... calculate what it would have cost to NOT rescue the auto industry...
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GM Share Price Needs to Triple for Taxpayers to Beak Even by Paul Eisenstein
The good news for shareholders is that General Motors shares are on a rise, gaining more than 25% in value so far this year – and reaching a $37.45 high during Wednesday trading before settling back a bit.
...[Mack] was a six-story structure [from] 1916...
Detroit is in bankruptcy for three reasons. One is that a city is a fixed cost enterprise, and so adjusting to a sharp drop in revenue is hard to impossible. The second is that Detroit really was the Motor City, but by the 1950s was suffering from the common fate of manufacturing, where as a general rule productivity increases outstrip the growth of demand. The third is that Detroit suffered from the disadvantage of being a first mover: the layout and location of factories reflected the environment of the 1910s and 1920s. Ford Motor Company literally outgrew Detroit, as it moved first from the Piquette Plant to Highland Park in 1910. It began work on its Dearborn Rouge complex in 1917. By the late 1920s it no longer operated inside the city [though in fact Highland Park was itself a separate city, albeit entirely contained within the boundaries of Detroit].
Guest Blogger Blake Grady, edited from April 30, 2013 post on the Econ 244 site
For those of us who do not have much of a business or even economics background, it is difficult to truly understand how large corporations work. One may not truly know the answer to basic questions such as: what does a CEO actually do on a day to day basis? Or: how do meetings of the board of directors work? These questions become even more difficult to answer when dealing with massive - and thus complicated - corporations such as Ford or General Motors.
By Alisa Priddle, Detroit Free Press Business Writer excerpted by David Ruggles from Could automotive supply chain snap?, June 16, 2013
A combination of rebounding sales and an unprecedented number of new models in the works has stretched the auto parts supply chain so taut that the entire industry is holding its collective breath that it does not snap and jeopardize the recovery. .... “Everyone has parts shortages,” said Carla Bailo, who heads Nissan Americas’ research and development in Farmington Hills. “The supply chain is one of our biggest threats. Everyone cut back and is now ramping up. We can’t get up to speed as quickly as in the past.”
During the downturn, suppliers consolidated operations — closing plants, laying off workers and reducing capacity by as much as 30%, said Kim Korth, president of IRN, a Grand Rapids consulting firm that works with suppliers. Now a smaller number of suppliers with fewer facilities and bodies is struggling to handle a 22% rebound in the auto industry. … “We’re not seeing lines shut down, but programs are being delayed,” Korth said. “We anticipate periodic disruptions due to material shortages, quality issues and troubled suppliers.”
Edited from a May 14th, 2013 post by Marybeth Benjamin on the Econ 244 web site
The eye opening drive through the city of Detroit during our weeklong trip perfectly showcased the devastation and the challenges that the city faces. The trip was particularly poignant for me because of the striking similarities between my city, New Orleans, and Detroit.
I saw the beautiful neighborhood of Indian Village, well-maintained mansion after mansion, bordered by crumbling buildings and abandoned homes. Everywhere I looked outside of such intact neighborhoods I saw abandoned street blocks, some with only one house in livable condition. It reminded me of the moment I returned home to New Orleans a few months after Hurricane Katrina. It devastated the city, but disproportionately affected some of the poorer areas.
The similarities did not stop there: During the last decade following hurricane Katrina, the population in New Orleans decreased by almost 30%, which parallels Detroit’s 25% population decline in the past 10 years.
After viewing the city and the extent of the decline, I couldn’t help but wonder if Detroit will ever make a full recovery some day.
click on graphs to enlarge
Headlines are trumpeting the latest month's job gains, based on the Current Employment Survey. Let's not get overly excited. I track employment, not unemployment, and subtract the number on involuntary short hours. I also use as my base the expected number of employed, corrected for population structure (e.g., the aging of the large baby boom cohort). Furthermore, I use the Current Population Survey. Details follow. But first, the automotive sector, which continues to add jobs at a faster rate than the economy as a whole.
The auto industry is doing better than the economy as a whole, both in manufacturing and on the retail side. In other words, the share of the auto industry in total jobs is rising. While the economy as a whole added 160,000 jobs in June, the auto sector added 13,500 jobs; under these metrics, the share of auto sector jobs has gradually climbed from 1.6% to 1.8%. However, that remains well below the 2.3% share of 1999.
The monthly Current Employment Survey is the data source. Unfortunately, it provides no breakdown between vehicle assembly and parts manufacturing, but we do have data on automotive manufacturing (parts & assembly), dealerships, and total retail including auto parts. All three show steady gains. In the process better matching supply and demand in NAFTA, Japanese, German and Korean firms are all adding capacity. To give a purely domestic side, Ford is expanding F-150 production, adding a shift in Kansas City while preparing to launch the Transit van on KC's second assembly line. (I was in the KC plant as well as the Rouge in Dearborn – Ford's two F-150 plants – this spring.) Some of this will be replacing imports. Even when that capacity will go into Mexico, it those won't detract from assembly jobs and will add to parts employment in the US. In other words, the outlook is for continued gains.
The picture for the economy as a whole is less reassuring. While the US added 160,000 jobs in June, the number of people working short hours rose by 322,000. So this past month we actually saw the number of full-time jobs fall by 158,000. Furthermore, the economy needs to add 67,000 jobs a month just to keep up with population growth. (This number is adjusted for population aging – the "boomers" are gradually retiring. For details, see this web site. ) While we've added a lot of jobs since the recession ended, and in most months have added more than the requisite 67K break-even level, the moving average of net job creation is now approaching zero.
Things look slightly better this past month if we look only at employment, and don't factor in people on short hours. Nevertheless, the basic picture remains unchanged; for many months the number of short hours fell sharply. So on balance the bottom line doesn't differ by much, particularly when compared against the total number of unemployed.
Two graphs on that. First, I have the "total pain" measure (formally, BLS's U-6 measure);
The government sector isn't helping. The sequester is turning out to be flexible, as seasonal cash balances have been depleted and as Congress has provided agencies with permission to reallocate funds unspent at the line-item level to programs running out of funds. (Of course these funds were unspent because in many cases Congress, in its predilection to micro-manage, gave agencies line items they said they didn't need. In other cases the underlying issue was annual budgets towards "lumpy" expenditures – large-scale maintenance projects – that may only be spent every 3rd year). Of course such accounting games can only go so far; once cash and reallocated funds are used up, the sequester will bite harder. In any case, despite population growth that would normally call for more police, fire departments, and teachers, local government cut 165,000 since January 2011, while state governments cut 119,000 and the Federal government 121,000. In any single month the numbers may not appear large, but given the weak level of job creation in the economy as a whole, this certainly represents a very real drag on growth.
Finally, what of the prognosis? Note that so far data suggest that the impact of the Great Recession has fallen almost entirely on the shoulders of younger and prime-age workers. The following chart illustrates that by looking at employment to population ratios of young, prime-age and older workers. This doesn't mean that lots of older people haven't traded a good full-time job for one at Walmart. However, it's very clear that lots of new college graduates have yet to find what society considers a "proper" job, and the empirical microeconomic evidence suggests that on average, after a couple years in such jobs they never fully recover career-wise: as conditions improve, employers turn first to new school-leavers who've not gone through an extended bout of underemployment. We really need an uptick there.
In any case, when we plot employment growth against the long-term implicit demand of the population for jobs, the news is not good. Yes, we're better off than in early 2009. However, under current trends we won't return to normal for another 5-6 years, even given the retirement of the "boomers" over the next several years. (Notice the black line of "target" employment gradually flattens, and lies far below the blue line that represents a naïve projection on the basis of historic labor force growth in the pre-2007 period.) The Fed may have its pedal to the metal, but while better than the alternative, that's not accomplishing much. However, that's the only policy tool available, since the House can't even pass a budget.
Detroit’s Worst Mistake Ever Nov. 7, 2012 by Drew Winter in Ward's Automotive Final Inspection
Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices.
History of Automotive Boondoggles
I recently blogged about some of the auto industry’s biggest boondoggles of the last 25 years and asked readers to contribute their thoughts.
My email bulged with suggestions, especially related to the Detroit Three.
Many mentioned General Motors’ misguided attempt to reinvent itself with Saturn and ill-advised investments inFiat and Saab. Plus, there were vehicles such as the infamous Pontiac Aztek and the entire Hummer brand. Others mentioned questionable adventures at Ford, such as its purchase of Jaguar and Volvo, and numerous bad cars going back to the 1970s including the Pinto subcompact and Mustang II.
Readers also pointed to head scratchers at Chrysler such as the TC by Maserati, a gussied up K-car with a Maserati badge; the odd-looking Plymouth Prowler; and the disastrous “partnership” with Daimler that ended in divorce.
But to ferret out the absolute worst mistakes Detroit has made in recent history, I look to professional automotive observer and author Maryann Keller. She has been enormously influential since the early 1980s. After a 28-year career as one of Wall Street’s top auto analysts she now runs her own company, Maryann Keller & Associates. She is as tough and insightful as ever.
During a recent speech to the Society of Auto Analysts, Keller unleashes her own list of auto industry blunders, and her choices make most of the items above look like minor glitches.
Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices, she says.
That incredible figure includes stock buybacks, excessive dividends and diversification efforts, all of which could have been spent making better products. GM alone doled out $20 billion from 1986 to 2000 on stock buybacks and actually borrowed money it did not have to pay dividends from 2005 to 2008.
Ford kissed off half the cash it had on hand in 2000 creating a special dividend of $10 per share, Keller says. GM and Ford also wasted billions buying rental-car companies that hid
excess production capacity and threw away billions more for e-commerce
efforts that looked sexy during the Internet bubble economy but
ultimately yielded zip in revenue and profits. Also on her list are the
names of financial-services companies, vehicle retailers, recyclers,
junkyards and mortgage companies. All were purchased in an effort to add
glamour and growth to auto maker bottom lines, but they did neither.
Of course, these strategies did not look quite so boneheaded at the time. In the late 1990s, auto companies were considered old-fashioned. No matter how many vehicles they sold and how much cash they raked in, their stock prices looked weak compared with the soaring value of technology and Internet stocks.
So auto makers tried to redefine themselves as something other than companies that built and sold cars and trucks.
And this was the Detroit Three’s biggest mistake ever: They tried to be something other than vehicle manufacturing companies. When they focused on being banks and mortgage lenders and impressing Wall Street, they took their eye off the ball of their core business. Design faltered, quality slipped and market share skidded. Disaster ensued.
Ford was first to see the error of its ways and avoided bankruptcy. GM and Chrysler were not so lucky.
But as Keller points out, “Wall Street didn’t make these decisions; the CEOs did.”
I currently am testing vehicles for Ward’s 10 Best Engines and as a judge for the North American Car and Truck of the Year awards. Detroit’s new products such as the Cadillac ATS, Ford Fusion and Dodge Dart are terrific. Detroit auto makers clearly have their eye back on the ball. It shows in vehicle sales numbers, on their bottom line and their stock price. Let’s hope they never again try to be something they are not.
Original version by Andrew Shipp on the Economics 244 blog, May 15, 2013
In a follow up to the Solyndra case, The House Committee on Oversight and Government Reform took testimony from several high-ranking Fisker Automotive executives. Fisker took $192 million dollars from the Department of Energy and immediately went bankrupt. Republicans are dragging the Obama administration and Democrats across the coals on the Fisker debacle. The republicans hope the failure of the electric auto company will be a beacon of government overspending and make voters return to the Republican ticket in the next election year.
