More on A Different Thought about the Auto Industry Bailout

Response to yesterday’s post was quick, and plenty. Most comments came to my email address, but one was posted to the blog.

This follow-up article is a reply to the question asked, “How can we do it?”

As to the other part of the comment about political courage; among current leaders there is not enough to take action such as suggested here. Perhaps Barack Obama will have it….

Your comments are encouraged and all are welcome – pro and con.

To bailout, or not bailout, that is the question.

On the one hand, some say the loss of jobs in the industry and related fields would cripple an already weakened economy. The ripple effect would be enormous: auto parts makers and auto dealers are the obvious; the trickle down effect is not so obvious, but towns, families, retailers, etc. would suffer.

On the other hand, some say the foreign auto producers will step into the gap left by the demise of the American auto companies, and the effect of the demise will not be such a disaster. In addition, with millions of US cars on the market, parts and service requirements will continue for many years. All we would really lose, in the long term, are the profits that the car companies might generate and keep in this country. That may all be true, but no one mentions the timing. It will take years for auto production in this country to rebound, regardless of who is making the cars.

Lastly, is $25 billion dollars enough or will the car people come back for more? At the rate they are burning cash, probably the latter.

Therefore, here is a more complete new thought.

Rather than loan or invest billions in Ford, GM and Chrysler, why not quickly nationalize them, removing management, installing new people, new energy, new thinking, a new model for doing business, and possibly even new pay rates and health insurance and retirement plans, and get on with the job. Bring in a Bill Gates or Steve Jobs, or one of hundreds more innovative thinkers to lead the charge. Use the $25 billion to create new, trim, companies rather than propping up old stale ones. Along that line, fire the entire core of lobbyist, especially those who fight against higher fuel efficiency standards.

That sounds very easy. Obviously, it is not. Here is a blueprint that might work if given a chance.

Consider the GM situation. GM stock is hovering slightly above $3.00 a share, and the capitalization of GM is somewhere near $3 billion. For the plan, have the company create a new class of voting stock and let the government buy $5 billion to $10 billion worth. The funds go to GM for immediate use. At the same time, voting the new shares, completely replace the GM Board of Directors. Get new people; with no auto industry experience; with creative minds; not willing to work the old, failed model; and let them go to work. Replace the current executive staff without bonuses. Let the lawyers begin!

Bring the best and the brightest to the Board and the executive ranks to lead the company. Develop a new model for doing business. Perhaps the DELL model of building to order, having dealers only to provide a few demo cars, take orders, and supply parts and service. Without saying, “It won’t work,” say, “It is a good idea, let’s make it work.” If not that though, what others ideas are there? Remember, the old model failed.

Here is another thought: Rather than manufacturing so much of the vehicle let others do so. Become a design and marketing organization. Buy engines from someone else – Honda, for example. Transmissions from another source. Fit the cars together in less than a year rather than taking two or three years to bring a new model to market. Alternatively, buy immediately salable cars from other manufacturers, customized to be the GM model. That is certainly not a new idea. Think about the Isuzu Rodeo and the Honda Passport of a few years ago. Honda sold Passports by the thousands. It was not a Honda vehicle though; Isuzu built a Rodeo, changed the trim and interior, sold it to Honda and then Honda sold it as a Passport. There are other examples.

Get vehicles with fuel-efficient engines on the market in a hurry. Give GM and/or its dealers something to sell.

Fuel-efficient small cars, and hybrids, have proven themselves as sellers in the market. There are more than a million of Toyota’s Prius on our roads. Rather than taking two or more years to do the research, design and testing, buy the technology. Now is the time for action – not development and design.

Get vehicles selling and cash flowing. Then, when operations are stable, start investing in research, development and design. At this moment, what difference does it make who manufactures the major assemblies? Later build a goliath of an industry and be a technological leader. There is no time now.

With no lobbyist fighting to keep fuel efficiency requirements low, the government can move forward with stringent regulation to reduce carbon emissions. In spite of what the auto companies and the oil companies have said, global warming is real. Let the bailed out auto industry be the leader in reducing carbon emissions, not the fighter against reduction.

There are many creative geniuses in our country. Let them “have at” the auto industry. Forget the words, “We have never done it that way,” or “We tried it once and it did not work,” or, even worse, “It can’t be done.” A long time ago, people said that about landing on the moon.

Adopt the cry, “We know it will work and we can do it.”

How many years will it take to move the inertia of the auto industry to make it into something new, different, and PROFITABLE and FLOWING CASH?

Probably close to three years. On the other, without the bailout suggested here, the existing companies, working the old auto industry model, will take at least five years IF they can do it at all.

It is exciting to think about. It would be exciting to participate.

Your comments are invited.

A Different Thought about the Auto Industry Bailout

Shakespeare might have said, "To bailout, or not to bailout, that is the question."

On the one hand, many say the loss of jobs would cripple an already weakened economy. The ripple effect would be enormous: auto parts makers and auto dealers are the obvious; the trickle down effect is not so obvious, but towns, families, retailers, etc. would suffer.

On the other hand, many say the foreign auto producers will step into the gap left by the demise of the American auto companies, and the effect will not be such a disaster. In addition, with millions of US cars on the market, parts and service requirements will continue for many years. All we would really lose, in the long term, are the profits that the car companies might generate and keep in this country. Of course, the dislocation and relocation of factories and thousands of people would be harsh.

Lastly, is $25 billion dollars enough or will the car people be back for more? At the rate they are burning cash, probably the latter.

So here is a new thought.

Rather than loan or invest these billions in Ford, GM and Chrysler, why not quickly nationalize them, removing management, installing new people, new energy, new thinking, a new model for doing business, and possibly even new pay rates and insurance and retirement plans, and get on with the job. Bring in a Bill Gates or Steve Jobs, or one of hundreds more innovative thinkers to lead the charge. Use the $25 billion to create new, trim, companies rather than propping up old stale ones. Along that line, fire the entire core of lobbyist, especially those who fight against higher fuel efficiency standards.

On that last line of thinking, could the car company disaster be similar to the financial disaster have been caused by deregulation (i.e. low fuel efficiency standards?)

Your comments are invited.

Investing or Gambling?

Years ago, when buying stocks, the pattern of many people was to carefully pick a target industry in which to invest, and then equally carefully pick companies within that industry that were growing or seemed poised to grow at rates faster than the general market. With this system, through the years, people made a few killings, and had a few losses, but overall created a steady and good return on their investments. Later, in managing a small 401k investment sthe process was the same, this time picking funds that were in target industries and that performed better than other funds in those industries. SGenerally the returns were better than double stock market indices growth rates. Buying in, and selling out of stocks, or more succinctly, TIMING was the key.

Some people pto them that this was not investing, it was gambling. Short selling seemed to be about the same thing; making a bet that a stock would go down, and making money when it did. It was also gambling. Sure, careful study preceded these investments, but because of the limited time period for them, it required selling on a schedule, not like longer term investments. Sometimes the timing was not favorable.

Day trading requires almost constant attention to the market, a luxury not available to most people.

Fortunately, most people did not become involved in the real estate bubble, although many did. In Phoenix, for example, there were plenty of opportunities. Property values in some areas increased 50%, or doubled, or in some cases even tripled in a year. The question was, “had the properties risen in value by the same amount as the increase in price?” It did not seem so. The great bulk of properties could earn only slightly greater rent because of higher property prices. It was apparent that properties were overvalued. (Some of this is 20/20 foresight, and some is 20/20 hindsight.)

For example, an investment group bought a nearby apartment complex with 270 units, and announced they would convert the units to condominiums. Tenants could buy their apartments at favorable prices, and a few did. After refurbishing the complex the new owners sold, in a little over two weeks, the remaining 200 or so units. Investors, not prospective tenants, bought the bulk of the condominiums. They gambled, and for the most part, they lost when the real estate bubble burst.

The same is so with most of the gamblers who expected great gains when they bought asset backed securities (derivatives), hedge funds, and other such paper instruments about which most people know nothing, or sold short, or bet on commodities, etc. In other words, they did not invest into value; they invested in paper assets. Underlying assumptions and the tacit assumptions behind them were either not investigated or ignored. Many of those paper assets disappeared, in many respects causing the mess our financial system, and our economy are in.

Here are some questions to consider. Readers say they appreciate your comments….

First, is there more benefit to the economy by investing in productive assets, such as operating companies, rather than investing into paper assets? Second, do the high-risk instruments and investments benefit our economy? Third, should we consider limiting or banning investments in paper assets and other high-risk methods of investing in the financial system?

Revision and more thoughts on the economy

It was only eight days ago that I posted a comment about the economy. In those eight days, worldwide financial and economic news was so bad, with massive employee layoffs, terrible earnings reports and steep stock market declines that, in my opinion, the comments in that post proved wrong. If there was an ethical way to remove those comments from the Internet, I would.

The better action, though, is to acknowledge an overreaction to the short-term developments that led to the opinion expressed. Following is a revised opinion.

Credit will slowly loosen making borrowing at all levels somewhat easier. The change will not be as fast as the Treasury and the Federal Reserve would like, but credit will slowly loosen. The Federal Reserve has started lending against commercial paper from banks and corporations, and some of the $250 billion used to capitalize banks by buying stock is deployed. Banks are slowly beginning to trust other banks – interbank loans are slowly rising. Yesterday’s news showed a rise in the rate of new home purchases, probably because cash rich buyers (there are some out there) see housing prices near the bottom of their decline. New home construction will not pick up for some time though because the inventory of unsold new homes is still high.

The Conference Board's index of consumer confidence index was just published. At 38.0, down from last month's 61.4, it is dismal. Consumer spending already is down. As consumer confidence declines, so does consumer spending. The present level of the index points to an extremely weak retail season. If gains in the stock market - up some 400 points today - continue, and gasoline prices stay down, confidence and spending will slowly return

Small business owners – hunker down. Reduce expenses as much as possible, and increase revenue if possible. Depending on the business, most of you can survive unless you are heavily in debt. If heavily in debt, have a contingency plan in mind or on paper so that if your line of credit is reduced or canceled you have a plan of action ready to go. Many options exist – take off the blinders and look at all.

I do not believe the US will suffer either the depth or the length of the worldwide recession that is at hand. However, it will be at least a year, and perhaps two years, before an upturn in the economy show up. Worldwide it will be deeper and longer.

In this country, we will have dodged a bullet. Barely.

Positive Signs 10/20/2008

Barring unforeseen surprises, of which there have been many, there seems to be light at the end of the tunnel of economic crisis. There are several signs of (the overused term) “cautious optimism” showing their heads long before Groundhog’s Day.

First, interbank lending rates are down today to the lowest level since September 30. That does not mean the credit crunch is over; in fact, it is long from ending. However, the lower rate does mean a larger number of banks are willing to lend to other banks – a statement of rising confidence in the viability of the banking industry. Confidence needs to increase even more before the credit crisis ends, but a glimmer of hope is showing.

Second, and quite a surprise, the Conference Board reported today a slight increase in leading indicators. Caution: this does not mean business will be booming soon. Nor, with a one-month increase, does it mean the economy is turning around. Having expected a decrease in the indicators, though, the very slight increase is welcome news. There is little question that the economy will continue to fall for some time; perhaps the slight rise means the fall will not be as severe as some expect. If there is continued rise in the indicators, a turn in the economy could be expected in less than a year.

Third, there is less and less doubt that the government will create another economic stimulus package. The style of the package will depend on the creators: either the current administration or a newly elected one (of either party.) Certainly, the infrastructure needs investment, and along with encouragement to the housing industry, a stimulus package can in short order return thousands of unemployed workers to newly created jobs.

Before dancing in the streets in celebration of an economic recovery, temper all the above with the size of the deficits that will follow, and the enormity of the national debt. The United States will be financially weakened for many years to come. We have put ourselves into a large hole and now face the perhaps impossible task of digging out.

Musings on the Economy

In the spring of this year, it seemed certain the economy was entering a recession. Oddly enough, based on the definition of a recession as two consecutive calendar quarters with shrinking GNP, we still are not in a recession.

Another definition sees a recession as a reduction in the amount of business activity in the economy, based on measures like employment, industrial production, real income and wholesale-retail sales. A recession starts as business activity reaches a peak and starts to fall and ends when business activity bottoms out and begins to rise. Using this definition, recessions last on average about a year.

Now, in the current economic drama, recession seems sure – using either definition. Employment is down; unemployment is up. Industrial production is down; wholesale and retail sales are down. Food and fuel prices have risen sharply, driving down real income.

There are some interesting good signs, though, even during the drama. The dollar is stronger. It has risen some 17% over the last two and a half months. Looking at the economy, that is a surprise. It seems it should have fallen further during that time. Apparently, compared to national economies around the world though, ours is better than most, giving strength to the dollar. If other economies are worse than ours are, they must be very bad. With the weak dollar, exports rose. As the dollar strengthens, they will fall. With a stronger dollar, the real cost of a barrel of petroleum is lower. Fuel costs are lower and may go down even more.

The critical issue in the current economic drama is credit. No one wants to lend money, especially banks to other banks. Without bank-to-bank short-term loans, credit availability dries up. The Fed yesterday intervened by buying commercial paper, never before done. Then the Fed, joined by the larger industrialized nations in the world, reduced interest rates. In the US, the federal funds rate dropped half a point. Mr. Bernake and friends are creative geniuses – he seems to have something new every day. The result, along with interest rate cuts worldwide, may stem the tide of the drama. If only (and how many times have you heard,”if only”) we get a few days of calming, these and other measures will begin to defuse the drama. I personally believe that the many measures and rescues of the Federal Reserve and the US Treasury will keep the economy from falling into a depression - defined as a severe economic downturn lasting several years.

Speaking of depressions, the Great Depression of 1929 lasted ten years, ending only when the outbreak in Europe of World War II began demanding greater output from our mines and factories. We certainly do not want that. Overburdened with a national debt far into the trillions, surviving a depression would become problematic.

Thoughts on Consistency in Business

I recently posted two pieces on consistency on another blog site I maintain. One piece has tips for achieving consistency, and the other is an example of the results of consistent operations. Rather than post the same content on this page I invite you to read them www.sixpillarsresearch.blogspot.com.

I believe consistency is one of the overlooked features of good business practice. We all know how important consistency is, and yet many companies completely fail at achieving it. Some stay in business, but many do not. Think about it. Would you do business with a firm that meets your needs only inconsistently? I doubt it. There doesn’t seem to be a reason to.

Some companies don’t care about repeat customers. They advertise and promote heavily to get new customers, but don’t consistently serve them. Their philosophy seems to be, “It is a big market with many, many prospective customers. Keep up the advertising and promotion to keep them coming in and all will be well.” Personally, I like the philosophy that says our customer are the most important asset we have so we take good care of them and keep them coming back again and again. What do you think? I would appreciate having your thoughts as a comment part to this blog.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.
Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.