Last week’s big business story was the bankruptcy filing by General Motors. The Federal government will be taking the lion’s share of the reconstituted entity once it emerges from bankruptcy court. In exchange for the billions that the Feds have already loaned GM, plus providing the debtor-in-possession financing, the government will have 60% of the equity. The UAW will have about 20%, and the secured bondholders will have the balance.
Just as in the case of Chrysler, the secured bondholders are getting the short end of the stick. Under normal bankruptcy law, the secured creditors usually get the majority of the equity in the company that emerges. In the case of these two car companies, the unsecured health insurance and pension claims of the union have been moved up in seniority, compared to the bondholders. Of course, this wouldn’t have anything to do with the fact that the UAW has supported Democratic candidates almost exclusively, with resources of both money and manpower. No, no, there’s no payola at work here.
What I found interesting about the deal was the government’s protests that they did not want to own a part of General Motors, let alone the majority stake. Over and over, spokesmen for the administration kept claiming that they did not want to be responsible for managing operations at a car company.
That reticence confuses me a little bit. After all, these are the same guys who are proposing to take control of the entire US health care sector in the interest of providing universal coverage. One out of every six dollars in this country is spent on health care, but the administration is not being shy about planning a massive restructuring. That restructuring will include a government owned health insurance fund that will compete directly with private health insurance companies.
Or how about energy, another major industrial area of the economy? The Obama administration is putting the finishing touches on their plan to completely restructure how electricity is generated and distributed in this country. Those plans include bankrupting the entire coal mining industry, and making obsolete any coal-fired power plants.
These guys aren’t shy about directly injecting government control over huge swaths of what is now private industry. The outlier is the automotive industry. For some reason, they don’t want to be in charge of that.
Just everything else.
Showing posts with label automobiles. Show all posts
Showing posts with label automobiles. Show all posts
Monday, June 8, 2009
Thursday, May 21, 2009
Car Wars, Part III
In my previous posts regarding the Obama administration’s new automotive fuel economy standards, I have intimated why I do not think mandating a huge increase in mileage is a workable idea. In this post I want to counter one of the arguments that has been raised in favor of the idea.
I’m talking about the “national standard” argument. Basically, this argument goes that it is better that we now have a new federal standard, as opposed to a “patchwork” of different fuel efficiency standards in various areas of the country. With a single standard, manufacturers can focus all of their engineering efforts on meeting the Federal goals, rather than trying to develop different cars for different states.
This argument is crap. It’s hogwash. No, it’s hogwash on steroids.
A little history is in order. A few years back, California announced that in the interest of controlling pollution from automobiles, the state was going to come out with a mileage standard for cars sold in California. This mileage standard was considerably in excess of Federal standards at the time.
The car companies sued to halt this action, arguing that mileage standards were the business of the Federal government. The Bush administration agreed with them. What the car companies really objected to was that the new California mileage rules would force them to develop cars that few people wanted to buy, and abandon vehicles that people did want to buy. Since the California market is so large, you can’t afford not participate in it. A classic Catch 22: they don’t want to meet the California standard, but they can’t afford to give up the California market.
But the car companies could have chosen to embrace the California standards. And the mix of cars developed for the strictest mileage standards in the country would meet the requirements of every other region as well.
Fast forward to the present day. The Obama administration has preempted the California attempt to impose higher fuel economy. How did they do it? By adopting the California standard!
Now, call me crazy, but I don’t think there is much preemption in capitulation.
The Obama administration has basically turned over control of the fortunes of a large, strategically important industry to the pollution control bureaucrats of a single state.
It may be a new Federal standard, but these actions are a betrayal of the Federal system.
I’m talking about the “national standard” argument. Basically, this argument goes that it is better that we now have a new federal standard, as opposed to a “patchwork” of different fuel efficiency standards in various areas of the country. With a single standard, manufacturers can focus all of their engineering efforts on meeting the Federal goals, rather than trying to develop different cars for different states.
This argument is crap. It’s hogwash. No, it’s hogwash on steroids.
A little history is in order. A few years back, California announced that in the interest of controlling pollution from automobiles, the state was going to come out with a mileage standard for cars sold in California. This mileage standard was considerably in excess of Federal standards at the time.
The car companies sued to halt this action, arguing that mileage standards were the business of the Federal government. The Bush administration agreed with them. What the car companies really objected to was that the new California mileage rules would force them to develop cars that few people wanted to buy, and abandon vehicles that people did want to buy. Since the California market is so large, you can’t afford not participate in it. A classic Catch 22: they don’t want to meet the California standard, but they can’t afford to give up the California market.
But the car companies could have chosen to embrace the California standards. And the mix of cars developed for the strictest mileage standards in the country would meet the requirements of every other region as well.
Fast forward to the present day. The Obama administration has preempted the California attempt to impose higher fuel economy. How did they do it? By adopting the California standard!
Now, call me crazy, but I don’t think there is much preemption in capitulation.
The Obama administration has basically turned over control of the fortunes of a large, strategically important industry to the pollution control bureaucrats of a single state.
It may be a new Federal standard, but these actions are a betrayal of the Federal system.
Tuesday, May 19, 2009
Car Wars
I have been hearing on the news today about the new deal to raise automotive fuel efficiency standards. The average passenger car mileage will increase from the current 27.5 miles per gallon to 35.5 miles per gallon in 2016. From the news coverage I’ve seen so far, it is not clear if that 35.5 mpg figure also applies to light trucks. Last year Congress passed a law requiring light trucks to hit fuel efficiency standards of 27.5 mpg by 2020, but that is now superceded by this new EPA rule.
For car makers, fuel efficiency is governed by a concept known by the acronym CAFÉ: Corporate Average Fuel Efficiency. The concept is pretty simple. The average fuel efficiency of all of the cars a manufacturer sells has to hit the government’s target. If you sell one Ford Fusion (26.5 mpg) and one Ford Fusion Hybrid (38.5 mpg), your CAFÉ rating is 32.5 mpg.
If you are Ford Motor, and you want to sell a muscle car like a Mustang (22 mpg) you have to sell another car that gets 49 miles to the gallon to hit the new standard. The latest version of the Toyota Prius only gets 44 mpg, so even that would have to increase by 11% to average out with a Mustang.
The new fuel efficiency standards represent a 30% increase over a seven year time period. To hit these targets, what all of the car companies are going to have to do is predictable. Cars are going to get (much) smaller, lighter, and less powerful. They are also going to become much more expensive.
A lot more cars are going to be hybrids. Since every hybrid has dual drive systems, one gas and one electric, there are a lot more components per car than a standard powertrain. More components, more cost.
For cars with more powerful engines, the prices will also go up. Why? Well, how else can the car companies convince you to buy a car that would lose a collision with a dog, when what you really want is a big honkin’ pickup truck? After all, the evidence of the marketplace is clear. Given a choice, Americans like to drive SUV’s and pickup trucks. In 2007, the top three best selling vehicles in North America were all full size trucks.
In the news coverage so far, everyone has been all smiley and happy, singing kumbaya over how great this is. So far, nobody has bothered to ask any automotive design engineers what they think about this. Those poor bastards are probably sitting in bars, trying to drink themselves into a catatonic stupor.
Tomorrow morning, they are going to have to wake up with a hangover, go in to work, and start trying to figure out how to retool 80% of the industry capacity to build small cars on lines configured to make big trucks and SUV’s. They have to do this during a major recession, with forecasted sales volume at 60% or less of what is was just a couple of years ago. And, oh yeah, the head of California’s pollution control board announced plans today to start work on the next major ratcheting up of fuel efficiency standards.
Work in the auto industry? I’d rather take on a career juggling chain saws. Flaming chain saws.
For car makers, fuel efficiency is governed by a concept known by the acronym CAFÉ: Corporate Average Fuel Efficiency. The concept is pretty simple. The average fuel efficiency of all of the cars a manufacturer sells has to hit the government’s target. If you sell one Ford Fusion (26.5 mpg) and one Ford Fusion Hybrid (38.5 mpg), your CAFÉ rating is 32.5 mpg.
If you are Ford Motor, and you want to sell a muscle car like a Mustang (22 mpg) you have to sell another car that gets 49 miles to the gallon to hit the new standard. The latest version of the Toyota Prius only gets 44 mpg, so even that would have to increase by 11% to average out with a Mustang.
The new fuel efficiency standards represent a 30% increase over a seven year time period. To hit these targets, what all of the car companies are going to have to do is predictable. Cars are going to get (much) smaller, lighter, and less powerful. They are also going to become much more expensive.
A lot more cars are going to be hybrids. Since every hybrid has dual drive systems, one gas and one electric, there are a lot more components per car than a standard powertrain. More components, more cost.
For cars with more powerful engines, the prices will also go up. Why? Well, how else can the car companies convince you to buy a car that would lose a collision with a dog, when what you really want is a big honkin’ pickup truck? After all, the evidence of the marketplace is clear. Given a choice, Americans like to drive SUV’s and pickup trucks. In 2007, the top three best selling vehicles in North America were all full size trucks.
In the news coverage so far, everyone has been all smiley and happy, singing kumbaya over how great this is. So far, nobody has bothered to ask any automotive design engineers what they think about this. Those poor bastards are probably sitting in bars, trying to drink themselves into a catatonic stupor.
Tomorrow morning, they are going to have to wake up with a hangover, go in to work, and start trying to figure out how to retool 80% of the industry capacity to build small cars on lines configured to make big trucks and SUV’s. They have to do this during a major recession, with forecasted sales volume at 60% or less of what is was just a couple of years ago. And, oh yeah, the head of California’s pollution control board announced plans today to start work on the next major ratcheting up of fuel efficiency standards.
Work in the auto industry? I’d rather take on a career juggling chain saws. Flaming chain saws.
Monday, May 4, 2009
Mystery of the Week
The big business story this last week was Chrysler Corporation filing for Chapter 11 bankruptcy. The goal is to have a quick, “surgical” bankruptcy, and emerge from court in a matter of weeks, not months.
When they come out of Chapter 11, the rough outline of the ownership structure will be the UAW holding about 50%, the bondholders holding about 10%, Italy’s Gruppo Fiat having up to a 35% stake, and the US government holding the remainder.
Here’s my question: What is Fiat doing for their share of the equity? Two things Fiat isn’t doing is ponying up any cash up front, or guaranteeing any of Chrysler’s existing debt.
I haven’t researched the deal very deeply. But on the surface it looks like Fiat will pick up a big share of the reconstituted Chrysler in exchange for—nothing!
Nice work if you can get it.
When they come out of Chapter 11, the rough outline of the ownership structure will be the UAW holding about 50%, the bondholders holding about 10%, Italy’s Gruppo Fiat having up to a 35% stake, and the US government holding the remainder.
Here’s my question: What is Fiat doing for their share of the equity? Two things Fiat isn’t doing is ponying up any cash up front, or guaranteeing any of Chrysler’s existing debt.
I haven’t researched the deal very deeply. But on the surface it looks like Fiat will pick up a big share of the reconstituted Chrysler in exchange for—nothing!
Nice work if you can get it.
Wednesday, December 17, 2008
Closing Down
Chrysler has announced that starting tomorrow, they are closing all thirty of their manufacturing sites for a month. This is being billed as a cash conserving move on their part. This is being treated as a major news story, getting coverage on the networks and all the major newspapers. Of course, I have a reaction to this story. Ready? Wait for it.
Big, fat, hairy deal. Do they want us to think that this is a last ditch effort to save the company, because they didn't get their Federal bailout check?
My company shut down operations for the entire week of Thanksgiving. We came back to work on December 1, worked production until December 9, then closed up and sent the production associates home until January 5. Our maintenance crews are going home at the end of this week, and they'll be off for two weeks. So between November and December, we've taken four weeks off, just like Chrysler. We're doing this because orders are down, and you cannot keep building product when your customers aren't buying, just like Chrysler.
The difference is that we didn't issue a press release just because we are closing down for inventory reduction at the end of the year. We would rather be running production, but in today's environment, it is just a sound business decision, to cut production to balance inventories. You don't see us threatening the economy of Tennesse with collapse if we don't get a bailout.
In their campaign to get hold of Federal bailout money, the domestic car companies and the UAW have consistently presented the worst case scenario to support their claim on Federal money. "If you don't give us $30 billion, RIGHT NOW, we are going bankrupt, one out of every five Americans will be unemployed, and a new Great Depression will sweep the country."
It is the industrial equivalent of extortion. And it's getting old.
Big, fat, hairy deal. Do they want us to think that this is a last ditch effort to save the company, because they didn't get their Federal bailout check?
My company shut down operations for the entire week of Thanksgiving. We came back to work on December 1, worked production until December 9, then closed up and sent the production associates home until January 5. Our maintenance crews are going home at the end of this week, and they'll be off for two weeks. So between November and December, we've taken four weeks off, just like Chrysler. We're doing this because orders are down, and you cannot keep building product when your customers aren't buying, just like Chrysler.
The difference is that we didn't issue a press release just because we are closing down for inventory reduction at the end of the year. We would rather be running production, but in today's environment, it is just a sound business decision, to cut production to balance inventories. You don't see us threatening the economy of Tennesse with collapse if we don't get a bailout.
In their campaign to get hold of Federal bailout money, the domestic car companies and the UAW have consistently presented the worst case scenario to support their claim on Federal money. "If you don't give us $30 billion, RIGHT NOW, we are going bankrupt, one out of every five Americans will be unemployed, and a new Great Depression will sweep the country."
It is the industrial equivalent of extortion. And it's getting old.
Sunday, December 7, 2008
The 5% Solution
As part of the news coverage concerning the Federal bailout of the Big 3 domestic automakers, I have seen stories about how the president of the United Auto Workers, Ron Gettelfinger, has been meeting with other leaders of the union to discuss how labor is going to have to put some cost saving ideas on the table to help the Big 3 avoid bankruptcy. Obviously, it is the union's interest to avoid a Chapter 11 filing, because a bankruptcy trustee could unilaterally make changes to union contracts to preserve the value of the business for the creditors. It's better to volunteer givebacks before they are imposed upon you.
First and foremost should be the Jobs Bank. That is the part of the contract that says laid off UAW workers get to receive 95% of their hourly pay and full benefits while waiting for another job position to open up. Since the domestic manufacturers have been cutting headcount for years, the new job positions never do open up. The UAW members merely collect full wages and benefits, while doing no work for the company. The Jobs Bank has been bleeding the car companies for years now. The union says that the Jobs Bank is not that much of a problem, since there are only about 3500 employees currently in the program.
Only 3500! Wages and benefits for the average Big 3 autoworker are $75 per hour (compared to $45 per hour for Japanese transplants like Toyota and Honda). Simple math tells us that $75/hour times 1800 hours/year time 3500 equals $472 million dollars a year in potential savings. Now I've gotten kind of numb from listening to all the big numbers thrown from all of the different Federal bailouts so far this year, but $472 million sounds like a lot of money to me.
But I've got another idea for changing the UAW contract with the domestic automakers. This won't help stave off bankruptcy in the short term, but in the long run could help them regain some of their lost competitiveness. I call it the 5% solution.
The concept is simple, change the contract to allow management to fire up to 5% of the UAW workers every year, no questions asked. That means no seniority, no grievances filed, no arbitration. Management would have to follow Federal law, which prevents firing people based on their membership in a protected class (race, gender, age, etc.). Other than that, pull whoever you want and give them the boot. Management would not be required to exercise this right, they would merely have the option.
In Right to Work states, employment law features a doctrine known as employment at will. Employment at will assumes that the work relationship is mutually agreed upon, and that either party has reciprical rights to terminate that relationship at any time. Simply put, you can tell the boss to take this job and shove it. The boss can give you the boot. All I'm proposing is to apply this doctrine to the UAW contracts, subject to a limit of 5%.
Consider the effect this change would have. As things stand now, to terminate a union worker requires cause, and proving cause requires evidence that will stand up in a legal proceeding. Being lazy and inefficient doesn't qualify as just cause. But if you could fire 5% without having to show cause, think about the impact that would have on the organization.
You could let the maintenance worker go who has a lot of seniority but can't fix equipment, and keep the newer guy who can actually keep the machines running. Or how about the stock handler who has spent his years finding the best places to hide, and always shows up five minutes after he has been paged. Or the assembler who sends parts with a quality problem down the line instead of raising the flag about the issue. "Not my problem" the assembler says. Think about what it would do to efficiency to get rid of the shirkers and malingerers who drag down the whole team.
Management would not even have to use the option for it to have a salutary effect on the organization. Whe they know they can be fired, almost everyone will hustle harder to impress hte boss. The worst will pick up the pace significantly, and even the best will put out a little extra effort. When they see the bar being raised, employees will be more focused throughout the organization.
Some will complain that my idea will mean the end of job security, and will shift the balance of power away from labor and deciviely towards management. Well, right now the industrial workers with the most contractual rights on job security are the UAW workers. That's what the Jobs Bank was all about. But you have to ask yourself: How much job security do you have if your employer is on the brink of bankruptcy?
The only real job security is when the company is winning in the marketplace. It's time for a change in how the unions do business.
First and foremost should be the Jobs Bank. That is the part of the contract that says laid off UAW workers get to receive 95% of their hourly pay and full benefits while waiting for another job position to open up. Since the domestic manufacturers have been cutting headcount for years, the new job positions never do open up. The UAW members merely collect full wages and benefits, while doing no work for the company. The Jobs Bank has been bleeding the car companies for years now. The union says that the Jobs Bank is not that much of a problem, since there are only about 3500 employees currently in the program.
Only 3500! Wages and benefits for the average Big 3 autoworker are $75 per hour (compared to $45 per hour for Japanese transplants like Toyota and Honda). Simple math tells us that $75/hour times 1800 hours/year time 3500 equals $472 million dollars a year in potential savings. Now I've gotten kind of numb from listening to all the big numbers thrown from all of the different Federal bailouts so far this year, but $472 million sounds like a lot of money to me.
But I've got another idea for changing the UAW contract with the domestic automakers. This won't help stave off bankruptcy in the short term, but in the long run could help them regain some of their lost competitiveness. I call it the 5% solution.
The concept is simple, change the contract to allow management to fire up to 5% of the UAW workers every year, no questions asked. That means no seniority, no grievances filed, no arbitration. Management would have to follow Federal law, which prevents firing people based on their membership in a protected class (race, gender, age, etc.). Other than that, pull whoever you want and give them the boot. Management would not be required to exercise this right, they would merely have the option.
In Right to Work states, employment law features a doctrine known as employment at will. Employment at will assumes that the work relationship is mutually agreed upon, and that either party has reciprical rights to terminate that relationship at any time. Simply put, you can tell the boss to take this job and shove it. The boss can give you the boot. All I'm proposing is to apply this doctrine to the UAW contracts, subject to a limit of 5%.
Consider the effect this change would have. As things stand now, to terminate a union worker requires cause, and proving cause requires evidence that will stand up in a legal proceeding. Being lazy and inefficient doesn't qualify as just cause. But if you could fire 5% without having to show cause, think about the impact that would have on the organization.
You could let the maintenance worker go who has a lot of seniority but can't fix equipment, and keep the newer guy who can actually keep the machines running. Or how about the stock handler who has spent his years finding the best places to hide, and always shows up five minutes after he has been paged. Or the assembler who sends parts with a quality problem down the line instead of raising the flag about the issue. "Not my problem" the assembler says. Think about what it would do to efficiency to get rid of the shirkers and malingerers who drag down the whole team.
Management would not even have to use the option for it to have a salutary effect on the organization. Whe they know they can be fired, almost everyone will hustle harder to impress hte boss. The worst will pick up the pace significantly, and even the best will put out a little extra effort. When they see the bar being raised, employees will be more focused throughout the organization.
Some will complain that my idea will mean the end of job security, and will shift the balance of power away from labor and deciviely towards management. Well, right now the industrial workers with the most contractual rights on job security are the UAW workers. That's what the Jobs Bank was all about. But you have to ask yourself: How much job security do you have if your employer is on the brink of bankruptcy?
The only real job security is when the company is winning in the marketplace. It's time for a change in how the unions do business.
Monday, November 17, 2008
Buzzing with Excitement
Since Congress passed the $700 billion bailout authorization called TARP (Troubled Asset Relief Program) in October, the predictable rush to the trough has occurred. What I didn't anticipate, however, was how fast other players than banks would get their hands out for a share of Federal largesse.
Originally sold as a plan to buy up illiquid mortgages and mortgage backed securities, TARP quickly morphed into direct equity injections into major banks. Seeing how easy it was, insurance company AIG bellied up to the bar for a second round, having already received an $80 billion Federal loan.
Not to be outdone, the cities of Philidelphia, Atlanta, and Phoenix sent a letter to Treasury Secretary Paulson, asserting their rightful claim to a Federal handout. San Jose, the home of Silicon Valley, is waiting to see how that is handled before submitting their request for $15 billion.
This was closely followed by the domestic automotive manufacturers. Not satisfied with the first $25 billion in loan guarantees they got as a separate line item in the TARP authorization, Ford, Chysler, GM are threatening economic armageddon if they do not get at least another $25 billion.
This morning a group of automotive supplier companies applied for their fair share of the bailout money. In a strange way, this latest request almost makes sense. The big 3 car companies are threatening to take their supplier base down with them if they have to declare bankruptcy. The auto suppliers are just trying to cut out the middleman, getting the money directly from the Treasury instead of getting it from the car companies.
I guess I shouldn't be surprised with how fast players far removed from the financial industry are rushing in to get a chunk of the $700 billion TARP bailout fund. When you've got that big a honeypot, you're going to pull in a lot of flies.
Originally sold as a plan to buy up illiquid mortgages and mortgage backed securities, TARP quickly morphed into direct equity injections into major banks. Seeing how easy it was, insurance company AIG bellied up to the bar for a second round, having already received an $80 billion Federal loan.
Not to be outdone, the cities of Philidelphia, Atlanta, and Phoenix sent a letter to Treasury Secretary Paulson, asserting their rightful claim to a Federal handout. San Jose, the home of Silicon Valley, is waiting to see how that is handled before submitting their request for $15 billion.
This was closely followed by the domestic automotive manufacturers. Not satisfied with the first $25 billion in loan guarantees they got as a separate line item in the TARP authorization, Ford, Chysler, GM are threatening economic armageddon if they do not get at least another $25 billion.
This morning a group of automotive supplier companies applied for their fair share of the bailout money. In a strange way, this latest request almost makes sense. The big 3 car companies are threatening to take their supplier base down with them if they have to declare bankruptcy. The auto suppliers are just trying to cut out the middleman, getting the money directly from the Treasury instead of getting it from the car companies.
I guess I shouldn't be surprised with how fast players far removed from the financial industry are rushing in to get a chunk of the $700 billion TARP bailout fund. When you've got that big a honeypot, you're going to pull in a lot of flies.
Sunday, November 9, 2008
Bailout Nation
Ford and General Motors are looking for $50 billion in loans from the Federal government to keep their operations going. I should say another $50 billion, because they already got $25 billion earmarked for them when the $700 billion financial bailout package passed.
Speaker of the House Nancy Pelosi and Senate Majority leader Harry Reid issued a joint statement last week in favor of handing more taxpayer cash to the domestic carmakers. Rahm Emmanuel, chief of staff designee for President-elect Barack Obama, weighed in on the side of the increased bailout this weekend. I guess that this means the fix is in.
Still, I’m not convinced that a good case has been made for bailing out the domestic car companies. Not that I do not believe that bankruptcy is a real possibility for the car companies. GM alone burned through $6 billion in cash during the last three months. If they continue at that rate, they will run out of cash sometime next year.
But bankruptcy isn’t the end of the road. They can use Chapter 11 of the bankruptcy code to continue to operate while they reorganize. This is what all of the major airlines except Southwest and American have done, and they all managed to stay in the air while going through the process. If the airlines can do it, why can’t the auto makers?
A Chapter 11 filing would give them a chance to get out from under their UAW contracts. These are the contracts that require the car companies to pay laid off workers 95% of their base wage (and 100% of their benefits), even though those workers and actually doing any work.
My concern is that, even with the government loans they are seeking, GM and Ford are only staving off the inevitable. Without structural changes to how they do business, like dropping the UAW contracts, what’s to keep them from coming back to the taxpayers in another year or two, asking for good money to be thrown after bad?
Speaker of the House Nancy Pelosi and Senate Majority leader Harry Reid issued a joint statement last week in favor of handing more taxpayer cash to the domestic carmakers. Rahm Emmanuel, chief of staff designee for President-elect Barack Obama, weighed in on the side of the increased bailout this weekend. I guess that this means the fix is in.
Still, I’m not convinced that a good case has been made for bailing out the domestic car companies. Not that I do not believe that bankruptcy is a real possibility for the car companies. GM alone burned through $6 billion in cash during the last three months. If they continue at that rate, they will run out of cash sometime next year.
But bankruptcy isn’t the end of the road. They can use Chapter 11 of the bankruptcy code to continue to operate while they reorganize. This is what all of the major airlines except Southwest and American have done, and they all managed to stay in the air while going through the process. If the airlines can do it, why can’t the auto makers?
A Chapter 11 filing would give them a chance to get out from under their UAW contracts. These are the contracts that require the car companies to pay laid off workers 95% of their base wage (and 100% of their benefits), even though those workers and actually doing any work.
My concern is that, even with the government loans they are seeking, GM and Ford are only staving off the inevitable. Without structural changes to how they do business, like dropping the UAW contracts, what’s to keep them from coming back to the taxpayers in another year or two, asking for good money to be thrown after bad?
Thursday, May 1, 2008
Great Moments in "Duh"
Here’s a headline from today’s New York Times:
As Pump Prices Soar, Buyers Flock to Small Cars
Repeat after me: “When man bites dog, that’s news. When dog bites man, that’s not news.”
There was one piece of interesting information in the article, however. Last April, four cylinder engines outsold six cylinder engines in the US. What is interesting is that the milestone was reached, not that the market share of smaller engines increased.
The market share effect is simply a rational response to changed market conditions. When gas prices go up and consume a larger share of income, people find ways to consume less gas. In the short run, they try and drive less. You eliminate unnecessary trips; combine multiple errands into one drive. These are behavioral changes.
Longer term, people make bigger structural changes, like buying smaller cars that get better mileage. For many families, the cars they drive are either the first or second largest concentration of capital they have, after their houses. As that capital is fully depreciated, and comes up for replacement, people are buying more efficient vehicles.
Despite all the complaining about high gas prices, however, I haven’t seen any increase in carpooling. This indicates to me that people are more willing to devote higher percentages of their income to gas, rather than make that big a behavioral change. At least so far.
So when we see a shift in the number of carpoolers, that will be news.
As Pump Prices Soar, Buyers Flock to Small Cars
Repeat after me: “When man bites dog, that’s news. When dog bites man, that’s not news.”
There was one piece of interesting information in the article, however. Last April, four cylinder engines outsold six cylinder engines in the US. What is interesting is that the milestone was reached, not that the market share of smaller engines increased.
The market share effect is simply a rational response to changed market conditions. When gas prices go up and consume a larger share of income, people find ways to consume less gas. In the short run, they try and drive less. You eliminate unnecessary trips; combine multiple errands into one drive. These are behavioral changes.
Longer term, people make bigger structural changes, like buying smaller cars that get better mileage. For many families, the cars they drive are either the first or second largest concentration of capital they have, after their houses. As that capital is fully depreciated, and comes up for replacement, people are buying more efficient vehicles.
Despite all the complaining about high gas prices, however, I haven’t seen any increase in carpooling. This indicates to me that people are more willing to devote higher percentages of their income to gas, rather than make that big a behavioral change. At least so far.
So when we see a shift in the number of carpoolers, that will be news.
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