Detroit's Failure and the Dollar

On first analysis it would seem that the survival or not of the American automobile manufacturers will have little direct effect on the dollar. The United States economy is no longer a manufacturing economy, less than 20 % of GDP is directly tied to produce goods. Though the US is still the world’s top manufacturing nation by total value, autos are not a US export. In 2005 the value of US produced goods was $1.5 trillion, 1.5 times the value of the production of the next country Japan. The US leads the world in productivity per worker, in productivity gains, and in the flexibility and responsiveness of its economy.

The US has a successful, growing and very productive auto manufacturing sector, it is simply not in Detroit, not in union plants and it is not owned by Ford (F), GM (GM) or Chrysler. Almost every major German, Japanese and Korean car company has factories in the United States. In many cases the imports that Americans buy are manufactured in the United Sates. Cars with industry leading quality ratings from Toyota and Mercedes Benz are the product of American hourly workers.

The potential demise of the Detroit car industry is not due to lack of automotive ability. Ford and GM are not unable to make cars. They both have thriving and profitable overseas operations, manufacturing and marketing cars based on local designs and facilities. Their problems are tied to the North American market, to the cost structure that has evolved with its unions and to the impositions of regulators. The American manufacturers are not competitive in their home market but they are extremely so in Europe and China.

The greatest threat to the US economy of an auto industry bankruptcy lies in its unpredictability. That is the primary reason the big three will get their loans. If the Detroit factories close there will be unforeseen consequences. The bankruptcy of Lehman Brothers (LEHMQ.PK) was a warning. When Lehman was permitted to close shop it was thought to answer the moral hazard problem. If failed firms are not subject to the culling of the marketplace there is no market discipline. The government cannot rescue every badly managed financial institution. But the failure of Lehman brought on the acute phase of the credit freeze in September and October. And that credit freeze pushed a weakened economy and consumer into serious recession. The incoming administration will not dare take such a chance with Detroit.

Automobile manufacturing employs 200,000 or so workers directly with perhaps two million more throughout the supply chain. Even if half of these jobs were lost through the consolidation of chapter 11, the difference is one of timing and not amount. Whether employment in the auto industry shrinks through the enforced decisions of a judge or voluntary accession as part of a government loans, shrink it will. Congressional legislation cannot restore the profitability of Detroit’s North American operations. Congress will set some type of viability standard when it provides the automakers with loans but without a wholesale restructuring of their production costs the US car companies simply cannot compete with their newer, more efficient, less unionized rivals.

The risk that the collapse of Detroit poses to the American economy and by default to the dollar is not one of fact but of perception.

Until now, the dollar has not suffered any penalty for the US recession. Though the US economy is in no better shape than the Eurozone the dollar has gained a huge advantage. Because its policy makers recognized the severity of the financial crisis last August and began corrective measures while the ECB slept, the European central bank has a much longer repair to undertake. Once it became clear that the economic downturn would be worldwide and deep, and the Europeans could no longer pretend otherwise, the euro and the yen crosses sold off rapidly.

The currency markets have reached a rough equilibrium between the dollar and the euro. The ECB and the Fed now have the same rate policy; the economies of the Eurozone and the United States are in recession. The dollar has benefited from the early comprehension of the Federal Reserve and the Treasury and their willingness to use their powers to ameliorate the crisis. These early actions, combined with the resilience and adaptability of the US economy, are behind the assumption that the US will surmount the recession first. A prolonged and well publicized bankruptcy in Detroit, with its potential for unforeseen and unpleasant consequences could undermine the US recovery first scenario. Undermine that idea and the dollar could suddenly become very weak.

Comments

[Joey:]

If I were the car czar, here are some of the plans I would do to restructure GM.
How to Fix GM – Plan One
1) Sell All of GMAC and the Insurance Business (Ditech)
2) Cut down from five regional offices to two. One in Atlanta (east of the Mississippi River)and one in LA (west of Mississippi River). That means Chicago, New York, and Dallas are closed. With about 250 people working in each location (750 total) at an average of $100,000 each, that is a yearly savings of $75 million. Operation cost (rent, equipment, etc.) at the three locations will save another $1.8 million. Benefits for the 750 employees will save another (at $20,000 each) another $15 million.
3) Next, there is an average of three offices per state (local offices in cities across the country), if we close them, that is another $3 million in office space.
4) Next, the District Managers work out of their house and the Zone Managers (or whatever term is given to them), could be let go. They make around $150,000 a year and there are about 75 of them. Again, a savings of $11.25 million. With benefits, a total of $12.75 million in savings.
5) Next, cut around 150 jobs at the Detroit GM Headquarters. A savings of around $18 million with benefits.
6) Next, cut Buick down to two cars (Enclave and Lucerne), cut Pontiac to one (G6), cut GMC to two (Yukon and Sierra), cut Saturn to one (Vue) – and put all cars to a new umbrella called “United GM”. This will save GM billions. Also cut back on two Chevy models and two Cadillac models.
7) Next, cut advertising in December, January, February, March, April, and May (with the exception of auto show advertising for a three week period during the show and its incentives). This will save GM around $1.4 billion.
8) Sell all five planes. This will save GM $100 million in sales and another $100 million in yearly travel expenses for a total savings of $200 million dollars.
9) Change the Union rule from 90% of pay for one year if someone is laid off to 70%of pay for 9 months. This alone, if an employee was making $72,800 a year (which is equal to $35 per hour), this would save GM $27,300 per union employee laid off. If there are around 30,000 union employees laid off from the brands closing, that is a savings of $819 million dollars .
10) Get rid of any health care benefits for those 65 and over. Medicare will cover them.
11) Change the 90% of pay for a year factory workers laid off to 70% of pay for seven months. At a salary of about $75,000, this will be a savings of $36,875 per employee. For every 10,000 people laid off, this will be a savings of $369 million.


Plan Two on Fixing GM
How to save GM
1) GM needs to cut their total car models to 25 (from 60). What they could do is get rid of all Buicks expect Lucerne and Enclave; get rid of all Pontiacs except G6; get rid of all GMCs except Sierra and Yukon; get rid of all Saturns except the Vue; get rid of Saab all together; get rid of at least three Chevy models; get rid of at least two Cadillac models.
2) Get rid of half the dealerships. Chevy seems to have the best distribution so change the Chevy dealerships to Chevy, BPG, Saturn, and Cadillac
3) Close at least three of the five regional offices
4) Close all Zone offices and have employees work out of their homes
5) Get rid of 50% or more of white collar workers in the field
6) The factories will close based upon which models will be discontinued
7) Have upper management take a 35% pay cut
8) Have middle management take a 20% pay cut
9) Cut advertising from $2.3 billion per year to $750 million
10) Get rid of advertising groups and have national advertising only
11) Get rid of co-op advertising dollars
12) Get rid of all promotional advertising
13) Cut all regional and national meetings that cost more than $100,000
14) No parties for auto shows
15) Have special cash incentives for cash only purchases
16) Once the Volt battery is discovered, convert at least half the cars and trucks left after the cut to Hybrid
17) Move 1/2 the engineers to be used to discover more fuel efficient standards and more alternative fuel / hybrid cars
18) Sell all five planes and travel coach (a $100 million savings from cost of planes and a $100 million savings in yearly air cost for a total savings of $200 million).
19) Change the Union rule from 90% of pay for one year if someone is laid off to 70%of pay for 9 months. This alone, if an employee was making $72,800 a year (which is equal to $35 per hour), this would save GM $27,300 per union employee laid off. If there are around 30,000 union employees laid off from the brands closing, that is a savings of $819 million dollars .

2008 Dec 09 09:55 AM

[sumosama:]

Uh, Mercedes has LOUSY reliability ratings. Do your research first!

2008 Dec 09 10:12 AM

[Thinking DNA:]

Heck, they might as well declare for bankruptcy protection under your plan...

2008 Dec 09 11:35 AM

[xmplary:]

The timing of all this is very fishy... first comes the Credit Default Swaps, then the naked shorting, then the high gas prices, and now the patient is all but being put into the coffin. I'm not advocating conspiracy theories, but all these events coming together makes you wander. Is America worth more dead than alive? xmplary.blogspot.com/2...

2008 Dec 09 12:00 PM

[Chris B:]

Joey,
Here's my plan:

1) Declare bankruptcy, set wages to slightly below industry averages, cease payments for the pension, retiree healthcare, "jobs bank", and all the other pork, cut corporate overhead and travel, and tell your employees that you are no longer recognizing the union, but that anyone who wants their jobs under the new terms is welcome to stay.

2) Build commercial vehicles, 1 full size truck, 1 compact truck, 1 SUV, 1 crossover, 1 compact sedan, 1 luxury sedan, and one subcompact sedan all under one brand name - perhaps Saab or Saturn since they have the least stigma. Prices should be below competitors and fuel economy and quality should be above competitors.

2008 Dec 09 02:53 PM