The Bad Old Days: Chrysler Mack Stamping

I often wonder how many people read this blog. I was thus heartened by a substantive comment on my previous post on Mack Stamping in the City of Detroit. Let me add a bit on the bad old days.

...Quality was a management issue...

In 1973 I was working on a rail line [cross-member = engine cradle?] when the die on one of the old, old flywheel presses shifted, in the first machine on the line. The operator noticed it, called the foreman, and they tried hitting a piece. Bent, as they expected. We then ran it through the rest of the machines. The inspector came over, and threw it down in disgust, because not only was it bent, but the bolt holes were out of true. No way to fix. Repairing would require pulling a millwright from some other emergency; the plants were running 24/7 so there was no downtime for maintenance.

[I'm leaving out the colorful language and gestures, talking – screaming! – was a challenge given the high ambient noise levels, particularly when you were near the smaller punch presses.]

We quickly had the general foreman there, and the top inspector. So what happened? We worked the full shift making scrap. Only the plant manager and the #2 had the authority to shut down a line, and they were out for meetings at some other facility. The priority was indeed to "make production" and for that purpose bad parts counted, not just good.

We worked the full shift making scrap.

Japan's Changing Labor Force

...it's too late for less male-centered policies...

A concurrent set of posts on the NBR Japan Forum is on the role of women in the labor force. At younger ages, the shift towards greater participation is dramatic, a 30 percentage point jump among 25-29 year olds. Participation for women age 30-34 is following in parallel, with about a 13 year lag:

However, this is less economically meaningful than at first glance. Women are not going to be able to save Japan from its demographic challenges. Of course it is these very same women who are not having lots of children. But more to the point, these young women are now the only daughters of an already smaller generation of women.

So even a continued increase in women pursuing careers — already apparent among younger women — will only have a modest impact on the shrinking of the labor force. There are simply too few in these age brackets, and the number is falling yearly. Hence despite the rise in participation, the total number continues to decline:

Policy changes could smooth things, and from a microeconomic perspective (and a lifestyle perspective) could bring many benefits, particularly to women. [For an amusing portrayal of the challenge of a stay-at-home father, albeit in a US context, see Kim Stanley Robinson's Forty Signs of Rain.] But from a macroeconomic perspective it's too late for less male-centered policies around the workplace and the home to make a difference.

For the Japanese auto industry – by which I mean the industry located in Japan – this has strong implications. First, this is one of the underlying changes reflected in a set of graphs I posted on the future of the auto industry in Japan: firms hoping to sell cars face a shrinking market. It also means that recruiting workers will be harder. In Japan (unlike in China and India) families do not engage in sex selection (aborting girls), and the change in the number of young men in the labor force is likewise declining. (Indeed, because the participation rate for men has long been near 100%, the drop is more rapid as there has been no offsetting rise in the proportion of men working.)

This shows up too in technical fields; the number of engineers is down 15% from peak and casual observation (academic 2006-7 at Chiba University, a strong engineering school) is that many of those in technical fields are international students. Unless the auto industry (by which I mean suppliers, who generate two-thirds of employment) globalize, they will cease to be players, lacking the engineering clout to stay in the game. And if the unsuccessful efforts of my son (as a TEFL-certified teacher) to find an English teaching job in Japan are at all representative, young Japanese are not learning English. Meanwhile, of course, Honda and Toyota already employ 1,000 or more at their technical centers in the US. As businesses, they are positioning themselves to draw upon a global pool of engineering talent. That however does not help the Japanese industry.

World Cars, World Trade

GM is positioning Buick as a global brand drawing upon global product. As we've earlier blogged, this will work only if there is a convergence in tastes across major markets that allows the same vehicle to be made and sold with only minor modifications. Now the brand name may not be the same; what is a Buick in China may be an Opel Mokka in Europe and not sold in the US at all – though in this case the Buick Enclave is, as detailed in this Bloomberg article.

homologation and lower tariffs would benefit us

This isn't just to lessen risk (though in the case of China, that's been upside risk!), as argued in Spreading out for a little elbow room, a post by one of my students. Partly it's a story of platforms, as a manufacturer enjoys economies of scale when the same underlying vehicle can be tweaked. But ideally it's about selling the exact same vehicle on a global basis. That then works to the benefit of global suppliers (and to the detriment of medium-sized suppliers in Japan and elsewhere that have a narrow geographic footprint), as an OEM can ask them to supply the same part everywhere, down to the plastics and steel and so on that if allowed to vary can introduce defects, defects that are thus subtle and hard to diagnose, or add on to costs for local redesign and retesting.

At present, however, there are limits. The Insurance Institute for Highway Safety imposes crash tests that are unique to the US. Europe has its rules for pedestrian impact. Headlight standards vary, and require redesign and recertification. A standard approach in Europe – lights that track as you turn, and adjust vertically ascending and descending hills, are not always allowed in other markets. And providing those functions interacts with styling. So homologation of such rules across markets can bring big benefits.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership, as well as the on-going Trans Pacific Partnership talks with Japan, Australia and others. How autos are treated could be a boon to the US industry.

And by the US industry I don't mean just the Detroit Three (though if we're precise, only GM is headquartered in Detroit, reflecting a long-run trend to exit the city). Michigan is the leader of exports within NAFTA, both to Canada and to Mexico. BMW in Spartanburg, SC leads the auto industry in exports, and has just completed a $900 million expansion. (I've been through their paint shop, which includes a PACE Award-winning innovation from PPG that eliminates an entire oven.) But Audi is opting for Mexico because as an exporter they find it a better location for the range of available free trade agreements and resultant lower tariffs. (Audi's plant will be the only one to make certain products, as discussed in The Tariff Advantage of Mexico.)

So homologation and lower tariffs would benefit us, and benefit others. We'd presumably have to lower the temporary 1963 "Chicken War" tariff on light trucks that's still in place 50 years later. But while there is convergence across markets in what people drive and in styling – as our students heard in the spring from J Mays, Ford's Chief Creative Office, reflected in their notes here and here – that convergence is not complete. Japan's "minicar" market is deeply entrenched; so are big pickups in the US. So it's really not credible threat to the Detroit Three, who hold a lock-grip on pickups (Toyota has about a 6% share, Nissan closer to 1%). There's nowhere imports could come from. So as I see it, we'd benefit from these agreements. We might see some low-volume vehicles that for now are found only in Europe, because of the cost of adapting to US standards. Low-volume however is the crucial adjective.

Tesla says Model S crash test score is best NHTSA has ever recorded

by Jonathan Ramsey of AutoBlog

"We found out a couple of weeks ago that the Tesla Model S aced the crash tests administered by the National Highway Traffic Safety Administration. What we didn't know until Tesla filled in some of the details is that the Model S scored more than five stars on the way to recording the best result of any car the NHTSA has ever tested. While NHTSA's highest public rating is five stars, the Vehicle Safety Number it gives to manufacturers can go higher, and Tesla says the Model S scored a 5.4. That's a better result than has ever been achieved in NHTSA testing of a passenger car, SUV or minivan.

Tesla's press release says that after its internal tests showed that it would score five stars on government's crash tests, it addressed any other weak points it found on the vehicle to ensure it would get perfect marks "no matter how the test equipment was configured." It was already going to do well in the frontal test, as the lack of an engine allows much more leeway in creating an occupant-saving crumple zone. And the rollover test was aided by the battery pack being located in the floor. The low center of gravity meant that the Model S couldn't be rolled over "via the normal methods and special means were needed to induce the car to roll."

Nested aluminum extrusions along the hatchback's flanks took care of the side pole intrusion test, the Model S not only scoring five stars but, according to Tesla, leaving nearly nine times more "driver residual space" post-impact than the five-star rated Volvo S60. And when the roof of the Model S was tested for crush resistance, the testing machine broke just after it crossed the four-G mark - the Model S, on the other hand, didn't."

Ruggles writes: A neighbor bought one of these. It is flat out beautiful. I have seen them at auto shows and at a Tesla showroom, but this is the first one I've seen on the road. My wife made me go around the block for another look, and she is ambivalent about cars.

I predict the beef over the Tesla company owned showrooms will blow over. Even Elon Musk isn't rich enough to finance a real distribution system, even if he included all of his friends. As long as they are a boutique manufacturer, he'll be just fine with the current setup, as we noted in a May 23rd post on Tesla's Distribution Challenge. The next step, if he gets that far, will require a dealership system. He will be selling off his company owned stores for large multiples. It isn't practical to try to attract investors if they know they would be having to compete against their supplier. Then there are those pesky franchise laws.

Super investor increases stake in General Motors

As feds are selling GM stock, Buffett is buying.

DealersEdge Headlines

Billionaire Warren Buffett's investment firm Berkshire Hathaway Inc. boosted its holdings in General Motors by 60 percent to 40 million shares, the firm disclosed in a recent SEC filing. That brings Berkshire Hathaway’s holdings to 2.9 percent of outstanding GM stock, according to a report in the Detroit News and SEC filings.

The firm initially purchased 10 million shares in 2012, when the stock was trading in the low $20-per-share price. It closed last week at $34.55, down $1.02. At current prices, the stake is worth more than $1.38 billion.

Mr. Buffett acquired the new shares in GM in the three months ending June 30. That's the same period during which the U.S. Treasury has been steadily selling off its holdings in GM it received as part of its $49.5 billion bailout.

Fuel Cells Still a Viable Option?

Based on an original post by Daniel Tomm on the Econ 244 course blog

By chance there is a CNN Money story today (Aug 15) on fuel cells, Has the fuel cell car's time finally come? by Brian Dumaine, senior editor-at-large @FortuneMagazine, which will appear in the September 2, 2013 issue of Fortune. This post was written prior to seeing that story.

Automotive News reported here on May 13th that Hyundai, Mercedes, Nissan, and Toyota have been working with the U.S. Department of Energy to prepare hydrogen fuel-cell powered cars. This public-private partnership – if successful – will lead to a new class of alternative fuel vehicles. These would cut point-source emissions to zero, because the only on-vehicle byproduct is water. At present the underlying hydrogen source is natural gas; fuel cells thus likely have a low overall greenhouse gas emissions burden.

...specialized applications may develop ... passenger cars won't be one of them...

The Tariff Advantage of Mexico

Adapted from a post by Griffin Cook on the Econ 244 blog, May 18, 2013

Audi's decision to place the plant that will build the new Q5 crossover in Mexico resulted from more than cheaper labor and government incentives. After all, assembly is likely 10% or less of manufacturing costs, and direct labor only one piece of that. Inventives are even less a factor – what big greenfield plant wouldn't likewise enjoy incentives if located in the US? (See an August 13th Bloomberg story on efforts to recruit car-related factories in the US.) So other considerations likely dominate.

According to CEO Rupert Stadler, Europe's growing interest in SUVs and and crossovers played a key role. The European Union slaps a 10 percent tariff on U.S.-built vehicles, which would have cost Audi more than $3,000 per vehicle – and only 25% of the plant's cars will likely be sold inside NAFTA. A majority will instead be headed for the European Union.

This is part of a growing trend in which cars are produced in a foreign country and then exported to the home country, in part due to cheaper labor costs and flexibility in trade laws, but also access to a supply base and to hedge foreign exchange risk. This presents a problem for the European Union, with production in its periphery, outside the Euro zone.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership. Lowered tariffs would help the US. And another component is homologation, which might lessen the divergence in safety and testing standards that mean that Audi and BMW (whose South Carolina plant exports 70% of its output) must produce slightly different products for different markets – variations in headlight standards, how emissions are measured, and on and on.

Sources:

• Automotive News Europe May 17, 2013: Tariff played a role...
• TTIP – Official EU Site
• TTIP – Official US Site

Red and Yellow

A guest post by Andrew Shipp; original draft May 15, 2013 on the Econ 244 blog

Florida revealed a scheme to shorten yellow light times. The reduced intervals have, in some areas, doubled the tickets given to citizens for running a red light. According to one Dept of Transportation official, the practice may raise money for the state but makes traffic extremely unsafe. "A one-second increase in yellow time results in a 40 percent decrease in severe red-light related crashes." In some communities the yellow light interval change was below the nationally mandated minimum time limit. After that was discovered, the counties upped the time back to national levels but did not tell the drivers who were ticketed under the old light time.

(WTSP 10 News followed the story.)
The Prof notes that in some countries traffic signals include time remaining,
and drivers are off the moment a light turns green. Woe to anyone who fails
to stop in advance of a light turning red!

The Decline of the Japanese Auto Industry

Here are three graphs, pulled from a talk I gave at UMTRI in the spring. The Japanese auto industry – that is, manufacturing and retail inside Japan – faces permanent decline.

Two trends interact. First, due to demographics Japan's population is in decline, and so is the number of licensed drivers. I don't have statistics on the latter, but I have used Census data and population projections to calculate the potential number of licensed drivers. (In Japan you can't get a license as young as in the US, and after age 70 it becomes increasingly hard to get your license renewed.)

Second, the vehicle mix is unfavorable. From the production standpoint, exports are important, but the data show that the market isn't increasing, has more low-value vehicles and is very volatile. The third graph is the domestic parc, which is what matters for dealers. Here the story is even worse, while full-sized cars rose in share along with incomes, that process has ended. Instead what we see is a decline in mid-size car sales (compacts in the US context) and their replacement by "kei" minicars.

Here are implications, as I see them.

1. Over time dealers will face extraordinary pressure. That will be accentuated by the geographic aspect of population decline, because population will fall more and age faster in rural areas where car ownership is highest. Rural areas are already distinctly older than the major urban areas (Tokyo-Yokohama-Kawasaki-Chiba, Osaka-Kyoto-Kobe, Nagoya, Hiroshima, Fukuoka-Kita Kyushu, and Sapporo). Their potential market is literally dying off. Dealerships in Japan are also unable to sell across prefectural boundaries, so better-run dealerships can't use the internet to extend their geographic market to offset local decline.
2. Manufacturers will face a smaller market. They have a large number of distribution channels – not including trucks, Toyota has six channels: Daihatsu, Netz, Corolla, Toyopet, Toyota and Lexus, with lineups that overlap and cannibalize each other. (Dealerships are also multi-point, with sales points each trying to buy business from other parts of the same dealership, while the strong players in used cars are independents such as Gulliver.) Rationalizing production and model mix and distribution will be traumatic, as we've seen with the efforts of GM, Ford and Chrysler in dropping multiple brands.
3. Suppliers will have an even harder time. Small Japanese suppliers were slow to internationalize. Even worse, when I've visited suppliers in Japan for engineering presentations – and in sharp contrast to similar visits in the US and France – I've been the only non-Japanese in the room. That hurts in two ways.
   • First, there just aren't that many would-be engineers graduating from Japanese universities. Without international staff they simply won't be able to stay in the game. Honda and Toyota have huge engineering operations in the US that can handle the entire vehicle development process. As far as I can tell, that's not the case with most Japanese-headquartered suppliers.
   • Second, in order to serve their customers on a global basis, suppliers need to have the same global capability. Some will finesse that by being acquired by foreign firms, and thereby globalize their engineering. Others will prove unable to build a global engineering and manufacturing presence because they've been slow to delegate decision-making and build capabilities and staffing outside Japan. They will steadily lose market share to firms with HQs outside Japan. Indeed, my scanning of industry news (in English, Japanese and [less frequently] German) supports that. Toyota is turning more and more to the big US/Europe based global suppliers, because their own "keiretsu" suppliers can't support Toyota's global footprint.
   • Now this is a third bullet, but is speculative so I won't claim it as a 3rd point. My belief is that because of the two factors above Japanese suppliers lag in technology. Casual empiricism turns to the body of finalists in the Automotive News PACE competition, who are chosen on the basis of successful innovation. Japanese firms are largely absent. [Mea culpa: the competition is entering its 20th year, and I've been a judge since the start.] Not having a truly global mindset, not having the bulk of engineers in Japan able to use English as a working language, means that Japanese suppliers are behind the eight ball in technology. Sometimes it's better to be a bit behind where you can learn from other's mistakes and simply not invest spend money on "advanced concept" R&D that leads to dead ends, the "bleading edge" thing. OEMs also want second sources, so even firms that have reasonable intellectual property know they won't have a monopoly. Still, my judgement is that being second source is less profitable. And being second-source based on production in Japan is a losing proposition.
4. Japan, as a geographic entity, is already a shrinking part of the global industry. Of course the growth of the BRICs and ASEAN means the same is true of the Euro zone and of NAFTA. My belief is that slow internationalization will accentuate the impact of a shrinking domestic market. That's particularly good new for non-"Japan" suppliers.

In the 1980s the US industry feared that domestic firms would disappear under the onslaught of Japanese "keiretsu" suppliers. That's not what we see if we look at the top 100 suppliers today.

Diversion: An Economic Model of US Elections

Economics helps explain disarray in politics, at least politics US-style. Put every voter on a line, from right to left; candidates move towards the center. With a little bit of detail added, this model, due to Hotelling, helps clarify the strategic nature of our electoral game. (Harold Hotelling's simple model of product differentiation dates to 1929. The politics version is the median voter theory.)

Where on a small beach would two pushcart vendors locate? Assume they start on the ends of the beach, each to their own side. They then split the business – everyone goes to the nearest vendor, with the person in the very middle indifferent which he chooses. But let one vendor push his cart partway towards the center, and that cart then splits the business that lies between, plus everything towards their end, and so gets more than half the business. The response is obvious: the other cart moves towards the center as well. Repeat, and eventually they're next to each other, at the center of the beach.

So let's look at an election to Congress. That process starts with primaries; there's lots of local variation, but for simplicity assume they're limited to party members. Now voting is inconvenient, and primaries don't always get much publicity. So let's further assume that only those who really care vote. Candidates align themselves at the center of their party, and so we get one candidate at the 1/4 mark, another at the 3/4 mark. He who can move most successfully to the center wins the popular vote. If one candidate missteps and does not quite move to the center, the other candidate can take advantage of that. Of course random factors matter – an untimely scandal, spending money unwisely, misjudging which states are on the edge and so not allocating enough time, or even personality. The model doesn't capture everything.

This simple model highlights the dilemma Republicans (and in some races, Democrats) face, as the primary system pulls them to the right, with the issue of race (plus, less centrally, social nostrums) uniting a large enough block of activists to turn out to vote. As activists moved further from the center, that suggested that Democrats could win presidential elections even with weak candidates, by moving to right of center. Put in a strong candidate, a good campaigner such as a Clinton or an Obama, and you have a landslide. (Strong candidates and strong presidents aren't the same thing – we elect people because they're good at campaigning, not at policy or administration or negotiating with Congress.) Party activists who love the game, or love power are happy with this process. However, the party faithful will typically be unhappy with their final candidate, because the median activist isn't a centrist.

Now lots of assumptions are hidden in this model. However, we don't need a perfectly uniform distribution, or (with lots of caveats) only one dimension. We can, for example, let money sway matters, allowing candidates to "buy" votes. Of course two can play that game, and if it's harder to buy votes the further you are from a potential voter's position, then there's still pressure to move towards the other candidate.

However, the model does require flexibility; voters opt for whomever is closest to them, even if they're at one end of the spectrum and the candidate is all the way in the center. In other words, no one running for office gets locked into their initial positions. (In economics, the Stackelberg model assumes that's not the case.) A second crucial assumption is that there are only two players; three's a crowd, and there's no equilibrium strategy. Third, if the market is a circle rather than a line, then two players move as far apart as they can, the opposite result – but in my judgment that's not how politics works, even if the extreme right and the extreme left may be hard to distinguish on strong state issues (think Weimar Germany, where both the right and the left were nascent dictators and central planners).

So why are our politics not centrist? First, there seems to be a limit on how quickly (that is, how far) a candidate can re-center after the primary. In terms of the Hotelling model, if voters are limited in how far they will travel – they won't vote for someone who "betrays" them – then candidates will be limited in how far they can reposition themselves after the primary election. (In the Hotelling model, this comes for example from using the square of the distance a voter must travel.) The harder it is for a Republican to shift away from positions needed to win a primary, the easier it is for the Democrats. But potentially the Democrats enter the race with similarly untenable positions, if their primaries are similarly dominated by activists far from the political center. Casual empiricism, though, suggests that while there is a distinct "Right" in American politics, there is no Left – the US has never had a strong Socialist Party, or even a Labor Party. What "liberal" means is unclear. And that's an important point. Due to their diffuse positions those with some sort of liberal inclination have only a weak pull on a candidate, and a good grassroots campaign can turn out their vote.

In the last election, Republican candidates did not move. Perhaps this was a defect in the candidates themselves, or in their use of the same political advisors they employed in the primary, who were unable to distance themselves from their "natural" constituency. However, it's not just been this one election, and the Democrats (rhetoric aside) seem to be center or center-right, which would be consistent with what would happen with a coherent Right and an incoherent Left. To reiterate, the Greens and others on the left have always been too fractured to be a threat in primary elections. And when they do field a candidate who has campaign salience, the result is electoral disaster for Democrats: the further a candidate moves towards the Republicans, the greater the potential for a magnetic personality such as a Ralph Nader to nibble away at the more liberal part of their base.

Of course if being an incumbent get's you close to half the vote, then strategy doesn't much matter – an incumbent has to try hard to lose. Redistricting throws open the process, at least on the margins; scandals can matter. (Think of this as adding a second dimension, a "probity" axis, where scandal means the incumbent has chosen an extreme position, on the sideline, thereby ceding more of the playing field to the opposition…) In addition, for the House (but not the Senate) local issues can have salience. In practice, though, that seems to mean that rural candidates are always pro-farmer, whatever their party label; candidates move so far to the center that they're indistinguishable on such local issues. In any case, to the extent that incumbency dominates other factors, the only elections where this Hotelling model matters are ones for open seats – whether one views Romney's candidacy as amusing or as sad, if incumbency really matters, it was doomed all along to irrelevance.

To sum up, the Hotelling model suggests that a large swath of voters will always be unhappy with presidential candidates, come the general election. Our politicians are "slick" and "untrustworthy," flip-flopping, betraying those who worked for them in the primaries. Thanks to smaller electoral districts and hence a less diverse electorate – gerrymandering accentuates that – members of the House will also be more polar than the electorate as a whole. Granted, you always want to bargain down to the wire. But if the center dominates, then you do end up with a deal. That doesn't seem to be happening today, and this simple economic model suggests that all that is required to generate this is the rise of a modest-sized "sticky" right.

Addendum: Economics insists that models aren't sensible if they don't lead to equilibrium behavior. A "sticky" right opens room on the left for a third-party candidate, because it leads Democrats to move to the right of center. If political entrepreneurs succeed in finding issues that will unify those to the left, then the center can lose all salience. Now the right end of the US spectrum seems to have defined itself around racial and class lines, white and prosperous, with a largely overlapping group of social conservatives. That's a shrinking base, but the Hotelling model suggests that as long as we maintain a system of party-oriented primaries, that base won't become irrelevant anytime soon, at least for the House of Representatives. This is not what many political pundits assume to be the case, but does match the continued power of a distinct minority in the House. We'll see come fall whether the Senate continues to be less affected.

One other implication is that in districts with strong incumbents, it's hard to motivate the average person who might vote for an opposition candidate. Only strongly driven voters participate – in other words, you get kooky candidates, who take positions incompatible with any sort of move to the center. That reinforces the strength of the incumbent...

GM, and Ford – Onward and Upward?

As of this writing, the stock price of General Motors closed at almost $37.00, while Ford closed at about $17.  Both announced strong second quarter profit results.  Have GM and Ford peaked?

I’m not in the business of giving buy/sell stock recommendations but a discussion of both the head winds and tail winds the Detroit 2 automakers face going forward might be interesting.  

In the case of GM, the current stock price represents a degree of redemption.  GM’s Initial Public Offering stock was priced at $33.00 in November 2010, after it emerged from Chapter 11 bankruptcy. Immediately after the IPO the stock price took a quick jump to near $40.00, then dove to a low point of around $18.00 as recently as 18 months ago.  Some RW pundits, including Forbes, were predicting GM would be back on bended knee to the U.S. Government looking for funds to survive.   Since the IPO, GM has hemorrhaging cash in Europe as was the old GM.  

But after a decent first quarter in2013, GM just announced a $1.2 billion profit for the second quarter.  The company holds over $44 billion dollars in cash and credit and is rolling out new and well accepted models every few weeks, it seems.  The company enjoys a favorable UAW contract for the next few years, and is selling into a U.S. auto market with considerable pent up demand.  Chevrolet is setting sales records, and a resurgent Cadillac has restored brand prestige.  In fact, production restraints from cutbacks made during the bankruptcy period restrain current production and profits. 
It is expected that the U.S. Government will complete its sell off of GM stock in 2014.  In the middle of all of this, GM and its stockholders enjoy a gift provided by the Federal Government.  The new GM was granted “loss carry forwards” from the old GM that could amount to $45 billion in tax savings in the coming years.  That’s a lot of money that can be deployed in new technology and model development.  

On the flip side, GM’s market share remains a challenge.  Toyota has regained the mantle of world’s largest auto manufacturer.  There are no big captive finance arm profits contributing to overall results as there used to be with the old GM and its captive GMAC before GMAC got involved in mortgage lending.  For perspective, GM Financial, GM’s new “owned captive,” contributed $264 billion to GM’s bottom line. Ford Motor Credit contributed $454 million to Ford’s bottom line on about 20% fewer vehicle sales.  Ally Bank, GM’s “non owned captive,” and the old GMAC, is using its own profits to pay back to U.S. taxpayers for keeping it alive during the 2008 – 2010 crisis. 

Europe remains a challenge for GM.  Vice Chairman Steve Girsky has been been dispatched there to deal with the morass of labor and bureaucratic issues in a market that doesn’t look like it will rebound any time soon.  But the losses in Europe have recently been trimmed.

There continues to be executive shuffling at GM.  There are a couple of major exec announcements a month with high level executives either being “broomed” or leaving for “personal reasons.” The Board of Directors has developed no plan for CEO Dan Ackerson’s successor and seems to be particularly dysfunctional.  Ackerson himself seems to be a challenge for GM employee morale.  Even the rapid growth in China has been tempered recently.  GM’s recent buy into Peugeot is interesting.  Noted auto industry analyst Maryann Keller referred to that recent investment as “GM buying in to a “black hole.” 

 

Ford’s stock had reached low ebb in November 2008, closing as low as $1.26.  The stock price peaked at $19.00 in January 2011, driven by Cash for Clunkers euphoria and auto industry exuberance caused by the record GM IPO. The current stock price represents a significant recovery from $9.20 in November 2011.  The company just announced a second quarter pre-tax profit of $2.6 billion, which is more than GM on fewer sales.  The company states their liquidity as $37.1 billion.  Ford recently doubled its dividend to 10 cents per share, its highest in seven years.  according to Reuters. 
Ford also benefits from the same beneficial UAW contract it gained from UAW as a consequence of the overall U.S. auto industry reorganization. Ford Motor Credit contributes greatly to the parent company’s bottom line.

Ford, like GM, is challenged in Europe and is facing market share erosion at home.    Ford has to compete with two U.S. competitors, Chrysler and GM, which shed debt through their bankruptcies, while having to pay all of its own obligations.  The company continues to struggle with the Lincoln brand, having shed its Mercury division.  

On balance, things look good overall going forward for both automakers, despite the obvious challenges.  Europe won’t be in the economic doldrums forever.  Despite declining market share in the U.S., the home market seems to be advancing toward the old standard of a 17 million SAAR. (Seasonally Averaged Annual Rate)  As costs stay in line and sales continue to advance with the expanding SAAR, without huge incentives required to achieve them, profitability should stay strong for the both automakers for the foreseeable future.  Some analysts see Ford as a $40.00 stock with GM at $60.00.  Time will tell.   

June data update

Here are 3 charts from Friday's release of (un)employment and auto sales data. First, looking at employment-population ratios shows very little recovery, and no obvious trend towards improvement. Second, auto industry employment is up – but again, we're still far short of previous levels. Finally, auto market shares by broad groups are relatively stable, despite the ups and downs of the last 5 years. However, the Big Three – GM, Ford, Toyota – are down a bit, as are Japanese firms in the aggregate. That's because of modest gains by German and Korean firms (data not shown).   [click graphs to enlarge]

mike smitka