vu?

...a strong yen should boost exports to Japan...

In 1992 I wrote a paper about Japanese car imports, later picked up by the Economist, in Japanese by Toyo Keizai (東洋経済) and by the MIT International Motor Vehicle Program about the growth of Japanese car imports. Ah, but what news was in that? Well, I was writing about "reverse" imports by Japanese of their cars from the US to Japan, alongside the sales of German firms, the only foreign companies to set up proper dealership networks and import processing infrastructure. The recent strength of the yen against the US dollar and particularly against the Euro, made me wonder if we will see a return to that era.

A headline in the May 24th Sankei Shinbun web site thus caught my eye: Mercedes-Benz will sell the "Smart for Two" for ¥1.59 million (US$19,992; €15,950), about a 14% reduction in price. Other forthcoming models of M-B and BMW will likewise carry lower sticker prices or add a lot of options without raising the price. Now the article doesn't make it clear whether the base is appropriate -- it uses year-on-year comparisons, and in general spring 2011 was not a normal time. Still, it cites rises of 37% for M-B and 27% for BMW.

I've only glanced quickly through recent data: given the volatility of the global economy in general, and the post-3/11 economy of Japan in particular, I was expecting to find the data too noisy to interpret. That's not the case.

First, overall imports are at the highest level in the years for which I have (FY1999 to present), even though at 4.0 million cars FY2011 sales are 10% below their mid-2000s level (and 20% below the 5.1 million unit sales peak at the top of Japan's bubble in 1990).

Second, while the German firms are doing OK, both BMW and Mercedes are down from 2007 and the onset of the global recession; only VW and Audi show signs of a sustained increase. What really is driving the increase is Nissan, which now accounts for about 17% of imports or 50,000 units. This is surely consequent to their moving the production of certain vehicles (such as the March) entirely out of Japan.

Still, total imports of 295,000 units remain rather short of the 393,000 level of 1996. While the Japanese media may be full of hand-wringing about the impact of the yen, the evidence so far is modest, when looked at through the lens of vehicle imports. Realistically, it's probably too soon to tell; vehicle sales strategies are penciled in a couple years in advance. We aren't seeing "reverse imports" of Japanese-brand cars from the US -- yet. So from that perspective we're also not back in 1996, when 85,000 Toyotas and Hondas went westward across the Pacific. But it is worth watching.

Source: 「１５９万円のベンツ 円高追い風、価格抑え輸入車加速」 which freely translated says "Fanned on by the strong yen, a Benz at ¥1.59 million will accelerate imports." From sankei.jp.msn.com of 25 May 2012.

...Mike Smitka...

Who Would BUY a Chevy Volt?

Who In Their Right Mind Would BUY a Chevy VOLT?

After all, it’s $40K – think about what else one can buy for $40K! There are very nice Lexus, Benz, Infiniti, BMW, and Cadillac models in that price range. AND even with a government subsidy it doesn't stand on its own at $40K. Even if gas hits $5, it doesn't work. Plus who knows what it will be worth in 39 months, or 36 or 48 for that matter. If new technology trumps it, it could be next to worthless. Why take the risk just to be known as an "early adopter?" That's why Bob Lutz, the Father of the VOLT, told us at a fleet conference a while back, "It won't SELL. That's why we're leasing them for $350/month for 39 months."

Lutz says, "We gotta start somewhere if we EVER plan on achieving economies of scale." In true Lutz fashion he compared the VOLT to hunting ducks. "If you shoot at the duck, you will miss it every time. One has to "lead" the duck to hit it. We need to lead the market to have a chance to hit it. If we wait too long, the train has left the station and we are standing on the platform saying, "What happened?"

"Lead, follow, or get out of the way, said Lee Iaccoca. Lutz concurs.

Toyota lost money on every PRIUS beginning in 1996, and did for quite a while. That vehicle is thought to be profitable these days, although they are typically "tight lipped "on such matters. Toyota is now bringing a plug in hybrid to market. (The VOLT was the world’s first plug in hybrid.) Toyota has lots of experience and satisfied hybrid customers now, along with economies of scale.

In the meantime, the VOLT has attracted detractors. The Right Wing in the person of Rush Limbaugh has embraced the VOLT as a car they can hang around the President's neck, despite the fact it had been in development long before he was elected. Actually, Lutz IS the actual "Father of the VOLT." For Lutz to get after the Right Wing takes some doing -- see his Forbe article.

The barrage of untruths continue. A friend from told me that it would take 3 weeks to drive across the country in a VOLT with all the stops to recharge. He said heard it on Right Wing talk radio. In fact, the electric range on VOLT is about 45 miles before the internal combustion engine takes over to propel one across the country as with a normal car. It IS true that the internal combustion engine recharges the batteries which drives the electric motors rather than being actually connected to the drive train in a conventional manner. But to the driver, the difference is not noticeable except the engine doesn’t change RPM based on throttle position.

Others claim they catch fire in a collision. The VOLTs that caught fire had been crash tested and stored improperly for weeks before they caught fire. A vehicle with a regular lead acid battery stands the same risk if stored improperly. As with normal vehicles, the battery should have been removed.

A driver with a less than 30 minute commute to work, and a place to plug in while there, could drive all month without the internal combustion engine using any fuel at all. Figuring 50 miles per day plus other driving, one saves two tanks of fuel per month or about $120. Subtract that from the $350 lease payment and the VOLT can be easily justified. BUT GM has NOT made that case. Worse yet, sales people in Chevy dealerships haven't either. And coupled with the Right Wing misinformation blitz, GM has shut down production for 5 weeks to balance inventories. In my mind, the story has been that GM has not done the math for consumers in their marketing efforts. The marketing story is "$350 minus $120 equals $230./month. That WORKS!!!!!

[Smitka: But obviously consumers don't do the math -- ditto with the Prius, as there's no strong case for buying it on the basis of fuel savings, which is why no other hybrid, including those made by Toyota, sell well. In other words, people buy a Prius to make a statement – hence you don't find "base" models on the lot, the main reason Toyota may make money on the vehicle, despite the cost of installing two powertrains plus a battery pack. GM needs to borrow a bit of that marketing. At the moment, of course, so does Toyota....]

David Ruggles, April 17, 2012

Lights Turned Off at Bright Automotive

...new technology can't target the mass market...

The long-run goal for electric vehicles is the mass market. The expense of new technology means that is not the place to start. Instead, there are two alternatives. One is to target the high end of the luxury segment; that is Tesla's strategy. It's not clear, however, that that market is sufficiently large for two firms to survive, and the second – Fisker – is late to market. Others, such as Aptera, wanted to turn out a (very) small vehicle and charge a (super) premium price for it. The vehicle itself would certainly have attracted attention. But the very rich insist on luxury as part of the package, and a tiny car can't deliver that.

The other option is to target a market that is particularly sensitive to fuel efficiency: commercial fleets. That was the strategy of Bright Automotive. Vehicles for (say) UPS in an urban area are on the road all day, with fuel a significant operating cost. But they're not on the road at night, and they may not travel long distances, only long hours. The space and weight of batteries is less of a constraint; there's no chicken-and-egg issue of whether there are enough recharging stations, because they are only needed at the corporate garage. And it's possible to create a value proposition, that the gains in efficiency will offset the higher up-front capital costs. Car purchasers aren't particularly good at that sort of calculation, focusing on "first cost" (purchase price) and not life-of-vehicle costs.

Bright in fact was able to attract purchase commitments from customers on the basis of actual vehicle cost and performance specs. What they needed was capital, in order to fund the nitty-gritty up-front costs of engineering and testing / regulatory approval, and to provide operating capital to let them produce vehicles – they would have to pay workers and capital equipment suppliers and (depending on their bargaining skills) suppliers of parts and components before they were able to deliver their first vehicle and build their revenue stream. And unlike the "supercar" entrants they were looking at production at a relatively high volume; they couldn't accomplish that on a shoe-string, taking the money from the first vehicle they shipped to pay for the parts for the second one. In other words, they intended to be a viable, volume operation, in it to earn a tidy profit on an ongoing basis. But to be a real company in the auto industry takes a lot of resources.

Reuben Munger, the founder, is a W&L econ grad, but that alone isn't enough to impress me, except that he was an exceptionally good student. Reuben is also a former investment banker, and had "skin in the game." Another notch in his favor. We were able to bring him to campus; he met with some of us faculty privately, and gave presentations to our students. What he said made sense, and I'm a hard sell, as I've sat through a lot of presentations of the business case for innovations in the automotive sector.

From the beginning those involved with Bright understood the venture to be risky. However, they were able to raise initial capital for the R&D part of the venture – including from General Motors – because there would be money available for working capital from the Department of Energy loan program.

Unfortunately, that loan program seems to have unofficially closed its doors. The undercurrent in media reports is that it is a victim of the election campaign, where the loans are being tarred by the failure of Solyndra. (See stories in the Washington Post and in Automotive News.) I also wonder if those involved at the Department of Energy were fixated on passenger vehicles; unless you know something of the industry, selling trucks to Snap-On doesn't sound sexy or central to US energy policy.

I've encountered that mindset, even among people with some real grounding in the auto industry, who ought to know better. But then I've benefited from serving as a judge for the Automotive News PACE supplier innovation competition [link], where I've heard the business case for innovations with target markets across the industry, from machine tool and test equipment suppliers, to suppliers of (not-so-generic) materials, to suppliers of components specific to the long-haul "semi" market, to suppliers to the aftermarket (replacement parts), and suppliers to dealers, as well as the "traditional" Tier I suppliers of parts that go into high-volume passenger cars.

One of the hurdles for a firm to win a PACE award is that they show a credible customer has purchased their innovation and has it in use, on the road. And often one customer isn't enough. So when I learned that a number of hard-nosed customers had signed up (I know a bit about one of them, Snap-On), well, I thought Bright should be a slam-dunk. Too bad, because the US needs firms like Bright.

Mike Smitka, Prof of Economics
Washington and Lee University

Toyota vs GM: Guess Who's the Dinosaur!

...economic theory says dominant firms adopt strategies that undermine their dominance ...

This isn't an enthusiast site, and I'm not a car guy. My family didn't have a second car growing up so tinkering with one never became a hobby. My attitude is horribly utilitarian: a car's function is to get me from point A to point B. So my own vehicle is 24 years old, my secondary one is 14 years old (while my wife's is only 8 years old). When I go on long trips I try to rent a car. And when I visit auto suppliers as a PACE judge or otherwise do the limited travel in which a normal academic engages, I also rent cars.

That said, I have written on this blog about the logic of a leading firm to "never be first" (in its heyday this was the case at GM, and in the past two decades became an operating motif at Toyota). Furthermore, there is an internal bureaucrat logic at large companies. I've not interviewed people about this, so I'm not being my normal careful academic self in stating it, but I surmise that if you're an ambitious engineer / designer / marketer at Toyota, you wanted to be associated with the Scion (Akio Toyoda's pet project) and with Lexus (prestige and profits). To work on the Camry would be a ho-hum posting. You wouldn't be using it as a platform to launch new technologies. It isn't a platform for future products for developing markets.

That would be quite different at a Hyundai or at today's GM. Hyundai started out with a very small market presence, both quantitatively and prestige-wise and in the size of its cars. The Sonata received a lot of attention, details well done including NHV, but I've not driven one for a couple years so don't know the new model. GM needs to reconquer the sedan market. I've driven both the Malibu and the Impala -- the latter so quiet that I had to double-check that I'd turned on the engine, and with a "clean" interior. I was impressed.

Then there's the Camry – I drove a new one with a few thousands miles on it. It was noisy, wind noise in particular. Then there was an occasional vibration from somewhere in the instrument panel, a matter of both design and (poor) build quality. Next was the instrument panel itself. I counted 12 active functions in the speedometer area, a cacophony of visual information (the mixed metaphor seems appropriate). Speed. Tachometer. Miles per gallon performance. Engine temperature. Odometer. On and on. Other than the speedometer, you really had to take your eyes off the road to decipher these functions – and it wasn't clear why a driver of a modern, automatic transmission family sedan would want a tachometer or most of the other functions. Dysfunctions, actually. There was also a large and hard-to-use LCD display -- and the gas mileage information on it didn't match that found next to the speedometer. Furthermore, the hands-free phone function didn't work consistently, particularly dialing out. The developers clearly hadn't done their homework on testing the bluetooth protocols of various phones against their system. Finally, it drove like a modestly responsive boat. That may be what older drivers want – and by older, I mean those pushing age 80. I don't think that's really their target market in theory, and in practice age 70-something drivers wouldn't be particularly receptive to the boatload of gadgets confronting them every time they got in the car.

So, this is congruent with economic theory. A dominant player plays it safe, and puts its resources into growth areas and pet projects of senior management. Over time of course they lose their dominance. But this sort of thing is not easy to turn around, viz. GM's experience. Toyota has a well-entrenched bureaucracy, structured in ways that date back to when they were an exporter of models developed in Toyoda City. On the marketing side in the US there was Toyota, and Southeast Toyota, and Southwest Toyota, rather than a national structure. And they've bought into the upmarket strategy, with profits (and internal kudos) from Lexus and not small cars. That no longer matches their actual market base and production base, and it leaves them ill-suited to tap new markets such as China and India.

I strongly suspect that this is well-known at Toyota itself; after all, there was an internal coup in Toyota that elevated Akio Toyoda earlier than planned under the normal bureaucratic progression, even before the recall scandal. The Camry suggests however that organizational dynamics are deep-seated and have to date resisted change.

Mike Smitka

Bush 43 at NADA 2012

LAS VEGAS ― Having hit a low in 2009 due to the trauma of two domestic automakers nearing bankruptcy and the overall industry in turmoil, the annual National Auto Dealer Association convention this year was indicative of the vigorous rebound of the industry as a whole. Attendance was brisk and the expo hall was packed with vendors. Spirits were upbeat and optimism abounded.

As the final speaker on the closing day, former President George W. Bush had the last word. The hall was packed during his 25-minute prepared remarks and subsequent Q&A, with outgoing NADA Chairman Stephen Wade asking the questions. The ex-president showed his human side with a liberal mix of applause lines and humor. He cracked up the room on numerous occasions with spontaneous off-the-cuff remarks. He devoted some time to trying to sell his book, But every time Bush mentioned Decisions Points, he added with a wry expression and a twinkle in his eye, “We still have plenty of inventory.” The line became funnier every time he said it. “Did I mention, we still have plenty of inventory?”

Despite the fact that the room was primarily Republican, based on an informal polling, (and my interactions over the years with hundreds of dealers) there was no booing or hissing for the fact that then-President Bush authorized the advance of a bridge loan of $17.4 billion from TARP funds to GM and Chrysler in December 2008 after having been turned down for a bailout package by Congress. In current RW rhetoric, this is known as “government picking winners and losers.”

So given the audience, and after first spending some time on his personal battles with alcohol, Bush addressed the economic situation he faced at the end of his presidency. In fact, the auto industry rescue/restructuring might as well be termed the rescue of the North American industrial base, since that is what was at stake. Bush spoke glowingly of the advice and support of Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. He cited them as perfect examples of people a leader should surround himself with to offer insights on subjects about which the leader is unfamiliar.

Speaking of the massive government support for the financial services industry by his administration during the economic collapse of late 2008, Bush says: “In a normal environment, the free market would render its judgment and they could fail. I would have been happy to let them do so. As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would have been even more unfair to do nothing and leave them to suffer the consequences. The consequences of inaction would have been catastrophic.”

Regarding the economic crisis, “If we’re really looking at another Great Depression, you can be damn sure I’m going to be Roosevelt, not Hoover.” “Wall Street got drunk, and we got the hangover.”

In his book, Bush says he “opposed the Carter/Reagan bailout of Chrysler.” “Yet the economy was extremely fragile, and my economic advisors had warned me that the immediate bankruptcy of the Big Three would cost more than a million jobs, decrease tax revenues by $150 billion, and set back the country’s GDP by hundreds of billions of dollars.”

Stipulations attached to the billions in Bush Administration “bridge loans” ultimately cost GM Chief Executive Rick Wagoner his job, despite the fact many have “blamed” the next President.

Bush refrained from getting involved in the current politics other than to say “he understands the immense pressures of the job, and that it would be counter-productive for him to weigh in.” Despite the occasional malapropism, he conducted himself with class and grace with a large dose of Texas one-liner humor. While history may judge him harshly on some issues, it seems clear that the decisive action he authorized saved the economy, and in particular the auto industry, from a catastrophic meltdown.

David Ruggles

Comment by Mike Smitka: Certainly Wall Street got drunk, but it was policy that supplied the hooch. Greed on Wall Street isn't new; the ability to indulge however was. Both historic checks were removed. The first was that of regulation, which limited the ability of bankers to gamble with other peoples money (bankers have long demonstrated an ability to keep winnings for themselves while sticking others with losses). The second was monetary policy, which historically kept the supply of funds roughly commensurate with normal loan demand. Here Bush also leaned on outside advisors, Greenspan in particular but also Paulson and to some extent Bernanke -- though Bernanke was in subordinate positions as a Fed governor and then chair of the Council of Economic Advisors, as he was not named Fed chairman until 2006, by which point real estate prices had largely peaked.

Bob Lutz, the VOLT, and the Right Wing

The recent media coverage of so-called “Chevrolet Volt fires,” especially by the conservative talk shows and Fox News, has attracted my attention and ire. Let’s set out the facts (and feel free to check them yourself):

1. Not one Chevrolet Volt has ever caught fire in normal use or in accidents. Not a single one.
2. The National Highway Traffic Safety Administration, even after the highly artificial crash test (placing the car on its back, even though it did not roll over in the test) nevertheless awarded the Volt NHTSA’s highest crash-safety rating: 5 stars. Volt is supremely safe.
3. The crashed Volt, its battery shorted by coolant from the period unjustifiably spent “feet up,” caught fire three weeks after said test. (I submit that this would provide adequate time for surviving passengers to exit the vehicle.)
4. On average, 278,000 cars with gasoline engines caught fire in the U.S. each year between 2003 and 2007, according to the National Fire Protection Association.
5. No factory-produced electric vehicle has ever caught fire, to the best of my knowledge.
6. The Volt, the most technologically advanced car on the planet, was conceived by me and my team well before any federal bailout of GM.

These are the bedrock facts.

Now, how did the U.S. right-wing media choose to report this admittedly headline-tempting news? A nationally syndicated editorial three-panel cartoon stated (I believe I remember the sequence): “Thomas Edison discovered electricity;” then, “Alexander Graham Bell discovered the telephone;” and, in the third panel, “But it took the US Government to discover fire!” (accompanied by a drawing of a burning Chevy Volt).

Meanwhile, my fellow cigar-aficionado and erstwhile friend Rush Limbaugh launched the usual outraged, breathless tirades, denouncing the Volt as a typical failed President Obama initiative, on a par, grosso modo, with the dreaded Obama Care. The screen regularly depicted an exploding Chevrolet Volt.

But the Oscar for totally irresponsible journalism has to go to The O’Reilly Factor on Fox News, with, as its key guest, Lou Dobbs. Amid much jocular yukking, the Volt was depicted as a typical federal failure. In attempting to explain why Chevy has sold fewer than 8,000 Volts, Dobbs states, flatly, “It doesn’t work.” He elaborates, “It doesn’t go fast and go far on electricity. What happens is it catches fire,” adding that Chevy has recalled some 8,000 Volts. Bill O’Reilly, nodding approvingly, helpfully interjects: “So they’ve recalled cars that haven’t been sold.” Boiled down to the subtext, Dobbs’ message was this: “All Volts catch fire, and therefore all Volts have been recalled.” That simply isn’t the case.

Much air time was spent on the $50 billion-plus bailout, which, the audience was left to assume, “funded” the Volt, doubtlessly at the whim of Obama’s known army of evil enviro-Nazis, intent on forcing vehicle electrification on a good-ole’-boy, V8-lovin’ populace. To top it off, these two media pros lamented the fact that the same government that had forced GM to produce the Volt was now extending $7,500 tax credits towards its purchase, thus squandering even more of “our taxpayer” dollars on this failed Socialist-collectivist flop. Truth? The $7,500 tax credit was enacted under the Bush administration!

But who the hell cares about facts when you’re in O’Reilly’s self-described “No Spin Zone?” (The fine print might as well read, “We said ‘no spin,’ not ‘no deliberate misstatement of facts.’ ”) What on Earth is wrong with the conservative media movement that it feels it’s OK to spread false information, OK to damage the reputation of perhaps the finest piece of mechanical technology our country has produced since the space shuttle, OK to hurt an iconic American company that is roaring back to global pre-eminence, OK to hurt American employment in Hamtramck, Mich., as long as it damages the Obama administration’s reputation?

While as a conservative Republican I may well share the goal, I deplore the means employed to attain it. The conservative cause damages itself, destroys its credibility through the expedient spreading of untruths. The public will figure it out. The right-wing “talking heads”, O’Reilly and Limbaugh at the forefront, have managed to make me embarrassed to describe myself as a conservative.

Come on, you guys. Shape up! There’s plenty of legitimate fodder out there. Let’s leave the “invention of facts” to the left-wing climate-change alarmists.

Published in Forbes

Auto Bailout Redux and Mitt Romney

See the post on my parallel blog, US and Economics on Mitt Romney's puzzling statements on the government-led bankruptcy of GM and Chrysler. First, as I discuss there, Romney knows finance and so must know he's wrong. Second, and not discussed there, from my end it's not a bright strategy to take this stance in Michigan. After all, the UAW membership in my experience is strongly Republican in leaning -- it's the leadership who support the Democratics. So he's not exactly helping his cause, though I don't follow the ins and outs of campaign strategy and presume I am missing something.

Readers of this blog likely remember that it was Bush who bailed out the industry, with $17 billion or so in loans (the figure is from memory) with no strings attached except for providing a "plan". Obama would have none such, and let these firms file for bankruptcy. In the absence of a functioning financial market, the US government provided the DIP financing that is a normal and necessary part of Chapter 11, and took an equity stake when firms exited, again normal bankruptcy practice -- but the whole thing was extraordinarily well done, as large-scale bankruptcies normally take many years, not 90 days.

Now Rick Santorum is saying similar things -- see the following -- but we have no illusions that he knows anything about finance or economics. He seems to think that the normal "private market" Chapter 11 bankruptcy is quick, that recovery after one is prompt, and that in early 2009 private equity markets would have lent $50 billion to the industry. All three parts of this sort of claim are incorrect.

From Automotive News (link here):

GM and Chrysler would be "alive and equally as well, or better off, than they are now," Santorum told about 300 people at a Detroit Economic Club luncheon today. "The markets would have reacted to restructure it to be more competitive."

Read similar coverage on Bloomberg: http://www.bloomberg.com/news/2012-02-17/auto-recovery-defines-terms-of-engagement-for-michigan-primary.html

Mike Smitka

It's a big, bad world...

...will 2012 ring in the red?...

It's a big world...but everyone is aiming to expand for a bigger world. Toyota of course intends to get back on track. Hyundai/Kia will hit 7 million units (see the Bloomberg story). GM will stay on top, with VW close behind, or maybe a bit ahead. Honda is simply hoping to recover, and awaits the performance of new models. Nissan is doing well, Chrysler is helping Fiat stay afloat. PSA (Peugeot) – well, because they're neither in the US nor in Japan, I tend not to hear much about them. Of course Mazda and Mitsubishi, dependent on exports from Japan, will be lucky to stay afloat in the face of a strong yen. Suzuki looks more and more like an Indian company, not important globally.

Of course the global market will expand in 2012 – we hope. Europe however is likely to see full-fledged recession, and I think it's optimistic that NAFTA won't feel a cold wind. (New England: brace yourselves for a nor'easter of historic proportions.) Japan – well, the economy will be slow and the number of licensed drivers continues to decline. China's growth will surely be slower than in 2011, while India remains small and (unlike India) has done little to improve the infrastructure that helps make car ownership functional. Brazil may do OK. All this means that the major markets will on the whole be stagnant or, in the case of China, slower but with much greater supply and hence softer pricing. (For the major economies in 2012, I find the December 15, 2011 prognosis of Morgan Stanley's Global Economic Forum thoughtful, particularly in its effort to integrate the projections for individual countries to provide a globally consistent story reflecting the integrating effects of trade and capital markets.)

Now we're not looking at a repeat of 2009. Indeed, on a total unit basis there will be growth.

I think the industry may face another shock, lower energy prices. After all, while emerging markets continue to emerge, if more slowly than in 2011, the developed markets will be moribund, depressing demand in what in the aggregate remains the biggest market for energy. Meanwhile, a period of high prices boosts investment in exploration and extraction / recovery. The output of those efforts takes a few years to start showing up in the market. Upon completion financial imperatives mean those projects will be hungry for revenue and will produce even if they face a soft market. Well, it's now been four years. That may be good news to the Detroit Three in the US, but it will mean that overall the market for energy-efficient vehicles will soften. Yet that's where the industry's players have poured their R&D. Sure, R&D is a long-run strategy that isn't expected to generate much of a short-term pay-back. However, it has short-run profit implications when it doesn't generate any up-front return.

It's hard for me to see 2012 bringing in more black; I can't tell a consistent upside story for the industry on a global basis. Single markets are less and less capable of driving results; we have entered an era where firms need more than their home market to generate profits. (A caution: for years the effective home market for Toyota and Honda has been the US, not Japan. That may also be the case for BMW.) However, I'm not (quite) pessimistic enough to say that 2012 will ring in the red.

Mike Smitka