Ford to Richard Shelby: Suck. On. This.

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Ford points out that the manufacturers in Richard Shelby’s state all hopped on the SUV gravy train, too.

Throughout the 1990s and into this decade, we became increasingly dependent in the U.S. market on trucks and large SUVs, which were in heavy demand by consumers and generated large profits. Many of our competitors, both foreign and domestic, likewise followed market demand and added more truck and SUV products to their lineups.

How are those Honda Pilots made in Alabama doing, Shelby?

The Begs: Ford’s Political Requests

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I’m going to do a series of posts on what the automotive companies are asking for–and then I’ll do a summary (probably with questions some smart folks in Congress should ask). I’ll start with an interesting series of political requests Ford made. 

No CA-Specific CAFE Standard

This is cheeky. In its first political request, Ford basically takes on an issue dear to the Speaker.

First, Ford was proud to support stronger CAFE standards, and we are absolutely committed to meeting them. However, we urge Congress to maintain one economy-wide set of national standards on fuel economy. A patchwork of standards would place enormous financial and engineering burdens on manufacturers and have the effect of reducing consumer choice — all for little or no environmental benefit.

Of course, if I were Pelosi or Waxman, I’d turn around and say, "good, we’ll raise the national rates to the levels CA wants."

I’m not surprised Ford made this request–at the very least, it will spark discussions of why state-specific levels make it harder on auto makers to work efficiently. I am surprised that Ford led with this request, since it’s sure to piss a few people off. I guess Ford hasn’t given up its tin ear.

A Trade-In Incentive

Next, Ford asks for something that has been proposed around the blogosphere: a program, attached to the stimulus bill next year, offering incentives to consumers to trade up in terms of efficiency.

Second, in developing a stimulus bill to drive our country’s economic recovery, we ask Congress to consider incentives for consumers to trade in older vehicles and move to more fuel-efficient vehicles.

This makes sense, particularly for Ford, as it would create market demand for their cars, as they often now lead segments for efficiency. And it’d get consumers into car showrooms to buy.

Note that there’s no discussion of what happens to these trade-ins, though. That needs to be part of the equation, as no one wants these cars in the used car market.

Ongoing R&D Assistance

I’m not sure precisely which R&D incentive Ford is referring to here–but they want it to continue.

We also ask that continued R&D incentives be considered: the automobile industry spends $12 billion annually on research and development – more than any other industry.

I’m guessing this will be a totally uncontroversial request and will open discussions about what cool things the automotive industry is already doing on R&D.

Health Care, Health Care, Health Care

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Robert Ficano to Richard Shelby: Suck. On. This.

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Unless you’re from MI, you probably don’t know who Robert Ficano is. But as the Wayne County Executive, he’s one of the senior-most elected officials in the state (and a potential Democratic candidate for Governor in 2010). I guess he’s about had it with Richard Shelby’s bad-mouthing of American-brand SUVs, because Ficano has taken out radio ads in AL pressuring Shelby for being un-American in his opposition to the Big Two and a Half.

Congress wouldn’t turn its back on American veterans in need, yet that’s exactly what some Senators are about to do. In World War II, America faced its greatest challenge, three true blue American car companies stood up for our country in her hour of need: General Motors, Ford, and Chrysler were the arsenal of democracy that built the tanks, vehicles, and planes that helped our soldiers win.

We face a devastating economic crisis that threatens to destroy our American auto industry as Congress considers a loan package that will allow the car companies to stay in business, let us not forget the invaluable service they gave our nation.

One of every ten jobs in America is related to the US auto industry including thousands in Alabama. If GM, Ford, and Chrysler go out of business, millions of jobs would be lost. Southern suppliers that sell billions of dollars in parts to the auto companies would close. Call Senator Richard Shelby at 205-731-1384 and tell him to stand up for the car companies that still secure our freedom today. (Paid for by the Robert E. Ficano Committee, Wayne County, MI)

Apparently, Ficano started these ads during the first go-around with Congress; with the help of the Regional Chamber of Commerce in Wayne County, Ficano has expanded the ads to other states whose anti-union foreign automaker loving members of Congress want to bankrupt the American competition: in addition to Alabama, Tennesee and Kentucky (and DC). 

Sure, it’s probably not going to change many minds. But its time someone really started hitting Richard Shelby hard for his posturing on this–particularly since his beloved Japanese car companies’ sales slipped even more last month than Ford’s did (GM and Chrysler’s sales absolutely tanked, though).

Two and a Half Paths Diverged in the Woods

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When Mullaly refused to even consider taking a $1 dollar salary for the next year and then admitted that Ford didn’t need cash from Congress immediately, I knew this would happen.

But this week, as the automakers take a second run at Congress, hoping to persuade lawmakers to give them $25 billion in federal aid, their agendas are diverging as they contemplate futures as drastically different car companies.

Those differences will become clear as they deliver more detailed plans for how they would use that money not just to survive, but also to turn themselves around to be competitive in the long term.

That should make for a sharp contrast to the hearings two weeks ago, when the executives presented a united front, saying in lockstep that it was the credit crisis and weak economy, not their strategies, that had put them in dire straits.

The short version of what they’re asking for is as follows:

Ford: Ford will brag about all its recent improvements (including beating out even Honda on a recent list of safest vehicles), make some symbolic changes (including, hopefully, cutting Mulally’s pay), and simply ask that it have access to $7 billion credit if things remain bad when it would need that money, next summer or so.

Chrysler: Chrysler will beg Congress to help someone else buy it. I think it will be unsuccessful.

GM: GM will have to offer a much more comprehensive plan, because unlike Chrysler, Congress will refuse to let it fail. This NYT articles talks about closing Saturn dealers and selling Saturns through Buick/Pontiac/GMC dealers and postponing the payment to the UAW for it to pick up retiree healthcare.

I suspect that GM’s proposing the Saturn closures because those dealers would presumably be easier to back out of than the older Buick/Pontiac/GMC dealers (and there are fewer of them). GM might be thinking of rebranding the Saturn when it makes the move, since Saturns are basically now Opel cars; rebranding the line and moving it to new dealers ought to revitalize those older dealers, and give GM a way to ease out of those dying brands without giving up the market presence they have. And by rebranding, it would make it easier for GM to have people like Dan Neil proclaim GM to be his favorite car company. Read more →

The Big 2.5 on Main Street

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I’ve been talking about the bloat among the ranks of the American manufacturers’ car dealerships in just about every post I do on the auto crisis. My premise is two-fold. First, one of the big problems the Big Two and a Half have in restoring their brands to credibility–even though the quality of their cars now matches the Japanese–is that there are too many dealerships out there given the number of cars being sold. This means that dealers have been discounting for years, cheapening the cars and leading consumers to expect deep discounts every time they buy American. This has cut into profit.

Then there’s the recent credit problems that exactly parallel the credit problems of the country as a whole and the manufacturers themselves: Car dealers buy their wholesale every month using credit. So if they can’t get credit, they can’t get new cars to sell. And if they’re stuck paying interest on a bunch of big trucks they can’t sell (as happened in August), then they’re paying into a black hole.

Any return to profitability for the Big Two and a Half is going to have to be accompanied by a gradual decrease in the number of dealers. But this excellent profile shows how dealers are disappearing much more rapidly than that–and with them, thousands of jobs.

Top executives of the Big Three automakers are preparing to return to Washington this week with business plans they hope will lead to a federal bailout. But any government help will probably come too late for thousands of dealers like Mr. Thomas who sell American brands.

They have been struggling for years, as Detroit’s fortunes waned, but what remains of their sales is evaporating along with consumer confidence and credit.

The National Automobile Dealers Association predicts that roughly 900 of the nation’s 20,770 new-car dealers will go out of business this year, and automobile analysts say the number of failed dealerships could rise into the thousands next year.

The article puts a scale on the importance of dealerships in smaller towns for good-paying retail employment.

In October alone, 20,000 employees of auto dealerships lost their jobs nationwide, more than half of those who were newly unemployed in the retail trade, according to the Labor Department. Read more →

GM the “Failed Business Model” Pays Its Retiree Pensions; Exxon Doesn’t

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I mentioned the other day that Nancy and Harry had instructed the Big Two and a Half to explain how it will deal with its pension funds (and healthcare) going forward.

Include proposals to address the payment of health care and pension obligations;

That suggested an unspoken worry–that if GM went bankrupt, the Pension Benefit Guarantee Corporation–the Federal Government–would have to pick up those obligations to retirees. If it had to do so, it would overwhelm the PRGC.

But an NYT story reveals the degree to which Congress really wants GM to stay in business–because right now, GM’s pension fund is in pretty good shape (h/t Scarecrow).

G.M. appears to have enough money in the pension fund to pay its more than 400,000 retirees their benefits for many years — even with the markets swooning around it. That is largely because of the conservative way G.M. has managed the fund recently, and it explains why G.M. has not joined the long list of companies pressing Congress for pension relief.

But this glimmer of hope in a bleak auto landscape could change drastically, particularly if G.M. struggles along for a few more years, only to go bankrupt.

That’s because–at a time when the Bush Administration was advocating privatizing social security and moving money into stocks, GM was moving out of stocks.

The G.M. pension is viable today because of the company’s response to the firestorm at the beginning of this decade, said Nancy C. Everett, chief executive of G.M. Asset Management. The unit manages the company’s domestic and foreign pension funds, as well as other big pools of company money.

[snip]

At the time of the tech crash, most pension funds had invested heavily in stocks, and stocks lost billions of dollars in value. At the same time, interest rates fell to unusually low levels, causing a painful mismatch, because low rates make retirees’ benefits more expensive for pension funds to pay. G.M.’s pension fund finished 2002 with a shortfall of almost $20 billion, by far the biggest of any American company.

[snip]

The big mismatch of 2002 showed pension officials that stocks could produce more volatility than a mature pension fund like G.M.’s could bear. The company could not wait for stock prices to come back up eventually, because it had 400,000 retirees waiting to be paid about $7 billion every year.

[snip]

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Richard Shelby Wants To Place US Government In Bankruptcy And Eliminate Military Pensions And Benefits

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Seriously. He must be saying that, right?

Because here is what Shelby (and many other belligerent Republican union busters) has been spewing in every microphone and videocam he can get his demented Chesire cat grin in front of:

"I think a lot of it will be life support," Shelby, R-Ala., said. "I believe their best option would be some type of Chapter 11 bankruptcy … These leaders have been failures and they need to go."

Let me draw an analogy that will drive Richard Shelby and his fellow mouth breathing bottom feeders nuts. What about military pensions and benefits after retirement? Well, come on, what about it blowhards that are so quick to call for trashing the pensions and benefits of the auto workers, are you also arguing to trash and burn the same for those in the military???

Because, there is a lot of yammering about how the CEOs of the auto companies made bad decisions and are upside down financially; and, based on that, group think that the auto workers ought to be taken to the woodshed. How is that any different than the employer of the military? Their employer, the US Government, makes the auto company executives look like the most brilliant and responsible financial minds on the planet in comparison. Talk about yer upside down and bad management.

Who has been more of a failure in leadership, the auto executives or the Bush/Cheney Administration and their Republican toadie enablers like Richard Shelby and friends?

And speaking about people who take early retirements; jeebus, a lot of military people are retired and taking full benefits at 40-45 years old. Sorry. How do we afford this if we can’t afford a miniscule bridge loan for American auto manufacturers so they can save their auto workers?

You want to bankrupt GM? Then bankrupt the US too; they need the "reorganization" a hell of a lot more.

This is what Richard Shelby and his ilk are advising. It must be. Because, otherwise, they would just be mindless, hypocritical, bloviating bags of hot foul air.

I think we know the real answer.

Homework Assignment for the Big Two and a Half: Solve Retirement and Health Care

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Nancy and Harry wrote Mulally, Wagoner, and Nardelli with instructions on how they should re-do their homework assignment, to be turned in on December 2.

Congress is prepared to consider additional legislation that would give the assistance you seek, provided that you submit a credible restructuring plan that results in a viable industry, with quality jobs, and economic opportunity for the 21st century while protecting taxpayer investments.

In order for Congress to act in a timely manner, this plan must be presented to Congress by December 2nd, specifically to Senate Banking Committee Chairman Christopher Dodd and Financial Services Committee Chairman Barney Frank.

Most of their instructions are what you’d expect: guarantees of transparency and guarantees that taxpayers won’t get screwed if the companies go under.

Provide a forthright, documented assessment of the auto companies’ current operating cash position, short-term liquidity needs to continue operations as a going-concern, and how they will meet the financing needs associated with the plan to ensure the companies’ long-term viability as they retool for the future;

Provide varying estimates of the terms of the loan requested with varying assumptions including that of automobile sales at current rates, at slightly improved rates, and at worse rates;

Provide for specific measures designed to ensure transparency and accountability, including regular reporting to, and information-sharing with, any federal government oversight mechanisms established to safeguard taxpayer investments;

Protect taxpayers by granting the most senior status for any government loans provided, ensuring that taxpayers get paid back first;

Assure that taxpayers benefit as corporate conditions improve and shareholder value increases through the provision of warrants or other mechanisms;

Bar the payment of dividends and excessive executive compensation, including bonuses and golden parachutes by companies receiving taxpayer assistance;

[snip]

Require that government loans be immediately callable if long-term plan benchmarks are not met

There’s the predictable requirement that the car companies meet their CAFE obligations.

Demonstrate the auto companies’ ability to achieve the fuel efficiency requirements set forth in the Energy Independence and Security Act of 2007, and become a long-term global leader in the production of energy-efficient advanced technology vehicles;

And then there’s this requirement, which they don’t really explain, but which speaks volumes.

Include proposals to address the payment of health care and pension obligations; 

Ah, the payment of health care and pension obligations. It seems we’ve been talking about those things a bit around here. Read more →

A Gas Tax Instead of CAFE

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I’m working on a post describing what I think the Big Two and a Half ought to propose on December 2 when they drive their hybrids to DC (in lieu of flying) to beg for money again. As part of that, I will suggest that they ask Congress to levy a stiff gas tax. But since I am getting into more and more discussions with environmentalists who want any bailout to be tied to increased CAFE standards, I’m going to lay out why I think a tax is much better than increased CAFE standards for everyone.

Why CAFE Standards Suck at Achieving their Goal

I’m going to start with the assumption that the goal of CAFE standards is to force auto manufacturers to build more environmentally efficient cars (arguably that’s not what it was originally intended to do). It does so with brute force regulation that does not, at the same time, change the actual market-wide interest (or not) in environmental efficiency.

Until gas reached $4 plus this summer (and things are returning–though haven’t entirely returned–to where they were now that gas has gotten cheaper again), people calculated "energy efficiency" into their considerations when buying a car in terms of cost of ownership–that is, as one factor among others: how much the car cost, how much monthly loan payments would be, how much maintenance cost, how much insurance cost, and how much gas to run the car cost (this is reflected by the stickers dealers use to sell their cars, which usually describe efficiency both in terms of MPG but also in terms of year gas costs). For most people, efficiency is still a cost issue, and not a benefit per se.

Now consider how that will factor into the choice of a vehicle. For a lot of people, all those cost calculations will be less important than perceived safety or utility arguments. So if having something that feels like a tank is really important to you, you’re going to buy something that feels like a tank and only then consider how much it’ll cost you to run your psuedo-tank. The cost calculations will weigh, overall, much less in your consideration.

But if cost of ownership is your primary consideration, then you’re going to look at the cheapest cars that meet your basic needs, and pick which one is actually cheapest to run. Read more →

Prepackaged Bankruptcy: Be Careful of What You Wish For

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Ari links to a Barry Ritholtz post reporting that President-elect Obama is considering a pre-packaged bankruptcy for the Big Two and a Half (presumably just for the one and a half that are GM and Chrysler, as Ford is not yet at that point). Ritholtz (who undoubtedly knows more about the economy than me) declares this plan a winner.

Smart:

[snip]

This remains the best option IMO for Detroit . . .

Barry? President-Elect Barry? Be careful of what you wish for.

Bankruptcy is a positively genius idea, except for the ways it isn’t a genius idea.

Bankruptcy Would Allow the Big Two and Half to Renege on Pension Claims

The first thing bankruptcy would allow the Big Two and a Half to do is get out of their overwhelming obligation to pay retirees’ pensions. That would, instantly, eliminate one of the biggest remaining competitive disadvantages between American manufacturers and the Japanese and would therefore make a lot of unprofitable car lines profitable, almost immediately. 

Voila! GM can now compete with the Camry.

However, the Pension Benefit Guarantee Company would then pick up those pension obligations. Rather than giving the auto companies the money, you’d be paying it directly to the retirees. But taxpayers would still pay.

Bankruptcy Would Allow the Big Two and a Half to Break Dealer Contracts

A far more important advantage–from a competitive/restructuring standpoint–is that it would allow the manufacturers to break their contracts with a bunch of dealers. This would allow the manufacturers to shed dealers almost immediately, with the salutary effect that dealers in the same town wouldn’t be competing for the same customer, and therefore would be less tempted to make big cuts in the price of the car to keep a customer. This would, in turn, have the effect of restoring much of the value of the brand that is currently lost in the never-ending festival of rebates. And it would raise the profit on every car sold.

Furthermore, by breaking dealer contracts, the Big Two and a Half could change the profit model of dealers, such that they expect a one-time profit to sell the car itself, rather than a lifetime of service opportunities for each client. The Big Two and a Half are going to have to do this anyway to move away from the combustion engine (though that change is far down the road). So why not make that change now–move away from the entire dealer-network concept of marketing a car?

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