Guilt by association? Maybe, but I don’t care!!

I couple of weeks ago my family started the process of looking for a car for my daughter.    The problems with the braking systems on several Toyota models was already well know.   Because of the braking problems we decided not to look at Toyota, even though they were starting to make some nice deals.   Not including Toyota did not affect other  car company choices.  Two of the auto dealerships we went two where Honda and Ford.

The reason why I mention these two dealers specifically is because I asked them both the same question and got two different answers.  When I asked him if the problems at Toyota lead to increase in their foot traffic and sales I was told “no” by the Honda sales person, and “yes” by the Ford salesperson.  I admit my survey’s sampling size was small, but I thought their respective business would have definitely risen. 

 So why would Ford see an increase and Honda not?  I can think of a few explanations;  First, more Americans are reading my blog and are making a patriotic choice with their purchases.  Second, some consumer lump Honda, and other Japanese manufacturers, in with Toyota concerning safety.   Lastly, this is just a continuation of the sales momentum domestic manufacturers, lead by Ford, have been enjoying for the past several months. 

So is there any proof of an actual sales shift consistent with my two person survey?   Numbers from January show the U.S. trade deficit dropped.  A major reason, beside less oil imports, was a reduction in auto imports.   The trade deficit with both the European Union and Japan saw a significant drop, 56.3% and 27.3% respectively, in the monthly deficit.  Both drops were mostly attributed  to lower auto imports.

Overall, U.S. automobile sales have been mediocre at best, even for domestic brands.  What is good is that the domestic manufacturers are doing relatively better.  The surge in domestic sale comes at a good time for both the U.S. manufacturers and the economy.   The comparative quality of the domestic nameplates has improve a great deal over the past decade.  From initial quality to cost of ownership, domestic brands have, in many cases, overtaken their international competitors.  This has a twofold impact on sales.  First, there is great word of mouth for domestic nameplates.  When my daughter mentioned that she was looking for a car, one of her friends told her how much he loved his Ford Focus.  These factors will greatly increase the number of customers who return to Ford and GM for their next auto.   Another more important reason that this surge is important is that our economy needs it.  The increase domestic production needs has already started to add ten’s of thousand of manufacturing jobs back into our economy.  In addition, the reinstatement of over 600 “to be close” GM dealerships keeps thousands of more jobs which would have been lost.

There is a significant chance that we will have a double dip recession.   Just look at January’s trade numbers: As our imports dropped so did our exports.  It seems that only a few countries are producing more and/or consuming more in any significant way.  China continues undeterred with their global economic game playing, which will artificially improve their growth while subtracting growth from the rest of the world.   The financial crisis in Greece, even though their economy is relatively small, will drag overall growth in Europe down.   Although the worst might be over, there are still significant problems to solve.  As with the first recession, and even if there is no double dip, it is imperative that we re-double our efforts to buy American.  Our country’s standard of living depends on it.

Jumping the Shark

For those of you not familiar with the phrase “jumping the shark”, it is used to denote the point in time something moves past its original objective to a level of absurdity.  The phrase was coined in reference to a long running television program, Happy Days, which change the tenor of the show to attract viewers.  I think that this term can be applied to countries as well. 

A country’s government is there to serve their citizens based on the country’s style of government.  Different styles of government have a different set of pros and cons, but for the most part governments work to make life better for the majority of their citizens.  Sometimes governments go too far in their efforts and loss sight of what their overall goal is. 

Although I could pick from about a half a dozen countries that are either already jumping the shark, or are about to, I am going to focus on France.  France has long been a country on the cusp of jumping the shark.  Unfortunately, I think that they have now  jumped the shark. 

In documented in an article in Industry Week, France Threatens Boycott on U.S. Auto Parts Maker Over Plant Closure, the government of France is trying to force a company to sell a piece of their business to a French group in order to prevent the closing of a parts plant in France.  In the case of the Molex plant in southern Villemur-sur-Tarn, the company has decided that for many reasons, including safety and lower costs, the production needed to be moved to plants in the United States.

It is one thing to financially back a deal, or even take an equity stake in a business, but to threaten to do damage to a business if they do not agree to a deal is something more prone to criminal organization then a government.  Obviously the deal being offered to Molex was not good enough for them to sell that piece of the business.  As a business, Molex has both a right and a responsibility to do what is best for the business.  France does not have the right to use extortion to force a company to do a financially suspect deal.

Just by threatening a boycott, France has jumped the shark.   Let’s hope that they see their error and jump back.  If not, our government has to do its job or they might be jumping the shark.

Lets Face It, We Were Buying Too Many Autos

In a recent New York Time article, Industry Fears Americans May Quit New Car Habit, the subject is the concern in the auto industry that once the economy starts to improve total vehicle sales will not return to the pre-recession levels.  The article talks about changing habits and that people are starting to realize that they just cannot afford to own a car, or at least keep buying new cars. 

At the sales high point, Americans were buying over 17 million new vehicles a year.  This is in stark contrast to this past April when the rate was about 9.3 million a year.  Some analysts estimate that the current level is about four million vehicles below an appropriate demand, about 14.5 million vehicles a year. 

In the U.S. today there are over 250 million vehicles registered.  At the current rate of sale, it would take almost 27 years to replace the current vehicles on the road.  Using the higher demand estimate, it would take a little less than 19 years to replace the vehicles. 

I am not sure if I agree with the 19 year replacement cycle, but I definitely think the 27 year cycle is too long.  With everything going on in the economy, the 19 year replacement cycle seems too short.

The problem is that people have lost the perception of wealth that they once had.  Even people with relatively secure jobs are cutting back and saving.  One of the ways they are doing that is by holding onto vehicles longer.  Add to this the fact that most Americans are driving less and you have a longer replacement cycle.  Some people are giving up owning cars altogether.  The push by the government to improve public transportation can potentially remove the need for a car by many more people.  At a minimum, improved public transportation options will lead to a reduction in automobile usage and increasing their lifespan.

There are signs of life in the auto industry.  May sales inched up to a yearly rate of about 9.9 million vehicles from a 9.3 rate in April.  Although Ford sales are down 24% from May 2008, it is less of a decline then the other big six manufacturers leading to an increase of market share to a three year high.  In addition, Ford has outsold Toyota for the past two months.  This has led Ford to plan to raise production 6% over the next several months. Other positive signs for U.S. automobile manufacturing are the recent agreement, by GM, to sell the Hummer brand and the large number of bidders for Saturn.   If both units do get sold it will mean, for the short term, less U.S. job loses in the manufacturing sector.  Both the Ford production increase and the saving of one or two domestic nameplates help the general economy.

For the auto industry specific issues, the pessimists say that the industry needs a substantial recovery of demand to become profitable again.  The optimists argue that sales will rebound strongly and there is a great deal of pent up demand.  Even though the sales might not match their recent highs, the shedding of costs that are occurring, as we have seen at GM, may allow the automakers to be profitable at a much lower overall sales level. 

If some auto companies, or nameplates, do not survive, the auto demand will be satisfied from somewhere. I just hope that when the new “normal” sales level gets established, a majority of the domestic market is satisfied by quality vehicles manufactured in America.  Just remember that you cannot always tell where a vehicle is manufactured by the company name. 

Rick Wagoner – A Different Kind of Fall Guy

Was Rick Wagoner the fall guy for the trouble automobile industry? Maybe he was, but I do not really care about that type of fall guy. Rick Wagoner was the fall guy for GM. A quick look at the General Motors page on Wikipedia (http://en.wikipedia.org/wiki/General_Motors_Corporation) shows why. From 2001 to 2008 the approximate level of domestic sales decreased by 40%. Even if you take out 2008, which is a bad year for everyone, you see a decrease in sales of approximately 20%. As President and CEO of GM at that time, Rick Wagoner is the fall guy.

What disturbs me is that in 2007, the year after Wagoner lead GM to a huge 8.7% decrease in sales and a year where they lost an additional 6.3% of domestic sales, Rick Wagoner made $14,415,000 in compensation. That translates into $3.73 for every domestic unit sold.

I once attended a management seminar in New York City. The keynote speak spoke about decision making. One of the main points was that businesses need to continually make good decisions. Making a good decision only allows you to stay in the game so you can make the next decision. Making one bad decision could lead to ruin. If a bad decision was made, quick action is needed to minimize the impact.

The decision to focus on high margin SUVs while giving up market share in other vehicle categories is one of those bad decisions. Most analysts were critical of GM for their short sightedness, but it fell on deaf ears.

The problem with GM is not that we can not manufacture automobiles domestically. The problem is that, like all companies, we need run our businesses better. What is better? I am not sure, but it starts with having people who see the bigger, long term picture.

I do not blame Rick Wagoner for being a subpar business leader. Maybe he knew exactly what he was doing. Mr. Wagoner, as CEO of GM, had eight years where he made more money then 95% of Americans will make in their lifetime. Mr. Wagoner was incented to think short term.

Do I support the government strong arming Rick Wagoner to resign? I will give an ambiguous answer of No and Yes. The No is because I do not think that government should be involved in business at that level. In fact, I am not the biggest fan of the bailout of the auto industry. The Yes is because the bailout had to be done. We need to keep as many manufacturing jobs here as possible and the bailout will help. To do that we need to make sure GM is run better then it has been. Once the bailout was decided on, the Obama administration had to decide whether or not Rick Wagoner was the right person to lead GM back to profitability. The administration came to the conclusion that Wagoner was not the right person to do it.

American Assumption

How many times have your heard the phrase; Never assume, it will only make an ASS out of U and ME. I have heard it more times then I could count, but I still do it. As I was doing research for this entry, I discovered that an assumption I made about two years ago was wrong. First a little background.

In 1995, the Federal Trade Commission (FTC) was considering the requirement that automobile companies mention the domestic content of vehicles in advertisements. The following year, in comments to the FTC regarding “Made in the USA” advertising claims, the American Automobile Manufacturers Association (AAMA) confirmed that there was confusion in the market place about what “Made in the USA” actually means, but suggested that no specific action should be taken. See the complete comments at
http://www.ftc.gov/opp/jointvent/madeusa/ftp/usa/103.txt.

A couple of things about the comments shocked me; first, after all these years there is still the same confusion. Second, the AAMA seemed to want to play on that confusion. From the comments, “Moreover, we note that consumers’ contextual understanding of a “Made in the USA” claim may vary greatly from product to product and, for our industry, has changed in recent years and may continue to evolve. Therefore, we suggest that the Commission reject setting rigid standards that may soon become obsolete or cause more confusion than they resolve.” In other words, the AAMA agrees that there is a problem, but suggests that nothing be done.

Why would the AAMA object to regulations that would highlight “Made in the USA” product content? One answer comes later in the same comments. “During the 1970s, American companies began to offer imported products under American nameplates (“captive imports”), allowing consumers to choose, from Buicks and Fords built in Germany, or Plymouths from Japan. Today, captive imports continue to provide retailers with products, and manufacturers with sales outlets, that otherwise would be unavailable.” The AAMA wants to play on the confusion since it is more likely that the American consumer will ASS-U-ME an American nameplate has more domestic content then a foreign nameplate. Another reason is that the domestic content of the American nameplates is decreasing. This is confirmed by the AAMA comment “Next, domestic manufacturers began utilizing imported components, especially power train equipment, to fill voids in their own product lines.”

I have to admit that I was the kind of person they were thinking about. This is evident in my decision to buy a Ford Escape. I wanted to buy American and the Escape seemed like a good choice. In my research, I learned that the Mazda Tribute was really an Escape with a different body. I think that I made an assumption that most people would make: The Escape has the same domestic content, or more, domestic content then the Tribute. Turns out I was wrong. According to a USA Today article, see the following link http://www.usatoday.com/money/autos/2007-03-21-car-content-chart_N.htm, the 2008 Escape has only 65% domestic content while the Tribute has 75% domestic content.

In my buying decision the domestic content difference probably would not have affected my choice, since I purchased the Escape Hybrid. The issue is that I thought I could make an assumption on a topic I thought was a no brainer. Obviously I was wrong.

My wrong assumption only opens the door to a bigger question. Which would have been better for the overall domestic economy, buying the Escape or the Tribute? Is it the foreign nameplate Tribute, at 75% domestic content, or the domestic nameplate Escape, at 65% domestic content? In time I expect we will be able to know easily, just not today.