Steve Funk

Third Quarter Auto Production Expected to Boost U.S. GDP

I think you have to take these numbers with a grain of salt. Traveling in Michigan this spring I talked to GM workers who were notified of 10 week plant shutdowns this summer lasting into August. That will affect Q3 production and in the best of times Q4 production schedules are light. Since GM and Chrysler production schedules are near zero it only figures that any increase next quarter will be a huge percent increase. I think you have to look at absolute numbers here. With zero production the inventory reduction is bound to look good, even with sluggish sales.

On top of that, with the G'mint now involved with production planning I see product shortages next year. That is never good for anybody. Everyone thinks I am crazy but auto production scheduling is incredibly complex and interlinked. The long shutdowns that are going on now are bound to push some key suppliers into bankruptcy. Congress has already brought up the matter of how far they will go to support bankrupt suppliers and they are shying away from the matter (start by looking at Delphi). Those bankruptcies will further disrupt production.

Gee, in the 1960's and '70's didn't we see product shortages in the USSR when their master scheduling was most in control? Don't fool yourself, it could happen here. Bottom line, stay away from investing in auto or suppliers, and don't look for them to pull us out of the recession soon.

Consider 'Pull' Rather Than 'Push' for the Auto Industry

Ms. Rogers brings out some interesting facts but misses the bigger picture regarding a domestic auto industry. The lack of understanding is pervasive in the many columns being written as well as the uninformed comments.

The reasons for the demise of the domestic auto industry are complex and cannot be summarized in a short column. To do so trivializes the issue and is typical of the current American attitude toward manufacturing. This cavalier attitude and misunderstanding about $48/hour jobs (do you really believe people are clocking hours at $48?).

The truth is that this tradgedy has been unfolding for decades and no one but Lou Dobbs seems to care. I suspect our legislators (who share the blame but get a free pass in every column written), will try to put Humptey back together again but it will be too little too late. GM has some interesting facts about the economic impact of the auto industry on their web site, and say what you will about GM but few would call them grand standers. The repercussions of our failed industries will be alarming and a tradgedy.

The Failure to Admit Failure

Mr. Merkel is clearly upset about everyone bellying up to the $700B piggy trough. I don't blame him. He should, however, take his own advice that we be thoughtful about doleing out the money.

Since very few analysts or financial reporters have covered the auto industry in the last two decades there are very few experts to talk about this issue. Mr. Merkel's easy answer that "they" (auto industry) simply be allowed to go out of business is a very glib answer that does not begin to address the repercussions of such a catastrophe. First, he assumes that there will be a Chapter 11 bankruptcy, if it comes to that. Who pays the billions per month in negative cash flow while all the issues are sorted out in bankruptcy court? GM is a very large military contractor and still owns large stakes in Hughes (military satellites). If those interests are sold quickly to the highest bidder probably the only ones with cash will be foreign investors. Is it wise to sell large stakes in a top secret military company? Is it legal? The Pension Benefit Guarantee Corp (i.e. taxpayers) will surely wind up supporting (at least partially) the hundreds of thousands of retireees who will be left high and dry. What of the fallout from dozens of very large corporations being crippled or bankrupted (Lear, Johnson Controls, USX, American Axle, Detroit Diesel, you get the idea).

I don't have the answers to these questions and I don't think anyone does. What does irks me is how glib many are about the auto industry going bankrupt. It shows a total lack of understanding of how industrial complex works. That is not surprising since many believe that we can continue to be a strong economy without producing anything. The second thing that never is mentioned in the many articles like Mr. Merkel's is the huge hand that government regulation and Wall Street have had in the demise of the auto industry. Check into the 1957 Supreme Court ruling that forced GM to divest itself of DuPont (it's proprietary paint supplier) and forced resignation of the Board of Directors. Even in the 1980's engineers were being told that it was illegal to talk out of work with a Ford or Chrysler engineer due to anti-trust rulings. In the 1960's and 1970's the government had a huge hand in backing the Union demands for wages and benefits and unemployment benefits that is at least part of the fixed cost problem that the domestic industry is facing. GM has been coerced by government officials into keeping unprofitable plants open because of local economic concerns.

Obviously a book could be written (and many will) on how the auto industry stumbled. To simply blame it on management and unions is beyond short sighted. I can only hope that our brilliant legislators who brought us to this point will not be as cavalier about the choices we face as Mr. Merkel.

Nationalizing Detroit? It's a Good Idea

The time to take the auto industry seriously was in, oh, about 1982. No one thought it important then, and now the industry is gutted. Even with a bailout much of the core competency of the industry is gone. Tool & die, mold making, steel making, engineering education infrastructure, and manufacturing capability are all gone or greatly diminished in capacity. We could not make a whole car with US manufacturing and know how if we wanted to. This has been going on for decades and now that we are at the final spectacular point of industry collapse everyone is starting to think about what we have done. It is too late. All we can do is pick up the pieces.

One popular myth needs addressing first. To those in this column and everywhere else in the popular press who attribute this problem to bad products and bad management: give me data. Here is some to start with. For over twenty years Toyota has had a joint venture with GM (NUMMI). There is one plant in the joint venture in California. They have always produced a Toyota designed small car with Toyota management and Toyota parts. The production is split between a model badged as a Toyota and the other model has had various GM badges. There is no mechanical difference between the two cars, only upholstery and dash design and a much lower price on the GM badged car. If car buyers are rational why would the Toyota consistenly out sell the GM by a wide margin. The fact is the auto industry has become a fashion industry. Just as Levi struggles to sell jeans against Buckle, GM cannot overcome a fashion bias by Americans. This is not an isolated example. Read Lee Iacoca's book about Chrysler's struggle with the similar Mitsubishi joint venture in Illinois.

How does this impact investing? Hard to tell but one of the numbers you have forgotten is the several hundred thousand retiree's living off GM pension, health benefits, and stock dividends (more than active workers). This will definitely bankrupt the Pension Benefit Guarantee Corp when this happens. Something will have to be done quickly because when little old ladies in Saginaw start losing their homes, income and medical benefits you can bet it will make national news. Michael Moore will be first in line to tell the story. I think that this could be Obama's first opportunity to expand the Pension Guarantee program, Medicare, and Social Security all at once.



There might be some investment opportunities there, but it sure is not in the auto industry.

Default Risk of U.S. Automaker Debt: Too Big to Fail?

All the standard cliches' here about "dumb executives" and marketing mistakes are arguments that ignore the macro environment of the auto industry. I have worked with GM executives and they are some of the brightest and best trained you will find. I have also been in a key GM plant years ago during an important strike during an election year. The plant manager was paged for an "urgent phone call from Washington" and the strike was over in an hour. Let's not forget the Justice Department decree against GM in the 60's. That was truly the beginning of the end. The government has has their hand in every major shift in the auto industry, and we all know how adept Senators are at business. I think this article is spot on, as in the past, the future of the auto industry will be determined by Washington, not the skill of industry managers. Since the current trend is psuedo-nationalisation and government arranged marriages, why not force Honda and Toyota to absorb the Big 3?