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Why Does Mitt Hate Profit?

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[I posted substantially this post yesterday, but the BlogGods ate it along the way. So I’m reposting.]

Along with the deceitful attack on Italians who make better car company owners than GOP Private Equity types and the Lee Iacocca spin, Mitt has rolled out a radio version of attack on the auto bailout. From Greg Sargent, here’s part of the script:

Barack Obama says he saved the auto industry. But for who? Ohio, or China? Under President Obama, GM cut 15,000 American jobs. But they are planning to double the number of cars built in China — which means 15,000 more jobs for China.

And now comes word that Chrysler plans to start making jeeps in — you guessed it — China. What happened to the promises made to autoworkers in Toledo and throughout Ohio — the same hard-working men and women who were told that Obama’s auto bailout would help them?

The ad continues Mitt’s deceptive insinuation that GM and Chrysler aren’t also adding jobs in the US, which they are doing.

But it does something else. It takes a decidedly anti-profit stance.

You see, there are two reasons car companies are so gung-ho to enter (or re-enter, in the case of Jeep) the Chinese market. First, because it’s growing; when I was working in China, auto people considered the rising Chinese middle class to be 300 million–almost an entire US full of population. And most of them were just aspiring to buy their first car. That’s a whole lot of first time car buyers to sell to, as compared to US consumers, who are driving less and replacing their cars at a slower pace given more durable cars.

The other reason to go to China? Profit margins are bigger there than here. When I was in Shanghai in the mid-2000s, the profit margin on Buick Regals was about $2,000, as compared to the roughly $200 profit margin on a similar car here. The margins are closer now (because manufacturing in the US has gotten cheaper and in China has gotten more expensive), but China still offers good profit margins. Selling Buick Regals or Jeeps in China allows GM and Chrysler to accept lower margins on cars here.

By selling high margin cars in China, US companies can be more competitive here, meaning they will be able to expand sales and therefore production here, too.

All this is implicit in Sergio Marchionne’s response to Mitt’s ignorant rantings.

Together, we are working to establish a global enterprise and previously announced our intent to return Jeep production to China, the world’s largest auto market, in order to satisfy local market demand, which would not otherwise be accessible. Chrysler Group is interested in expanding the customer base for our award-winning Jeep vehicles, which can only be done by establishing local production. This will ultimately help bolster the Jeep brand,and solidify the resilience of U.S. jobs.

Marchionne notes 1) you can’t sell in China unless you build in China, 2) selling in China makes the Jeep brand stronger, 3) making the Jeep brand (and its profit margins) stronger makes it easier to keep up US production.

Marchionne’s implicit point should be where this discussion is heading: free trade hasn’t worked out to be fair trade. China–and Japan and Korea–still protect their markets, meaning if you want to sell there, you’ve got to make cars there.

Mitt has promised to get tough on China. But his series of auto ads have made no mention–not a peep!–of how he’ll reverse this practice and make it possible for Jeep to export cars made in Toledo. Indeed, when Obama launched a trade dispute over auto parts in September, Mitt scoffed at the effort (and ignored Obama’s decent and sustained effort launching trade disputes, one of which pertaining to specialty steel recently won at the WTO).

“The president may think that announcing new trade lawsuits less than two months before the election will distract from his record, but American businesses and workers struggling on an uneven playing field know better,” Mr. Romney said in a speech to the Hispanic Chamber of Commerce in Los Angeles.

Mitt Romney wants to attack American companies for going where profits are. And he’s doing so without discussing why that’s necessary.

That makes him neither a tough guy nor a good businessman.

Italian Automaker Brings about Chrysler Success after GOP Private Equity Failure

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I’ve been a bit tardy in responding to Mitt’s latest cynical ploy, to pretend that rather than expanding production and jobs in both OH and MI, Chrysler is outsourcing production to China.

The Detroit News’ David Shepardson has a good fact check on Mitt’s latest ad here. Greg Sargent rounds of OH papers mocking Mitt’s claims here.

But there’s an angle on Mitt’s claims that has been missed. His ad says,

Obama … sold Chrysler to Italians who are going to build Jeeps, in China.

As Shepardson notes, Chrysler used to build Jeeps in China for the Chinese market. Ford builds cars in China for the Chinese market. GM builds cars in China for the Chinese market (GM also exports Chinese-built subcompacts to Latin America). Chrysler’s return to the world’s largest car market is smart business, something any viable global brand needs to do.

If it’s a moral failing for Presidents to preside over private car companies trying to compete in China, then Mitt has a problem with St. Reagan, during whose Administration Jeep first made groundbreaking entries into the Chinese market.

And if Mitt has a problem with Chrysler (or Ford or GM) building cars in China to sell in China, then he had better prepare to get far tougher with China than he has threatened to do so far. China still slaps huge tariffs on cars made outside of the country, so to be viable in the world’s largest automotive market, you have to build in China. That is the crux of the argument American car companies (and Midwestern politicians) have been making for decades: while the US allows imports from all countries, Japan and Korea and now China make it very difficult to export to those countries. This is not fair trade.

But I’m most offended by Mitt’s insinuation that selling Chrysler to an Italian company–he doesn’t mention Fiat by name–was disloyal.

Recall Chrysler’s recent history. Chrysler’s most recent strong point was the early 2000s, when it succeeded in developing nifty (albeit gimmicky) cars with shortened development cycles (think PT Cruiser). But as Daimler took more control over Chrysler, it invested less in the brand. GOP Private Equity firm Cerberus bought its first 80% of the company in 2007 and picked up the rest in 2009.

Cerberus had no intention of bringing Chrysler back to its former strength. Rather, it wanted to strip out the finance side of the company (it was investing in GMAC at the same time) and sell off the rest. But with the impending financial crisis, it never managed to pull off the trick (though it did get a bank bailout in the very last days of the Bush Administration). Meanwhile, it virtually put the Chrysler model development on autopilot while it tried to find a way to cut its losses.

Thus, when it came time for bailouts, there didn’t seem much to bail out at Chrysler. Unlike GM, which really had started making a turnaround, Chrysler had no product in the pipeline to suggest it would be worth bailing out (though it did have a few super efficient factories in the US).

Choosing to bailout Chrysler was the most difficult decision Obama made during the auto bailout. I’m not even sure I would have chosen to bail it out. And it was difficult precisely because a bunch of Republican vulture capitalist types–people like former VP Dan Quayle and former Treasury Secretary John Snow–had stripped the company.

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In came Fiat and its Steve Jobs-like CEO Sergio Marchionne. Read more →

Do CEOs Really Matter?

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There’s a BusinessWeek report that confirms two things I’ve been arguing for a while: that Bob Nardelli will be ousted no matter what happens with Chrysler in the upcoming two weeks.

Chrysler CEO Robert Nardelli confirmed in a letter to employees today that he will likely be replaced as CEO of the automaker in the coming weeks as the company faces either an alliance with Italian automaker Fiat or a bankruptcy reorganization or liquidation. The company’s board, too, would be replaced, he said.

And that one of the reasons the Obama Administration treats the Fiat deal as a viable option for Chrysler is that they hope to put Sergio Marchionne, the head of Fiat, in charge of the merged company.

In Nardelli’s letter to employees, the former Home Depot CEO said a new board of directors will have the power to appoint a new CEO. “The majority of the directors will be independent (not employees of Chrysler or Fiat),” Mr. Nardelli wrote. He added that the board “will have the responsibility to appoint a chairman and select a CEO with Fiat’s concurrence.”

Executives close to Chrysler say that it is possible that Fiat CEO Sergio Marchionne will hold the title of CEO, similarly to the way Carlos Ghosn was CEO of both Renault and Nissan for a few years after he was granted the job at Renault. Renault has a controlling interest in Nissan, and had sent Ghosn to Nissan to turnaround the then-ailing Japanese automaker.

 Now, Marchionne is a darling of the Wall Street types because he managed to turn Fiat around. 

"The turnaround he steered at Fiat was just as miraculous as what Carlos Ghosn did at Nissan," says Tony Faria, business professor at the University of Windsor. "Fiat was in big difficulty, losing a lot of money. He had them in profitability in less than two years. The turnaround he steered was just magnificent."

Fiat–one of the oldest industrial businesses in Europe–was on the brink of bankruptcy when Marchionne was appointed CEO in 2004. Less than two years later, the maker of such brands as Ferrari, Alfa Romeo and Maserati returned to profitability as a world leader in environmentally friendly vehicles.

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