Demanding a Failing Plan

Congress, in it's decree to the (formerly) Big 3, wants sustainable green vehicles as part of the plan that they bring back to DC next month as they beg for more money.

The problem is, as pointed out by the Washington Post; in it's green section; is that green vehicles are money losers, and probably will continue to be for the foreseeable future.

The story reminds readers that the Toyota Prius, the poster child for how to build a good hybrid, is a money loser for Toyota. The company won't say how much they lose per car, but experts figure thousands of dollars per unit sold.

The Chevy Volt, the car that gets environmentalists into a nearly orgasmic state, won't save GM. Instead, it could sink the company based on estimates of $8-10,000 just for the battery pack. Conservative estimates are GM would need to get upwards of $50k per car to turn a profit on it. Even at $4.00 a gallon for gas they'd be hard pressed to price the car at a profitable price. That's why they are limiting early production to 10,000 vehicles a year.

GM already plans to have nine hybrid models on the market next year, but if each of them is a money loser, that Congressional bailout money might just as well go down the drain.

President-Elect Obama yesterday reiterated the requirement for a bold plan from the automakers to come up with a sustainable business model based on vehicles such as the Volt, Fusion Hybrid, etc.

I wonder what Congress will say if the three CEO's show up and tell them the truth, that business model doesn't exist, and probably won't for the next five to ten years?

Here's something Congress could look at, though it will drive the Green lobby nuts. They need to relax some of the diesel restrictions that they put in place. Ford's Fiesta, (which isn't going to come here with a diesel), and VW's Jetta diesel give people cars with mileage in the Prius range, but with the ability to turn a profit on the car.

VW and BMW both have diesel cars that have passed California's tough emissions standards, and are going on sale in all 50 states, and don't eliminate the performance Americans like to get better mileage. The flip side is with the federal fuel tax, and most state taxes being higher on diesels, the cost of fuel for them has a 20-30% premium over gas, discouraging the sales of those higher mileage vehicles.

A second thing Congress could do, instead of limiting the tax credits they are planning to hybrids, they could provide a smaller tax credit towards anyone who purchases a vehicle with an EPA estimated milage greated than 32 or 35mpg combined, and increase that number slightly each year.

As the Post story points out, getting the full benefit of the proposed $7500 non-refundable (you don't get back more than you pay in) credit for hybrids and electic vehicles means only those making more than $50k per year would see the full benefit of the credit.

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Looking the Wrong Way

Rhetoric from Democratic Congressional leaders and President-Elect Obama's advisors is heating up towards the automakers, and all being aimed the wrong way.

I've got little sympathy for the 3 clowns from Detroit who flew in on private jets; at a cost of $20k each; to beg for money from Congress. The $12 to $24 Million each makes is a ripe target for lawmakers, admittedly.

However, you can cut all executive pay, sell all the corporate jets, and each of the (formerly) Big 3 will still lose $1-5 BILLION per month. Ford burned through $7.7 billion last quarter. Their CEO, Alan Mulally will make $24 million this year. Take out 3 months of his pay, and Ford still lost $7.694 billion in the quarter. Sell off their $150 million worth of jets, and they still lost $7.55 billion.

It's easy to see why lawmakers want to look at those things, it's easier than going after the root cause of their losses, labor costs present and past. That's where the money is going, that's why Ford loses over $1000 per vehicle sold.

That's why lawmakers have positioned themselves to allow the Big 3 to file bankruptcy, and blame them. Senior Democrats have told them to come back in December with a plan that preserves the current labor deals, and retiree benefits, but will somehow magically make them profitable if they want government help.

The truth is they can't; it's not possible. You have a better chance of spinning straw into gold. When they come back to the Hill next month, and can't show on paper they they can turn a profit in a recession with a 3 month cash infusion, Congress can throw up their hands, blame the evil corporate management, and say they tried.

Late January or early February is when you can probably expect to see GM toss it's papers to the court. Ford will be following shortly, with Chrysler last. They still have about 7 months worth of cash.

Then it will really get interesting in Washington.

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Walk Into The Light

Hey, Big Three, see that bright light. It's not the one at the end of the tunnel, it's the one at the end of your business as usual attitude, since it looks like Congress isn't going to pass a bailout for you before the end of this session.

If, as the CEO of GM claims, his company is going to run out of money by the end of December, I see a bankruptcy judge in his future.

Mitt Romney has a great piece in today's NY Times about what should happen in Detroit, and why. Basically, file for bankruptcy, and then rebuild the business model from the ground up.

I listened to Senator Russ Feingold on the radio this morning talking about that being the "death of car making in the US". That's of course patently false; Toyota, Honda, BMW, and Hyundai employ well over 100,000 workers building cars in the US. And, the court isn't going to shut down the Big 3, as their CEO's would like you to believe.

3 Million people aren't going to immediately be out of work, unless the CEO's decide that liquidation is the route they should take.

So, how can the (formerly) Big 3 declare bankruptcy, and still have folks buy their cars, which they say is impossible? Easy, explain it to the people. Take off the advertisments for your vehicles for a few days, and instead, advertise what the company is doing, and why.

Assure consumers that Chapter 11 isn't the end of your companies, but the beginning of a new era for them. An era where instead of losing between $600 and $1200 per vehicle produced, you actually turn a profit.

Assure them that while there may be less dealers (at least 1/3 less is what GM needs), they will still get warranty work done, and be able to find parts for their cars.

Dan Hesse from Sprint has been trying for months to show you guys how to get on TV and let consumers know what you offer, talk to him for some advice.

Yes, it will cause pain, for both current employees, some who will have to lose their jobs, and retirees. But that pain is much less than what they'll feel if Congress just tosses a lifeline, that will run out in mere months.

GM's own CEO says the company is burning through $5 billion a month, and may be broke before January. Giving him the 10-12 billion of the bailout money he wants means that unless something major is done about their costs RIGHT NOW, they'll still be broke by the end of March, and going to DC with his hat in hand again, looking for money to make it to the new model year.

A quick word for Congress, too. The Volt isn't going to save GM. To be sold at a price consumers will pay it will probably lose more money per car than anything any car company has ever produced. Yes, it might get people into the show room, and thinking about a Cobalt or Malibu, but one of them barely turns a profit, the other loses money every time one is sold.

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Save Our Jobs, But Don't Ask Us to Help!

You gotta love unions. The UAW has said that while they want a goverment bailout of the auto industry, Congress and the car makers shouldn't look to them for any more concessions.

Ron Gettelfinger, head of the UAW claims that "labor costs now make up 8 percent to 10 percent of the cost of a vehicle". That might be true, if all you look at is direct labor costs such as wages. However, when you look at the included health care costs of current and retired workers, pension costs, etc, the US auto industry still spends more money on workers; active and retired; than it does on steel.

Congress of course is in a tizzy over the bailout. They of course want to help their union buddies with money from the financial bailout. But the Treasury won't do it, claiming the money is for a "financial sector bailout", like the law they passed says.

One of the things the car makers (and President Bush) want to do is use the $25 billion they've already been given towards operating costs instead of green technology investments. Congress would probably agree to this, except it has the Democrats environmental allies in a tizzy, wanting more green cars, not caring that they aren't profitable.

Congress could make a common sense concession toward the industry, and kill the "two fleet" CAFE rule, which treats North American made cars and imported cars as two separate lines. That would immediately allow Chevy to count it's high mileage Aveo as part of it's fleet, and lower the penalties it pays for the trucks and SUV's that actually make them money. They could then get rid of the money losing Cobalt, or move it's production somewhere that it would be a profitable car.

Wait, they can't do that, the UAW, who doesn't want to help, can't stomach the idea of the Korean and Japanese imports that the Big Three buy being counted in the fleet. It would mean they'd have competition in the company for their jobs.

Here's my idea, the heads of GM and Chrysler, the two automakers most likely to fail soon, need to send Nancy Pelosi and Harry Reid a note. "Drop the two fleet rule, or we file for reorganization, and dump all of our retirees into Medi-Care and the Pension Guarantee fund".

While Congress may think the $50 billion the automakers want is expensive, it's nothing compared to the costs they'll incur if GM decides to file and rip up it's retiree benefits package.

And while the UAW may think that their current posture is best for current and former employees, they'll have to explain to them why they wouldn't work with the automakers to get through the crisis, and why the retirees don't have pensions anymore.

If I were a GM retiree, I'd be looking to some of the former US steel workers for advice on what to tell the union. They were all feed the same lines the UAW is using, and a good number of them lost their pensions.

I don't buy the union line that if any of the car makers file for bankrupcy no one will buy their cars. The airline industry already proved this to be untrue after 9/11 when all the major carriers had to reorganize. They emerged and stayed fairly profitable until fuel costs killed them this year. They proved that consumers are smart enough to know the difference between a liquidation sale and reorganization.

The truth is, the union doesn't want anyone to file because it will mean that their contracts end up under the scrutiny of a judge, who'll get to decide what's best for both parties. That would mean workers and retirees having to start paying some of the costs of their health care, and current workers under the old contracts picking up some more of their retirement costs.

They also lose their biggest bargaining chip, striking, under Chapter 11. The judge can decide if the company can hire permanent replacement workers to keep operating, instead of working under the mirade of state and federal labor laws; or the judge can just order them back to work (more likely), with the power to decertify the union if they don't obey.

Personally, I don't want to see the US car makers fail, even though I stopped buying their products years ago. I mentioned the Elantra above because I bought on in 2005 over a Chevy Malibu, which was about the same size that model year. To get a comparably equipped Chevy would have cost me about $5,000 more, with a lesser warranty.

What I'd like is to see a US auto industry, and UAW, that realize the 21st century is truly a global market place. It's going to take decent, well priced, fuel efficient cars for them to stay in business. The white collar end needs to design them, the blue collar end needs to realize that the cars have to be profitable, and a Congress that realizes some of it's rules are causing these problems.

35 years of eroding market share hasn't taught any of them anything. Maybe a big time failure of one of the (formerly) Big 3 will.

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