Detroit: Same Old, Same Old
Andrew Sullivan points to an article by Jonathan Cohn in the current TNR arguing for the proposed automotive bailout.
The core of Cohn’s argument is that the Big 3 are turning around, and that the bailout will give them time to complete their transformation to competitive companies. While this might be true, it is very hard to accept that Cohn provides any compelling evidence that the future is about to become very different than the past several decades of Big 3 performance.
He begins this portion of his article by writing:
But what’s missing in the tsk-tsk editorials is any recognition that the culture of Detroit has been changing, however belatedly, starting with its labor relations. … “I think they’ve shown unprecedented ability to change and transform the union,” says Kristin Dziczek, who directs CAR’s Automotive Labor and Education program. “They understand what is at stake.”
Yeah, well, here’s the lead headline on Yahoo Finance as I write this: “UAW leader says blame economy for Detroit 3 woes”. And of course GM’s CEO just got a 64% raise this year, presumably for the excellent performance.
Cohn then goes on to say that:
So far, the results are promising. According to the most recent Harbour Report, the benchmark guide for manufacturing prowess, Chrysler’s factories now match Toyota’s for the most productive, while both Ford’s and GM’s are improving. (A Toledo Jeep factory was actually named the nation’s most efficient.)
I’ve done a lot of manufacturing benchmarking-and-improvement analyses, and while this is a frequent interpretation of the numbers in that report, it is very misleading. The statement is true as made, as long as we define “productivity” as labor-hours / vehicle. What are some of the problems with this definition if we use it as a synonym for “profitable” or “good” or “successful”? Here are several off the top of my head (even accepting that Harbour attempts to adjust for differing total loaded cost of an hour of labor across companies): labor-hours / vehicle ignores the issues of the relative gross margins of the cars this labor is used to produce, product line complexity, plant utilization and non-production costs (especially dealer network costs) attributable to each plant. Guess who is disadvantaged on these metrics?
It would be complicated to combine all of these metrics to a better summary metric of profitability; luckily, I really don’t have to, since this exact report does it for me by reporting pre-tax profit per vehicle for North American sales for each major company. Here’s how well the Big 3 are actually doing:
They’re getting their clocks cleaned (even before adjusting profits to reflect the amount of capital each business ties up to produce a dollar of cash, which would almost certainly make the Big 3 look even worse). U.S. automakers are nowhere near competitive with their Japanese rivals, even here in their home market.
Cohn goes on to say that in spite of this “remarkable progress,” the Big 3 do have some “lingering problems”, but that “[b]ankruptcy is a messy, expensive process that would likely do more for lawyers than for the automaker, which has already taken the most obvious steps toward efficiency.”
This story – look, we now see how foolish we’ve been, and finally have our act together; with just a little more time we’ll be world-beaters again – has been sold by Detroit to journalists many times over the past 20 years. Here’s the New York Times in 1992, making almost the exact same argument as Cohn makes: “Ford and Chrysler have increased the efficiency of their factories and workers so much in recent years that their basic cost of producing a car is now less than that of their Japanese rivals, according to a study published today.” Here’s Fortune in that same year saying that “For the first time in a decade, the U.S. auto industry has a genuine chance to grasp the lead from its Japanese competition. Ford and Chrysler are operating at worldclass efficiency, and General Motors has taken on a new sense of urgency with seismic shakeups at the top.” How’d that work out? This kind of coverage continued almost into the current crisis – here’s Fortune as recently as 2004 saying “GM Gets Its Act Together. Finally. How America’s No. 1 car company changed its ways and started looking like … Toyota.”
But inexorably, in the face of all of this serial optimism, the Big 3 just keep losing share:
In 1960, the Big 3 sold about 90% of all cars purchased in the U.S; today they sell about 47%. That is, most cars bought by Americans last year were not made by the Big 3. And this share loss has accelerated over the past decade. (Also note that Michigan has already lost more than half of its auto manufacturing jobs in the last ten years, so lots of current Big 3 jobs will likely be “lost” even if they continue to operate outside Chapter 11.)
A dollar invested in a diversified basket of S&P 500 stocks twenty years ago would today have a face value of about $3, while a dollar invested at the same time in GM shares would today have a face value of about 7 cents (though to get true comparability you would have to calculate Total Shareholder Return, including dividends). There is no five year period that I could find in the last thirty years for which GM’s stock price outperformed the S&P 500. The market capitalization of GM is now under $2 billion, which is substantially less than that of such icons of our economy as Cognizant Technology Solutions, DaVita, Inc., Freeport-McMoRan Copper & Gold, and the Potash Corporation of Saskatchewan. GM is in danger of becoming a small-cap. Investors apparently don’t buy (literally) Cohn’s thesis.
In the face of all this evidence, Cohn wants us to believe that this time it’s different – that in spite of the forecast of the stock market, in spite of the judgment of consumers voting with their own money, and of in spite of the actual financial results, we can put tens of billions of dollars of taxpayer money at risk based on the opinion of some academics and interested parties that really, things are about to turn around.
Hey, without PCS, nobody eats. [And no, I’m not a shareholder.] Without GM, we’ll still be able to drive.
— Klug · Nov 17, 04:42 AM · #
What bothers me a great deal, Jim, is that so many of the people who argue against the bailout seem to have no idea, or don’t care, that the Big Three have made some significant gains in the past few years, particularly in terms of consumer satisfaction and media rankings. They’ve improved in reliability and value retention. And many people don’t bother to mention that the union has, in fact, made a major restructuring recently, one which has been a great help to the financial situation of the automakers.
Look I’m open to the idea that they just can’t be fiscally solvent and shouldn’t be bailed out. But most of the people arguing along with you haven’t demonstrated anything like your level of analysis on this issue. They just follow the conventional wisdom that the Big Three can’t succeed, and don’t even bother to gather evidence that might be contrary to their ideological leanings. There’s just a very low level of basic argumentative integrity on this issue from those opposed to the bailout, and I’m sick of it.
“ if you look at General Motors, walking dead in America, it’s
bleeding money; but overseas GM is a champion. Second-largest car market in the world is China. GM is number one. Largest car market in Europe is
Russia. Forty-four percent growth last year for General Motors. It’s numberone. And what is the fastest growing car in the world? Chevrolet.”
— Freddie · Nov 17, 04:53 AM · #
Also, Cohn’s argument had two major points, while Jim only responded to one. I’m similarly skeptical of GM’s claims to now be on the right track too, but Cohn also argued that Chapter 11 isn’t an option, and that big 3 will have to liquidate without a bailout. If there claims are correct, then it seems like the same painful logic applies to GM that applied to Wall Street: they’ve screwed up and bailing them out is very distasteful, but if we don’t we’ll face total economic ruin.
Is Jim confident that GM, ford and Chrysler won’t wind up in Chapter 7? If he is, does mr. Manzi think that Cohn’s staggeringly high layoff numbers are off base? If Cohn’s numbers are even close to true, how is letting GM fail an acceptable option in our current economic climate?
— Zeke · Nov 17, 06:24 AM · #
Freddie, the argument for whether the Big 3 should get a slice of the bailout has nothing to do with how much good they might do for themselves with the money. It’s about whether the damage the disintegration of Detroit would do to the economy is worth the fiscal costs, the risk of creeping corporatism, and the lapse in moral hazard. I know Jim recently argued that it isn’t, because the manufacturing and distribution assets wouldn’t go anywhere, so any shakeup in Detroit would be nothing more seismic than a change in management. One could of course argue that the fallout could be much worse, but the discussion is largely immaterial to whether or not American automakers “deserve” a bailout, or would make good on it.
(I know there is the whole issue of pension plans. I don’t know enough about it to discuss it intelligently, but if the argument is that Detroit’s inevitable collapse means that we are on the hook for the UAW’s retirement no matter what we do, then it makes sense to counter that Detroit is not so doomed so long as they get another chance.)
— Blar · Nov 17, 06:36 AM · #
Zeke:
Please see Klug’s post for a very brief version of the key response – if GM stops producing cars, it won’t dramatically reduce demand for cars. Other companies will provide them. Unless you think that transition costs will literally kill off the plants, experitse, brands names, IP and so on, and result in permanent, 100% substitution of imports (meaning produced outside the US, not “foreign” nameplates), then the legal owner of the assets producing these cars will change, but the assets and employment won’t disappear. If you do think that such a transition would wipe out all of these assets, it’s very hard to imagine that they aren’t so fragile that they’re going away soon anyway.
Look, it will suck for current Big 3 employees if these companies go bankrupt. But look at the chart on employment – most automotive jobs in MI have already gone away in the last 10 years. The base case of what happens to these employees without a bankruptcy, isn’t “things stay pretty much as they are, but everybody works smarter and better with slightly reduced benefits”.
— Jim Manzi · Nov 17, 03:40 PM · #
Jim, forgive me. I’m about to waste space.
Freddie, you’re a bright guy. Some of the stuff you write is very good. Since this is the case, I know you can get the following:
You have a bad habit. On about 50 different occasions (that I know of), you’ve responded to a strong, lucid argument at TAS with a variation of:
And then you talk about that, rather than respond to the strong, lucid argument in the post.
Seriously, man: you’ve done this at least 50 times. You’re better than that.
— JA · Nov 17, 04:08 PM · #
Jim, one of the themes of Cohn’s argument is that the GM, Ford, and Chrystler have improved their standings by increasing plant-level efficiencies. As these companies apply Toyota-modeled systems in domestic plants, is there evidence that demonstrates improvements in these plants’ profitabiliby relative to their foreign-owned counterparts (Japan’s Big 3, Hyundai, Kia, etc.)?
— CP · Nov 17, 04:25 PM · #
GM is in freefall domestically. It’s quite popular in China, though.
The Federal Government and US domestic capital markets are deeply under water, with far too much on our plates to bail out GM. The government of China, though, has enough money for a super-massive stimulus package, and their population still has super-high savings rates.
It seems to me there is a deal to be done here: the U.S. government puts GM into conservatorship, wiping out the common and preferred stockholders in GM, providing the equivalent of DIP financing for the short term, and packages the whole kit-and-kaboodle for sale to the government of China.
It would be clarifying, if nothing else.
— Noah Millman · Nov 17, 04:34 PM · #
Some updated lyrics to the Don McLean classic:
Bye Bye Miss American Pie
Drove my Chevy to the levy
and let the dog die.
“Let the dog die” is a brutal, but common, assessment (in the turn-around industry) of an impaired business which is allowed to go under because the perceived value of its assets is worth more to creditors than its value as an on-going business. Speculation that GM can file for bankruptcy and that somehow it will emerge as a leaner, well-managed company is hopelessly naïve. Bankruptcy will put the brand out of business. If one thinks that the so-called “Wall Street” bankers are greedy and immoral, as characterized by much of the political mainstream, they are collectively Mother Teresa compared to the bankruptcy process. There are no more vile words in the English language than “assigned for the benefit of creditors”. As a group, secured creditors and their counsel are the most rapacious breed of animal in the financial markets. Bankruptcy courts have absolute power to do anything they perceive is in the interests of creditors; once a company like GM files for bankruptcy, everyone will be looking for their share of the booty. Having run a successful fund which acquired companies out of bankruptcy (with the plan of turning them around and not liquidating them), I can assure you that GM will not survive a bankruptcy filing. Assets will instantly be worth 10 cents on the dollar, and so-called professional fees (attorneys, investment bankers, trustees, et all) will absorb 20-50% of that amount as compensation for administering the bankruptcy. Proprietary assets such as molds, designs, manufacturing processes, patents and trademarks, marketing materials, training programs, dealership support programs et al… will be worth virtually nothing in a liquidation. In this environment, there is absolutely no chance that some entity will have the wherewithal and the interest to turn around and retool a company as complex as GM. Creditors will take what is left after the scavengers have picked the bones clean. Talk of providing “retraining” for workers is a pipedream. Retrain them to do what? And where? I’m guessing that a GM or Ford failure will lead to the collapse of both the City of Detroit and the State of Michigan, as the entire automotive industry supply chain collapses and thousands of suppliers to GM/Ford go bankrupt in rapid succession. Dealerships, after-market retailers and repair shops nationwide will also fail, leading to more economic problems in every community in America. What is left of the US automotive tire industry will also fail, which will put pressure on all big-box retailers. Should we let those dogs die, as well? It is all well and good to talk about how inept the management of GM is, but the failure of GM or Ford has far larger ramifications. Do you really want to wipe out billions of dollars of brand equity and an entire industry because their management is inept? Can we afford such a cavalier attitude in the face us such a severe financial crisis? What if we were talking about drug manufacturers and hospitals, or the airline industry? Just because we have the option of buying automobiles from Toyota or BMW does not mean that losing GM or Ford is good for the country. Seriously, do you want an America where no American branded cars are produced? Baseball, motherhood and apple pie can’t be far behind.
A better solution would be to force these companies into Federal Receivership as a condition of bailout funding. A Federal Receiver has the same options as a Bankruptcy judge, but not the obligation to manage assets solely for the benefit of creditors. Instead, a Receiver can manage the assets for the benefit of all constituents and stakeholders (e.g. employees, creditors, suppliers, customers, shareholders, taxpayers etc…). A Receiver could renegotiate contracts and retirement plans, assign equity, defer compensation and replace management at will. If/when a leaner healthier GM (or Ford) emerges, stock or notes can be issued and sold to recoup the bailout investment. There are literally hundreds of talented turn-around executives who would welcome the challenge of restructuring the automotive business with the proper authority and financial support. It won’t be easy, but at least it isn’t unconditional surrender. A public/private partnership to create a 21st century automotive industry should be a large part of our coming energy independence. It will not come to pass by callously destroying what little is left of the US auto industry because “they deserve it.”
— Robert · Nov 17, 06:06 PM · #
Cohn’s argument also suffers from one additional major defect. His support for the bail out is premised on the assumption that in the absence of DIP financing GM will have to file for Chapter 7 not Chapter 11. Assuming that is true then proponents of the bail out would have more credibility if they argued that the Government should provide the DIP financing so as to allow GM to file for Chapter 11 in order to restructure its business to be competitive.
The fact that they have not suggested this suggests their their sympathies are not with a healthy auto industry but rather with the vested interests- executives, labor shareholders bond holders and politicians.
— sanjay sathe · Nov 17, 06:08 PM · #
“ if you look at General Motors, walking dead in America, it’s
bleeding money; but overseas GM is a champion. Second-largest car market in the world is China. GM is number one. Largest car market in Europe is
Russia. Forty-four percent growth last year for General Motors. It’s numberone. And what is the fastest growing car in the world? Chevrolet.”
If GM is making a profit overseas (is it?), what’s the difference between overseas operations and domestic operations—the UAW and the massive retiree pension/health care burden? Just asking.
— hb · Nov 17, 06:16 PM · #
And therefore…? I assume you are ok with a collapse of the domestic auto manufacturers and the consequences that may have. Now, you may think those consequences are preferable to the possible perpetual series of bailouts we may need to offer going forward, but it would be nice to see you articulate that explicitly. Why don’t we see a series of blog posts in the right-leaning sphere arguing the positive (or relatively positive) consequences of the collapse of Ford, GM, and Chrysler? When making decisions like this, we must consider the counterfactual. It would certainly be better than a series of blog posts (not just here, certainly) that seem to be trying to take advantage of the populist backlash against the banking sector bailouts.
— GR · Nov 18, 04:25 AM · #
GR:
I did an earlier post explaining why I don’t think “new owners for these assets + renegotiation of contracts” = “collapse of the industry”.
— Jim Manzi · Nov 18, 06:57 AM · #