The Real Legacy?

Maybe the reason for U.S. automaker's problems has less to do with the cost of retirement and health insurance programs than management has led us to believe:

Japanese gain top slots in US car league, by Bernard Simon, Financial Times: The Asian invasion of the North American car market has passed another milestone with Consumer Reports ... ranking Japanese models as its top choice in all 10 vehicle categories. ... Not a single Toyota, Honda or Nissan model is included in the magazine’s list of used-car “lemons”. Of 34 used-car models reporting an unusually high number of problems, six are Chevrolets, five GMCs and four Volkswagens. ... Of 44 “most satisfying” vehicles, 31 are Japanese.

That explains this:

GM, Ford See Sales Slide, Plan to Cut Production, WSJ: General Motors Corp. and Ford Motor Co. reported sales fell in February and announced plans to cut second-quarter production. GM, the world's largest auto maker, said its U.S. vehicle sales dropped 2.5% in February, while Ford's sales dropped 4% as Detroit continued to battle gains by Asian rivals. ...

Comments

[jm]

With the enormous cost and pricing advantage given them by the undervaluation of the yen, augmented by the national health insurance policies of Japan, the Japanese auto makers can afford to expend much more effort on quality. In addition, those advantages must surely enable them to recruit more and/or better engineers.

When you currency is undervalued by 30%, you can afford to pay much higher salaries relative to those of the work force as a whole, and get the very best people.

[calmo]

But those Japanese plants operating in the US, jm? Those wages and benefits are similar, no? (Ok, the legacy health/benefit costs are different.) The executive compensation the last time I looked was significantly higher with the US makers.
Japan has not had to intervene in the fx market since Mar 03? and tbill purchases have been modest for the past year no?
But I'm with you on the thought that Japanese management is focussed on the engineering (lemons no mo) while their counterparts are busy doing the financial 2 step (offer incentives and more advertising --cut and paste).

[save_the_rustbelt]

Having watched this close up for 30+ years, the Big 3 had this business model for a long time:

1. make crappy vehicles
2. with short warranties
3. give lousy service
4. assume Americans will feel compelled to buy

There are certainly other problems, but this has been the biggest problem all along.

[ilsm]

The fault resides in management.

The US auto model is flawed. That is not the result of "benefits", it is the result of managers being off point.

The top dogs in Toyota know about and care for how cars are designed, built and supported.

If US auto makers were concerned, it likely ended with Henry Ford.

It is no longer my duty to fool around with US built trash.

[jm]

calmo writes:
Japan has not had to intervene in the fx market since Mar 03? and tbill purchases have been modest for the past year no?

Not visibly -- but the failure of the yen/dollar exchange rate to adjust despite the large account imbalance seems to me prima facie evidence that Japan's current account surplus is being recycled back into the US by indirect means. One of these is the influences of the ZIRP (zero interest rate policy) which funds carry trades by both Japanese and non-Japanese financial entities. About a year ago one of the writers on the Morgan Stanley site mentioned that at one of their international meetings discussing the issue of whether foreigners were being adequately compensated for exchange rate risk and would keep buying US debt, a Japanese insurance company employee commented that the then-current spread of 3% looked pretty good to them (though potential decline in the dollar was then being viewed as much larger). The ZIRP forces any Japanese financial entity that needs yield to avoid immediate failure to buy foreign securities despite the potential for even greater ultimate harm.

The end result is suppression of the yen/dollar exchange rate. I have worked in both Japanese and American companies where business was substantitally impacted by exchange rates. The difference between a 20% headwind and a 20% tailwind is enormous, and influences what happens in myriad ways. 'ilsm' writes, "The top dogs in Toyota know about and care for how cars are designed, built and supported." Not only does a 20% tailwind allow a lot more freedom to do that, it also makes the business much more attractive to talented people; one must contemplate the question of why the US automakers haven't attracted better talent. If this were just GM, bad management would be a more adequate explanation. But it's not just GM. I posit that one of the reasons is that it's been obvious for decades that government-subsidized foreign competition makes the business a not very attractive one in which to work, so clever people -- the people who might turn things around -- tend to go elsewhere.

No more time to write. The day job calls.

[Fred Hapgood]

What are the odds that in ten years Toyota will be where GM is now? Not zero, for sure. The Chinese and Indian internal markets are big, their consumers seem to get it about today's energy cost environments, labor costs are what they are, and high end manufacturing tools are getting cheaper and more mobile every day.

Meantime, out at the ranch, the automobile is going through a massive design change, from the electrification of the power train on out, in which a lot of current investment is going to have to be written off and a lot of old mental tropes discarded.

I am certainly persuaded that GM is doomed, but it is not all obvious to me that Toyota and Nissan and Hyundai are in that great a position either.

[calmo]

Thanks for the explication jm and the suggestion that a sizeable portion of that 'private foreign investment' is not only China (whose US reserves are growing) but real, private Japanese (manufacturing?) concerns for whom "3% looks pretty good to them". So the BoJ US reserves are one story, but the larger picture showing private Japanese holdings, different?
I find the social infrastructure more compelling (as the larger influence): the health care costs born by the government and the managers more modest about their place (with us and not the gods) in the country.

[Emmanuel]

While browsing the WSJ article MT links to, I noticed that one of the most popular articles was about how Detroit's symbol of dysfunction is paying employees not to work. How depressing.

At the risk of getting hammered yet again, I once suggested that GM and Ford should be sold to the Chinese. It will help finance the deficit, and channel Chinese savings into a more productive activity--keeping GM and Ford alive. But that's just me. If people keep making funny noises over the Chinese buying a relatively minor oil company like Unocal, just think how they'll be react to GM and Ford being sold to the Chinese. Then again, desperate times (for US government finances and the auto industry) call for desperate measures.

Someone once said what's good for GM is good for the country. Once again, I'll have to agree--financing US profligacy will require US assets being sold to the Chinese. If patterns do not change, there is no alternative.

[Fred Hapgood]

> ... GM and Ford should be sold to the Chinese.

Why on earth would they want them? Why would anyone? Even without the debt. Their revenue model, which was not badly summarized by rustbelt above, is melting at such a rate I would tempted to bet on a filing by the end of 2008. Maybe I'm too gloomy, but seriously: what can GM and Ford possibly do now that will give them a market advantage over -- that will give them market equality with -- the cars that Japan, Korea, and China are going to be making in five years?? And they will absolutely need to by there by then. You can lose a $8.6 billion a year only just so long before it starts to catch up with you. And why China want to buy any part of that system? To get the brands? Ha.

[dryfly]

Why on earth would they want them? Why would anyone? Even without the debt. Their revenue model, which was not badly summarized by rustbelt above, is melting at such a rate I would tempted to bet on a filing by the end of 2008

The Chinese would want the 'brand' & the outlet channels (distribution & dealership relationships) & marry it to a Chinese cost structure. Since approximately 70-75% of the cost of vehicle mfg is 'purchased components'... misc parts, power train, chassis, electricals & cockpit instruments...

So a Chinese company (or more likely a consortia) could make all the parts dirt cheap in China, ship them here & assemble. If they could produce those parts for say 2/3s of the cost of domestic suppliers they could reprice the products by 25% (33% less of the 75% component cost). And yet still claim they are 'made' here.

A double coup - biz & PR.

But it will never happen. Think there was flack over Occidental & CNOOC... imagine the noise over losing Ford &/or GM.

On a similar theme I've always wondered why the domestic suppliers - Lear, Tower, Magna, Dana, TRW and maybe even Delphi & Visteon... don't form a consortium to do the same... build cars & by pass Ford & GM and the hassles they impose. Form an automotive version of 'Airbus'.

Not much imagination in automotive here or anywhere. Deer - headlights - CRASH!

[save_the_rustbelt]

Take a look at Consumer Reports annual ratings.

Honda and Toyota - spectacular.

GM and Ford - nowhere.

Can't be good newws in Motown - they even got beat in pickups.

[dryfly]

Can't be good newws in Motown - they even got beat in pickups.

They can't be too happy in Toledo today either...

Dana Shares Fall After Missed Bond Interest Payments(Update3)

March 2 (Bloomberg) -- Dana shares fell to their lowest price in at least 26 years after the auto-parts maker missed $21 million in bond interest payments yesterday, increasing concern that the company will file for bankruptcy.

Standard & Poor's and Moody's Investors Service lowered Dana's corporate debt ratings further below investment grade. Missing the payments ``dramatically heightens the potential for Dana's filing for Chapter 11 and casts greater doubt on the progress of the company's discussions to renegotiate its bank facility,'' Moody's said in a statement today.

Dana, the world's largest maker of light-truck axles, said yesterday that a grace period gives it until March 31 to make the payments and avoid a default. The company has been hurt by production cuts at General Motors Corp. and Ford Motor Co. Dana closed plants and eliminated jobs last year to reduce costs.

The shares of the Toledo, Ohio-based Dana fell 63 cents, or 34 percent, to $1.22 at 1:19 p.m. in New York Stock Exchange composite trading. Today's price would be the lowest close since at least 1980, according to data compiled by Bloomberg.

Moody's cut Dana's corporate rating three levels to Caa3, nine steps below investment grade, and said the downgrade affects about $2 billion of debt. S&P lowered its corporate rating on the auto-parts maker two levels to CCC-, also nine steps below investment grade.

S&P said that a failure by Dana to negotiate a new credit agreement with lenders ``would lead to a default and likely bankruptcy.''

http://www.bloomberg.com/apps/news?pid=10000103&sid=aDnlbL2oOjUk&refer=us

[Belfour]

1.If I was in government, I would simply ban Foreign cars, be American, buy American.
2.Push the "big three" by helping propell other competiters to possibly oust them if they don't get their act together. The BS they throw on the road is not necessary and their monopoly will be crushed otherwise.

Simply no excuse for American's degenerating decline. The lack of Economic Nationalism and to many Monopolies is ruining this country. When the life tube is cut, this country is done.

[calmo]

My goodness Belfour, you figure the auto industry is the "life tube" (umbilical cord?) of this country? [ "is done." --like cooked, kaput, --not cooked, come and get it?]
Ok, I can see you are propelled:
Push the "big three" by helping propell other competiters to possibly oust them if they don't get their act together.
and I wonder why American Motors or Edsel or so many of those smaller competitors don't start up again and give them a run for their money. The airlines is an example where smaller companies did jump in and aren't doing all that badly, no?
You are right. A lot of our hearts are tied up in this decline.

[mauisurfer]

USA car makers put their money in lobbying to maintain gas guzzling standards, and in advertising. Japanese put their money into making better cars, including extensive research on efficiency. When GM and Ford had no hybrid model to sell, Ford made a quick deal to license Toyota's technology, but of course Toyota kept the latest/best for itself. In fact Toyota recently bought a big interest in Subaru from GM just so it could control Subaru's proprietary advanced hybrid batteries.
Even back in Carter's presidency, Big 3 efforts were NOT on engineering a more efficient reliable vehicle. When GM made the Vega they used a 3 speed automatic transmission with PLASTIC bearings: poor performance/efficiency and worse reliability.
The best GM small car, the Chevrolet Prizm was made for GM by Toyota at their jointly owned (Toyota operated) plant in CA from 1998-2002. The Prizm was a Corolla with a GM badge. They ceased manufacture in 2002.
The chickens have come home to roost in Detroit.

[calmo]

I'm getting depresseder and even more depresseder. (Lookout here come those stupid chickens...just to rub it in what bird brains we are.) We are more than the cars we drive. In fact, we don't even have shares in that stock. No, we saw this coming for years and balanced our resources and commitments elsewhere. It is a good thing to get these old dinosaurs off our financial and social road map. These are outdated symbols of our industrial strength and capacity. The roads and highways are consuming too much of our natural resources without filling them with vehicles that consume even more precious natural resources. All that infrastructure doesn't need to be upgraded to handle more or the same but to handle way less.
That's what those chickens are telling us people:
So much depends upon
the small chicken farms
between the divided highways