Last week President Obama imposed a stiff tariff on imported automotive vehicle tires made in China. In retaliation the Chinese government threatened to impose heavy duties on American exports of automotive parts and chickens. While this may sound as a petty tit for tat trade dispute between the U.S. and China, there are some important lessons to be learned about the consequences of such actions from the great depression.
In 1930, President Herbert Hoover, reacted to intense lobbying from farm, labor and business and imposed tariffs on 20,000 items that were produced abroad. The Smoot-Hawley tariff act, as the bill was was known had disastrous consequences for American trade and unemployment. From 1929 to 1933, imports from Europe into the United States declined by almost two-thirds and our exports were more than halved. From 1929 to 1934, overall world trade declined by some 66 percent. The net result of these trade restrictions led to U.S. unemployment of up to 33% in 1933.
After the financial upheavals of last year and the subsequent high unemployment, the President needs to be mindful of the consequences of creating trade barriers. The global economy is becoming more intertwined every year. In order to create jobs and grow the U.S. economy there needs to be a free flow of goods and financial services between the U.S. and the rest of the world. Both the President and congress have to promote the need for free trade as a means of rebuilding the economy and take the high road instead of pandering to special interests.
Monday, September 28, 2009
Tuesday, July 28, 2009
GM and Chrysler Dealership Closings are Opposed by Congress
Both GM and Chrysler have recently emerged from bankruptcy as smaller and leaner companies. This was done in large part through the intervention and support of the federal government which saw to it that all the effected parties made the necessary concessions and liquidation was avoided. However this has come at a price. The government now has a majority ownership stake in both companies in exchange for the funding received by both companies in order for them to survive.
After both GM and Chrysler moved to close dealerships in order to streamline their respective operations, the US House of Representatives just passed a bill telling them to reopen them again. Actions like this can have damaging consequences for the following reasons:
1. GM and Chrysler have steadily lost market share to the foreign automotive companies and need to slim down their operations in order to achieve long term profitability.
2. Congress needs to understand that in order to nurture a strong and independent GM and Chrysler, they need to stop interfering in their business operations and second guessing the management. Both companies need to be allowed to either succeed or fail by themselves and away from government meddling.
It is understandable from the dealers viewpoint that they are loosing their livelihoods and jobs are being lost at each dealer that closes. However, for GM and Chrysler to survive and grow again they need to be smaller and leaner companies. This will be impossible if they have the same bloated structures that they previously had. Current projections show that 2009 annual vehicle sales will be 10.5 million as compared to 16 million back in 2007. With such reduced sales volumes all the OEM's need to be nimble in order to remain profitable until the economy recovers and consumers start buying new cars again.
After both GM and Chrysler moved to close dealerships in order to streamline their respective operations, the US House of Representatives just passed a bill telling them to reopen them again. Actions like this can have damaging consequences for the following reasons:
1. GM and Chrysler have steadily lost market share to the foreign automotive companies and need to slim down their operations in order to achieve long term profitability.
2. Congress needs to understand that in order to nurture a strong and independent GM and Chrysler, they need to stop interfering in their business operations and second guessing the management. Both companies need to be allowed to either succeed or fail by themselves and away from government meddling.
It is understandable from the dealers viewpoint that they are loosing their livelihoods and jobs are being lost at each dealer that closes. However, for GM and Chrysler to survive and grow again they need to be smaller and leaner companies. This will be impossible if they have the same bloated structures that they previously had. Current projections show that 2009 annual vehicle sales will be 10.5 million as compared to 16 million back in 2007. With such reduced sales volumes all the OEM's need to be nimble in order to remain profitable until the economy recovers and consumers start buying new cars again.
Sunday, June 7, 2009
GM and Chrysler Bankruptcies threaten Auto Supply Base
The GM and Chrysler bankruptcies are likely to further threaten the automotive supply base. The automotive suppliers are the thousands of companies that supply parts to the the domestic big three auto suppliers to keep production running on a daily basis. While everyone is concerned with the reorganization of GM and Chrysler under government and bankruptcy court supervision, who is concerned with the auto suppliers? The auto suppliers, as a group, employ more people than the big three. The government has set aside $5 billion to help prop up the suppliers but this is unlikely to be enough money to cover the wave of bankruptcies that are starting to happen.
As the big three have lost sales over the last few years, the impact has been felt by auto suppliers who have steadily decreased payrolls. The closure of plants by Chrysler, after it filed for bankruptcy, has caused further layoffs and bankruptcies in the supply base since suppliers only get paid when parts are shipped to plants to meet daily production requirements. This process will accelerate with GM filing for bankruptcy on Monday, 6/1/09.
Some auto suppliers are trying to diversify into other fields in order to increase their sales. However there are two issues that they need to deal with:
1. In order to remain as viable suppliers to the big three a minimum plant capacity and tooling is required to profitably manufacture parts. This means that the auto suppliers must maintain an investment in their plants to be considered to existing and future business.
2. Breaking into a new business requires upfront investment in tooling and plants. In the current investment environment, suppliers will find it difficult to obtain the required capital. The best bet in being to diversify, will be to related industries that do not require whole scale production line changeovers.
Unfortunately, while GM and Chrysler have received the financial support of the taxpayer, this is not the case with the auto suppliers who have no such safety net. The supply base is now so interconnected that one supplier frequently supplies all the big three. This means that even though Ford may be increasing production, the production fall off at Chrysler and GM will impact suppliers. The concern is that suppliers that file chapter 11 must not disrupt daily operations at Ford, which has so far taken no government handouts.
Ford's management has stated they are watching the supply base to ensure that they can head off any supplier bankruptcy. However, with the GM bankruptcy this week the number suppliers failing will increase. With a limited safety net for the supply base, it remains to be seen if Ford can emerge through this situation unscathed.
As the big three have lost sales over the last few years, the impact has been felt by auto suppliers who have steadily decreased payrolls. The closure of plants by Chrysler, after it filed for bankruptcy, has caused further layoffs and bankruptcies in the supply base since suppliers only get paid when parts are shipped to plants to meet daily production requirements. This process will accelerate with GM filing for bankruptcy on Monday, 6/1/09.
Some auto suppliers are trying to diversify into other fields in order to increase their sales. However there are two issues that they need to deal with:
1. In order to remain as viable suppliers to the big three a minimum plant capacity and tooling is required to profitably manufacture parts. This means that the auto suppliers must maintain an investment in their plants to be considered to existing and future business.
2. Breaking into a new business requires upfront investment in tooling and plants. In the current investment environment, suppliers will find it difficult to obtain the required capital. The best bet in being to diversify, will be to related industries that do not require whole scale production line changeovers.
Unfortunately, while GM and Chrysler have received the financial support of the taxpayer, this is not the case with the auto suppliers who have no such safety net. The supply base is now so interconnected that one supplier frequently supplies all the big three. This means that even though Ford may be increasing production, the production fall off at Chrysler and GM will impact suppliers. The concern is that suppliers that file chapter 11 must not disrupt daily operations at Ford, which has so far taken no government handouts.
Ford's management has stated they are watching the supply base to ensure that they can head off any supplier bankruptcy. However, with the GM bankruptcy this week the number suppliers failing will increase. With a limited safety net for the supply base, it remains to be seen if Ford can emerge through this situation unscathed.
Monday, May 18, 2009
Toyota Trips Up: Posts Bigger Loss than GM in Q1
I just read two interesting articles regarding Toyota's financial performance in Q1, 2009. The first was published in the Wall Street Journal on 5/9 and the other in the New York Times on 5/13.
Toyota posted a loss of $7.7 billion in Q1, 2009. This exceeded the loss by GM in the same period. Luckily Toyota has the cash to survive, unlike GM which will probably file for bankruptcy by the end of this month.
There are many factors for the miscues which caused Toyota to incur it's first annual loss in 59 years:
Toyota posted a loss of $7.7 billion in Q1, 2009. This exceeded the loss by GM in the same period. Luckily Toyota has the cash to survive, unlike GM which will probably file for bankruptcy by the end of this month.
There are many factors for the miscues which caused Toyota to incur it's first annual loss in 59 years:
- Toyota failed to recognize and exploit the growth of the small car market in China. GM is the dominant auto company in the Chinese market where it has partnered with two local OEM's.
- A mistaken belief that demand would continue to increase in the US car market. Toyota chose to increase it's presence in the light truck market just as the market collapsed. This has led the company to idle lines at several plants and place construction of a new plant in Mississippi on hold. Sales for the Toyota Tundra are down by 55% compared to the same period last year.
- The price of gasoline, which was up to $4 per gallon last year, has decreased to $2 per gallon, based on the latest prices in Michigan. This has meant that US consumers have lost interest in paying the extra premium for hybrids or in buying smaller vehicles. As an example, the Toyota Prius is now selling at a discount whereas last year it sold for full sticker price. Sales of Toyota's Yaris small car are also down by 50% compared to the same period last year.
- Toyota was not as aggressive as the big three in offering incentives to sell vehicles. Consequently the company slipped to third place, behind Ford, in US new vehicle sales for Q1.
Toyota management has taken several steps in attempting to remedy this situation. Vehicle inventory, which had increased to 100 days on hand is being reduced to 60 days. Toyota accomplished this by closing its plants in late 2008 and early 2009. This is in line with similar inventory levels at the big three. Toyota is also offering more sales incentives to boost sales. A new model of the Prius hybrid is also being launched and this is expected to increase customer traffic at sales rooms. Toyota's assembly plants are also engaged in cost cutting to help boost its bottom line.
The fact that Toyota, which is experienced in small vehicle and hybrid manufacture, should stumble in today's eco friendly atmosphere is a somber reminder to the big three on how big their task really is. Since gas prices continue to fluctuate, US consumers feel no real compulsion to buy hybrids or small vehicles. The big three must build small vehicles that are attractive and competitively priced if they are to take market share from the transplant OEM's.
Saturday, May 9, 2009
Ford takes a Gamble on an Electric Focus
Ford announced this week that they would invest $550 million to retool the Michigan Truck Plant in Westland (MI) and Louisville (KY) to build an all electric Ford Focus. The North American version of the Focus is currently produced by Ford at the Wayne Stamping Assembly plant. While this is very encouraging news, since it will save and create jobs in Detroit, I have several concerns with Ford's strategy.
Firstly, Ford does not currently make any profit on the current Focus. This is generally true for all small cars produced by the big three and explains why the big three have never been keen on the small car market until the increase in oil prices forced them to rethink their strategy.
Ford is counting on economies of scale to reduce the cost of the Focus by simultaneously launching the Focus in the US, Asia and Europe. However, launching global programs can be problematical. Extra coordination is required for ensuring tooling is the same, materials are consistent and all suppliers must work in tandem to ensure a smooth launch. Changes will also require more coordination. This will add cost and complexity to the launch. Ford management is also negotiating with the UAW to further reduce labor costs and benefits. These negotiations also involve introducing flexible manufacturing and work practises so that several models can be assembled on the same line.
The typical north American consumer will also need to be enticed to buy an electric Focus since they regularly like to buy larger vehicles such as SUV's and pick-ups instead. This would have been an easier sell with gas at $4 per gallon rather $2 per gallon as it is today. Ford will need to add features to up-sell the Focus as they do in Europe. But, the European version of the Focus is more expensive than the north American version. Europeans are also more used to driving smaller vehicles since the price of gas is substantially higher (due to government taxation) and the cost of living is higher.
Ford also needs to prove to consumers that their Focus can compete on the same level as the compacts from Toyota and Honda. They will have to show that they can produce at an equivalent or higher quality standard than the transplants.
While Ford has my vote as the most likely of the Detroit big three to survive, I remain skeptical of their new car strategy. Bottom line US consumers will never seriously look at small cars unless the price of gas remains consistently high (as in Europe). Last year when the price of gas went to $4 per gallon, sales of the Focus increased. While I am against a new government tax on gas to promote energy conservation, we do need sustained government programs to promote the sale of small fuel efficient vehicles.
Firstly, Ford does not currently make any profit on the current Focus. This is generally true for all small cars produced by the big three and explains why the big three have never been keen on the small car market until the increase in oil prices forced them to rethink their strategy.
Ford is counting on economies of scale to reduce the cost of the Focus by simultaneously launching the Focus in the US, Asia and Europe. However, launching global programs can be problematical. Extra coordination is required for ensuring tooling is the same, materials are consistent and all suppliers must work in tandem to ensure a smooth launch. Changes will also require more coordination. This will add cost and complexity to the launch. Ford management is also negotiating with the UAW to further reduce labor costs and benefits. These negotiations also involve introducing flexible manufacturing and work practises so that several models can be assembled on the same line.
The typical north American consumer will also need to be enticed to buy an electric Focus since they regularly like to buy larger vehicles such as SUV's and pick-ups instead. This would have been an easier sell with gas at $4 per gallon rather $2 per gallon as it is today. Ford will need to add features to up-sell the Focus as they do in Europe. But, the European version of the Focus is more expensive than the north American version. Europeans are also more used to driving smaller vehicles since the price of gas is substantially higher (due to government taxation) and the cost of living is higher.
Ford also needs to prove to consumers that their Focus can compete on the same level as the compacts from Toyota and Honda. They will have to show that they can produce at an equivalent or higher quality standard than the transplants.
While Ford has my vote as the most likely of the Detroit big three to survive, I remain skeptical of their new car strategy. Bottom line US consumers will never seriously look at small cars unless the price of gas remains consistently high (as in Europe). Last year when the price of gas went to $4 per gallon, sales of the Focus increased. While I am against a new government tax on gas to promote energy conservation, we do need sustained government programs to promote the sale of small fuel efficient vehicles.
Sunday, May 3, 2009
Chrysler Bankruptcy Filing Impacts Suppliers and Dealers
As many of you are aware Chrysler LLC filed for bankruptcy in New York on Friday, 5/1/09. Per the reports in the news, deals had been worked out with the UAW, Fiat and most of the creditors and bondholders in order avoid the chapter 11 filing. However, a small group of hedge funds held out for a better deal for their investors, and refused to accept the offer from Chrysler. Unable to resolve this issue before a government imposed deadline of 4/30/09, Chrysler had no choice but to file for bankruptcy.
This filing has several ramifications:
1. Chrysler will shutdown all its plants starting Monday, 5/4/09. They will not reopen until the company re-emerges from bankruptcy.
2. The supply base will be significantly impacted. Existing bills will be paid by the federal government. But the suppliers, who are already hurting due to falling sales, will now have to idle their plants until Chryslers plants re-start. The President stated on Friday that he wants a quick bankruptcy. However experts are stating that given the size of Chrysler and its issues a 30-60 day bankruptcy may not be feasible. With this loss of revenue there are likely to be many suppliers forced into bankruptcy. This could have a ripple effect on GM and Ford since they rely on many of the same suppliers for their parts also.
3. Dealers have inventory on hand at this time. The chapter 11 reorganization will force many of the dealerships to close as Chrysler consolidates its operations. Those dealers that are forced out of business will also sell inventory at fire sales prices depressing new car sales for the other OEM's.
4. Fiat will take a 20% stake in the re-organized Chrysler. They will contribute technology and new fuel efficient models to boost Chryslers sales. But this process will take at least 2 -3 years in order to transfer designs from Europe and launch the vehicles in North America.
Bottom line I am skeptical about the chances for Chrysler to emerge from Chapter 11 within 30-60 days. I think the issues that must be resolved have been over simplified. All I see is more pain to the automotive supply base before things start to turn around.
This filing has several ramifications:
1. Chrysler will shutdown all its plants starting Monday, 5/4/09. They will not reopen until the company re-emerges from bankruptcy.
2. The supply base will be significantly impacted. Existing bills will be paid by the federal government. But the suppliers, who are already hurting due to falling sales, will now have to idle their plants until Chryslers plants re-start. The President stated on Friday that he wants a quick bankruptcy. However experts are stating that given the size of Chrysler and its issues a 30-60 day bankruptcy may not be feasible. With this loss of revenue there are likely to be many suppliers forced into bankruptcy. This could have a ripple effect on GM and Ford since they rely on many of the same suppliers for their parts also.
3. Dealers have inventory on hand at this time. The chapter 11 reorganization will force many of the dealerships to close as Chrysler consolidates its operations. Those dealers that are forced out of business will also sell inventory at fire sales prices depressing new car sales for the other OEM's.
4. Fiat will take a 20% stake in the re-organized Chrysler. They will contribute technology and new fuel efficient models to boost Chryslers sales. But this process will take at least 2 -3 years in order to transfer designs from Europe and launch the vehicles in North America.
Bottom line I am skeptical about the chances for Chrysler to emerge from Chapter 11 within 30-60 days. I think the issues that must be resolved have been over simplified. All I see is more pain to the automotive supply base before things start to turn around.
Monday, April 27, 2009
Ford Appears Likely to Survive
I just read an article that appeared in the New York Times on Saturday, 4/25/09, about the latest quarterly financial results posted by Ford Motor Co.
Ford lost $1.4 billion and new car sales fell by 43% in the 1st quarter of 2009 and it burned through $3.7 billion of its cash. Even though Ford lost money, investors took the latest quarterly report as a good sign since Ford now appears unlikely to need government financial assistance. Unlike GM and Chrysler which are under close government supervision and may file for bankruptcy in a few weeks, Ford has started to distance itself through better financial management.
I must admit I was very skeptical when, 2 years ago right after he joined Ford as their new CEO, Allan Mulally leveraged all the factory assets of Ford. Through this action Ford obtained the cash that may help them survive through at least 2010 according to Patrick Archambault of Goldman Sachs. This has so far saved Ford from approaching the government for a bailout.
The rate at which Ford is burning through its cash is now less than half what it was a year ago. Ford management is counting on its new products to help pull it through the current situation.
Even though Ford may avoid bankruptcy, a possible chapter 11 filing at GM or Chrysler will have a hugh ripple effect on the automotive supply base. Ford relies on many of the same suppliers as GM and Chrysler. If these suppliers are forced into bankruptcy them they could hurt production at Ford if they fail to ship parts. Ford management is working with their supply base to track the situation and source parts to alternate suppliers if this becomes necessary. The government has already offered to step in and fund suppliers in order to keep them running. One concern I have is that even though $5 billion in aid funds have been promised this may not be enough to keep all the suppliers running until sales stabilize.
Another issue that threatens Ford is that GM and Chrysler will have to shutdown dealerships as they eliminate brands and downsize. As dealers close they will hold "fire" sales in order to clear inventory prior to liquidation. These sales will depress prices and will hurt Ford's sales. Some analysts are concerned that Ford may not have enough cash to withstand this slump in new car sales.
Despite these issues I remain bullish on Ford and expect them to weather this storm and emerge as a leaner company with some great fuel efficient vehicles.
Ford lost $1.4 billion and new car sales fell by 43% in the 1st quarter of 2009 and it burned through $3.7 billion of its cash. Even though Ford lost money, investors took the latest quarterly report as a good sign since Ford now appears unlikely to need government financial assistance. Unlike GM and Chrysler which are under close government supervision and may file for bankruptcy in a few weeks, Ford has started to distance itself through better financial management.
I must admit I was very skeptical when, 2 years ago right after he joined Ford as their new CEO, Allan Mulally leveraged all the factory assets of Ford. Through this action Ford obtained the cash that may help them survive through at least 2010 according to Patrick Archambault of Goldman Sachs. This has so far saved Ford from approaching the government for a bailout.
The rate at which Ford is burning through its cash is now less than half what it was a year ago. Ford management is counting on its new products to help pull it through the current situation.
Even though Ford may avoid bankruptcy, a possible chapter 11 filing at GM or Chrysler will have a hugh ripple effect on the automotive supply base. Ford relies on many of the same suppliers as GM and Chrysler. If these suppliers are forced into bankruptcy them they could hurt production at Ford if they fail to ship parts. Ford management is working with their supply base to track the situation and source parts to alternate suppliers if this becomes necessary. The government has already offered to step in and fund suppliers in order to keep them running. One concern I have is that even though $5 billion in aid funds have been promised this may not be enough to keep all the suppliers running until sales stabilize.
Another issue that threatens Ford is that GM and Chrysler will have to shutdown dealerships as they eliminate brands and downsize. As dealers close they will hold "fire" sales in order to clear inventory prior to liquidation. These sales will depress prices and will hurt Ford's sales. Some analysts are concerned that Ford may not have enough cash to withstand this slump in new car sales.
Despite these issues I remain bullish on Ford and expect them to weather this storm and emerge as a leaner company with some great fuel efficient vehicles.
Subscribe to:
Posts (Atom)
