RSS

Toyota

To Go Bankrupt or Not to Go Bankrupt That Is the Question

by Bill O'Connell on November 26, 2008

Share and Recommend:
Share

The battle lines are being drawn and the factions are jockeying for position.

  • The UAW is standing firm that they are not contributing anything more (but the taxpayers should)
  • Rick Wagoner, CEO of GM, says they are not even planning for bankruptcy (but recently news has come out that the board is now considering it, if they can’t get the taxpayers to step up)
  • Congress wants a plan from the automakers before showing the money (they want to make sure that the auto companies adopt a green agenda and build a lot more cars that they can’t sell at a profit, and palm it off on the taxpayers)
  • Some pundits are claiming that 3 million jobs will be lost if we don’t bail them out (but fail to finish the thought and tell us who is going to build the cars that the market demands but GM, Ford, and Chrysler won’t be building if they completely shut down as some predict)

The louder the hue and cry against bankruptcy and the need to empty my wallet, the more confident I feel that bankruptcy is the right thing to do.  Without fundamental management change, union change, and structural change, no amount of taxpayer funding and bailout upon bailout, will enable the Big Three to crawl off their death bed and once again be giants of American Industry.  Bankruptcy is bitter medicine, but without wrenching change that bankruptcy protection can provide, with a trustee making hard decisions and getting concessions from all sides, this patient on life support will die.

A Sad but True Parody

I came across this excellent joke on Evolving Excellence that was making the rounds a few years ago, but seems sadly relevant today.  As I said it is a few years old, so don’t look too closely at the financials:

A Modern Parable.

A Japanese company ( Toyota ) and an American company (Ford Motors) decided to have a canoe race on the Missouri River Both teams practiced long and hard to reach their peak performance before the race.

On the big day, the Japanese won by a mile.

The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.

Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 7 people steering and 2 people rowing.

Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.

They advised, of course, that too many people were steering the boat, while not enough people were rowing.

Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team’s management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.

They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the ‘Rowing Team Quality First Program,’ with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The pension program was trimmed to ‘equal the competition’ and some of the resultant savings were channeled into morale boosting programs and teamwork posters.

The next year the Japanese won by two miles.

Humiliated, the American management laid-off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.

The next year, try as he might, the lone designated rower was unable to even finish the race (having no paddles,) so he was laid off for unacceptable performance, all canoe equipment was sold and the next year’s racing team was out-sourced to India.

Sadly, the End.

Here’s something else to think about: Ford has spent the last thirty years moving all its factories out of the US , claiming they can’t make money paying American wages. TOYOTA has spent the last thirty years building more than a dozen plants inside the US. The last quarter’s results:

TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.

Ford folks are still scratching their heads, and collecting bonuses…

IF THIS WEREN’T SO TRUE IT MIGHT BE FUNNY

It will be interesting to see when the auto executives go back to Washington, will they fly in three separate corporate jets? will they “jetpool”? will they fly first class?  will they fly coach? or will they drive one of their excellent products to ask for a bailout?  How much trunk space do you need to carry $25 billion?  Remember that’s 25,000 million.

A Modest Proposal

About every three years when the labor contracts between the unions and the auto companies come up for renewal, a target company, Ford, GM or Chrysler is typically chosen.  The purpose is to threaten a strike on that company while allowing UAW members to keep working at the other two (and still pay union dues), rather than striking against all three.

Here’s my proposal.  Since GM seems to be in the worst shape, they should go Chapter 11 right away.  Let Ford and Chrysler stand back and watch the result.  If it works and GM successfully restructures, you can bet Ford and Chrysler will be scrambling to go Chapter 11 to get their houses in order.  If it is a bust, then one of three things can happen.  One, they can learn what GM did wrong in the process and perhaps craft a better and maybe even “prepackaged” Chapter 11 filing.  Two, they can go back to Washington and try again, but at least they would have a stronger case for why bankruptcy is a bad idea.  Three, they can wake up and get all the parties together including management, unions, retirees, suppliers, banks, bondholders, local governments, Congress and make the changes voluntarily that would otherwise be made under a bankruptcy.

What do you think?

Share and Recommend:
Share
Comments (0)

GM’s Big Bet

by Bill O'Connell on November 23, 2008

Share and Recommend:
Share

He looked nervous.  He curled up the corners of his two hole cards, aces.  He eased them back down on the table and scanned the other players.  Nancy Pelosi had a stack of chips totaling $25 billion and he wanted all of them.  No, he needed all of them.  Desperately.  The other three, all Japanese, sat expressionless behind their dark glasses.  At every hand all they said was “Call”.   No raise.  No drama.  Very cool.  Very dangerous.

He looks again at the four cards on the table.  Nothing to help him there.  He needs another ace. He needs the ace he calls the Volt. Pelosi turns to him. “So, what’s your plan?”  He swallows hard, trying hard not to show it and says, “All in,” and pushes his remaining chips into the center of the table.  The dealer burns another card and then peels off the “river.” And we’ll be right back for the final outcome of tonight’s game.

GM on the Precipice

That must be how Rick Wagoner feels.  It seems he’s betting everything on the Chevy Volt. If he draws that ace, he’s a hero.  If not, he’s history.  So what are his chances?

If that’s all he’s got, they’re pretty long odds.  The Volt is not due to hit the showroom floor until 2010, and at a whopping $40,000 per copy.  Not a bad price for a Cadillac, but for an untested electric car with a 40 mile range?  That’s a tough sell.  Even at that, the $40,000 might not be profitable, just break even.  But, there will be a tax credit of $7,500 to help take the sting out of it.

Without Bankruptcy

Without a major revamping of their cost structure that can probably only be achieved through the bankruptcy courts, GM is still carrying $2,000 per vehicle in labor costs that its competition doesn’t have.  And what about those three players to his right in the dark glasses, do you think they are standing pat?  Although very low key, it is reported that Toyota, Nissan and Mitsubishi are all planning to introduce electric cars in the same time frame.  If they do that and they also have the $2,000 per vehicle edge, it will be very bad for GM and any bailout will go down the drain.

The other factor is the way the Japanese do strategic planning.  They typically do not look to just the next quarter.  They are known for developing 50 and 100 year plans.  That is not a typo.  So if they introduce a vehicle they will do it for the long haul.  Believe it or not the Toyota Prius has been on the market for seven years already.  The Japanese are not afraid to introduce a pretty good model and then continuously improve it and if they believe the direction is right, they are willing to wait for the results.  The Big Three, on the other hand tend to have a shorter planning horizon.  Witness Ford’s announcement that it intended to build 250,000 hybrids and then did a market survey when gasoline was about $2.30 per gallon, and decided that they should not go forward.  When gas prices took off they were caught flatfooted while Toyota was selling Priuses at a premium and they couldn’t make them fast enough.

New Administration, New Congress, New Energy Policy

Then there is the energy issue.  Putting more and more electric cars on the road is a good idea and a way toward energy independence.  However, the new administration and the incoming Democratic Congress want to kill the coal industry.  Coal currently generates 49% of our country’s electricity and when it comes to coal reserves, the U.S. is to coal what Saudi Arabia is to oil.  But the new incoming chairman of the House Energy committee, Henry Waxman of Beverly Hills, California, is more determined than ever to implement a green agenda and kill coal.

So what do you replace the coal with?  Oil? Gas? Nuclear?  On the campaign trail, I heard Barack Obama and Joe Biden mumble some things about nuclear being okay, but it was hardly a ringing endorsement.  Do they think for a minute that wind or solar are anywhere near replacing coal?  So, they actually plan to reduce our electric generating capacity by 49% and then not only replace it but grow it to be able to handle all these electric cars.  Where’s that plan?

If you don’t have enough electricity, you can’t charge up your electric cars.  If good old supply and demand does its usual thing, the price of electricity should skyrocket and I can tell you first hand that in New York, it’s not cheap right now.  If electricity skyrockets, whatever manufacturing is left in New York and other rust belt areas will be pulling up stakes left and right and heading south.  If that population follows the jobs, does that mean more votes for the red states and a shift in Congressional seats as well?

The Democrats better re-think that plan if they want to stay in power.

Share and Recommend:
Share
Comments (2)

Bailing Out the Auto Companies

by Bill O'Connell on November 11, 2008

Share and Recommend:
Share

The conga line for companies with their hands out forms on the left.  The next ones bellying up to the slop trough are GM and Chrysler.  They need $25 billion to help them through a tough patch or they may go out of business.  It is a loan?  Is it buying a stake in the company?  Is it that thing of which we dare not speak– socialism?

What’s Next?

The question is are we, by the continued intervention of the government, managing our way out of a recession and into a full blown depression?  For all the warm memories of FDR, the depresion lasted more than twelve years thanks to, “We’re from the government and we’re here to help.”  Perhaps it’s time to take our medicine, pull the covers up under our chin, sweat it out, and get back on our feet.

Business, like many things, runs in cycles.  There are up cycles and there are down cycles.  We can’t eliminate them, they are a necessary part of the process.  But just as there is no cure for the common cold, sometimes it is best to let it take its course as soon as possible and be done.

Was Government Intervention Wrong?

I don’t believe so.  It was unfortunately necessary to end the panic.  When lenders have no confidence that if they lend they will be paid back, and if they have non-performing assets and they can’t sell them because they don’t know how to price them, the whole system locks up.  The system needs a lender of last resort and the only one big enough to step into that role is the government.  However, that should be for the least amount of time possible.

The Problem with the Auto Industry

The auto industry has had 35 years to figure this out.  With the Arab Oil Embargo of 1973, Japanese auto companies made major inroads into the automobile markets.  Imagine buying a car that got 20 miles per gallon, rather than 8, was better built, and cost less.  Well, that’s what the Japanese companies were offering, but what did Detroit learn?  Union contracts too expensive, let’s invest in robots and get rid of the expensive people!  GM bought boatloads of robots and later ended up scrapping them.  Why?  Because the workers weren’t the problem.

Who transformed the Japanese auto industry?  An American by the name of W. Edwards Deming.  After World War II, Japan’s industry was in shambles.  Deming went to help them get their industry back on its feet and taught them about statistics and quality control.  They learned their lessons well.  They focus on incremental changes every day.  If someone sees a problem on the assembly line and takes action to stop the line, he doesn’t get chewed out, he gets applauded.

The Big 3 have had all this time to figure out what they were doing wrong and fix it, but what did they do?  During the good times, they just rolled along.  If signing a big labor contract kept the peace and kept the factories running, they would buy off the unions.  But when the trouble starts, there’s no room to maneuver.

Leading the Way to the Future

The Japanese saw the need to cut back further on fuel consumption, but they knew there was a limit as far as how much mileage you could squeeze out of a gasoline engine, so they came out with hybrids.  Initially they were a novelty, but when gas was headed for $4 per gallon, they we economical.  Where was Detroit on this?  Lagging behind, of course.  Don’t develop a hybrid car until your customers demand it, but by the time they do, they would rather buy the tried and true hybrids being built by Toyota and Honda.  Ford promised to produce 250,000 hybrid cars but rescinded that pledge nine months later.  Why?

“According to a Ford spokesperson, an internal panel of experts analyzed customer interest in hybrid cars and did not feel that there was enough demand to warrant the expense of building 250,000 hybrids.”

What was the price of a gallon of gas when they made that decision? $2.20, the lowest it had been in ten months.  The other half of that article quoted above said, “Toyota remains top hybrid producer.”  GM is now placing a very big bet on the Chevy Volt, which will be an electric car scheduled to launch in 2010.  Although there is little fanfare, Toyota, Nissan and Mitsubishi are all planning electric cars in the next two years.

To Bail or Not to Bail?

So why should the taxpayer be on the hook for the mistakes of the Big 3 auto maker’s management for these past 35 years?  Perhaps they should just go into Chapter 11, reorganize and come out as more competitive companies.  Why prop them up so that they can stumble along for another 5-10 years until the next downturn and come back to the trough?  The stockholders have been electing the boards of directors for these companies for 35 years and buying their stock.  The boards have been hiring the management team and providing them with their compensation.  The management team has made the product decisions, negotiated the labor agreements, and all the other missteps.  Why should American taxpayers have to step up to the plate and bail them out.  They got themselves into this mess, let them get themselves out.

But that’s just my opinion.

Share and Recommend:
Share
Comments (0)
© 2008 Liberty's Lifeline. All Rights Reserved.