In the next round of Congressional hearings on the $25 billion auto industry bridge loan (a.k.a. bailout) coming up this week, the Detroit 3 must focus on making their argument simple and winning the PR battle. We have become a nation that has less and less expertise in making things. Making a product like an automobile is a complex business. Public reaction to the first round of Congressional hearings has highlighted that the industry is not well known outside of Detroit. Media interviews with luminaries such as Tom Friedman, Seth Godin, Ted Turner and Mitt Romney suggest that, while they may be leaders in their respective fields, their arguments are outdated and they do not understand the complexities of today's global automotive industry today.
The Detroit 3s' arguments this week should emphasize that they:
1. ... Are in dire straights because of the credit crisis. The US automobile market (the largest auto market in the world) is down significantly, not just the market for US-made automobiles. And, approximately 70% of consumers rely on credit for vehicle purchases or leases.
2. ... Are requesting a loan (not a bailout) to cover working capital needs during this unprecedented down-turn
3. ... Focused on trucks and SUVs earlier in the decade because cheap gas and consumer preferences demanded this. Toyota and Nissan spent over $3 billion to design and build full-size trucks and SUVs, but were late to market and not successful. One way to sell a higher percentage of cars is to have unsuccessful truck offerings.
4. ... Have an extensive portfolio of hybrids and small fuel-efficient cars that consumers did not start buying until the price of gasoline spiked this year. In a capital-intensive business like automobiles, it takes time and cash to shift production capacity (from trucks and SUVs to more cars) to align with such a fast and radical shift in consumer preferences. The shift in capacity from cars to trucks in the '90s, again to meet consumer demand, took more than 5 years to occur.
5. ... Have taken several aggressive steps toward restructuring - closing plants, laying of employees, discontinuing products, consolidating dealerships - and there are more to be taken, but the credit crisis has taken "time (and cash) off of the game clock".
6. ... Are performing well in fast-growing emerging markets outside of the US, e.g. GM's #2 market position in China, ahead of Toyota and Honda. Isn't selling American products in China a good thing?
7. ... Contribute significantly to the US Treasury through corporate and income taxes
8. ... Would support an energy policy that encourages the consumer to conserve. Gasoline below $2 / gallon (as it is today) does not encourage consumers to pay a premium for a hybrid or compromise their desire for a larger or more powerful vehicle.
Keep the debate focused on the facts and the benefits to the country and the US economy. Avoid letting it get distracted by issues such as private planes... but fly commercial just in case. Or, maybe they should drive to DC in hybrid Cadillac Escalades, Saturn Vues, Chevrolet Malibus, Ford Escapes and Mercury Mariners. It's only 9 hours from Detroit, and imagine the free publicity that they (and the vehicles) would get. I guarantee at least one news helicopter would follow them on I-70.
Sunday, November 30, 2008
Thursday, November 27, 2008
Government Should Invest in Tesla and Not the Big 3? Not So Fast...
Innovation plus commercialization - Several journalists have made the claim that the auto industry is stuck in the past and not willing to change... that they are like typewriter manufacturers fearing a shift to computers; that the Government should invest in modern car companies like Tesla Motors (the computers) instead of making loans to the Detroit Big 3 - GM, Ford and Chrysler (the typewriter manufacturers). I’m not sure the typewriters vs. computers analogy fits. A more appropriate analogy might be Cray supercomputers (Tesla Motors) vs. Dell or Compaq PC’s (Detroit Big 3) in the 1990’s. Sure the Cray supercomputer was more advanced, but which had a greater impact on enabling everyone on the planet to own or have access to a computer? Companies like Dell and Compaq effectively commercialized computers and made them available to the masses. True innovation is commercially viable.
Hummer $$$ to 4-cylinders and hybrids - The Detroit auto companies have invested the profits from vehicles like the Cadillac Escalade, Chevrolet Suburban, Hummer H2 and Lincoln Navigator - vehicles that consumers who did not need their utility demanded when gas was cheap - into several fuel saving technologies that are affordable and available to the consumer right now. The Detroit automakers' gasoline engines have become more efficient. For example, the fuel economy of the Ford Focus is equal to that of the Toyota Corolla and the Chevrolet Malibu’s fuel economy on the highway is better than that of a Honda Accord. GM and Ford each offer more hybrid vehicles than Honda and Nissan. GM’s and Ford’s pickup trucks get better fuel economy than the new Toyota Tundra. GM also invested Escalade, Hummer and Corvette profits in the creation of the 2010 Chevy Volt - a plug-in hybrid that will run on electricity-only for 40 miles (no hybrid can do this today, including the Prius), will seat 4-passengers (unlike the Tesla), will do 0-60 in the 8 - 9 sec range, and will likely be priced in the high $30’s vs. the $100K+ Tesla.
US auto market, not just US auto makers, dragged-down by the credit crisis - All companies need working capital to fund their day-to-day operations. There is a lag time between when a car company for example, buys and pays for steel, turns that steel into a car and then gets paid for that car. Working capital funds that lag time. The current financial crisis has made it difficult for all companies in all industries to get access to working capital. Because automobiles are so expensive to design, engineer, produce and buy, their working capital requirements are proportionally higher than other industries. The current financial crisis has also created a crisis in consumer confidence and caused buyers to stop purchasing vehicles, from all manufacturers. For the month of October, GM sales down (45%), Toyota down (23%), Ford down (32%), Honda down (25%), etc., vs. October of 2007. Overall annual vehicle sales in the US market will be down this year from ~16.2M vehicles in 2007 to ~13.5M vehicles. As a result of the current financial crisis - cash is coming in slower and working capital loans are more difficult to come by. The external macro factor of the credit crisis, has resulted in all companies using their cash reserves at a much faster rate. A $25B loan, not a bailout as Friedman and the media positions it, to help the automakers make it through this externally driven working capital / liquidity crisis, avoid putting 3M+ jobs at risk, avoid driving our economy further into recession and keep an American company that is bringing affordable / commercially viable technology that will reduce oil consumption to market, is in all of our best interests.
Strength around the world - In 2007, GM sold more vehicles than anyone else in the world - 9.4M, about 3k more than Toyota. GM also holds the #2 market share in the fastest growing automobile market in the world, China (VW is #1, Honda is #3 and Toyota is #4). GM sells more Buicks in China than in the US. This achievement in China was also funded by Escalade profits. Governments throughout Asia and other parts of the developing world are spending billions to develop an auto industry in their respective countries because of the huge impact it can have on creating jobs and developing their economies. Why would we idly sit by and let the credit crisis destroy ours?
Hummer $$$ to 4-cylinders and hybrids - The Detroit auto companies have invested the profits from vehicles like the Cadillac Escalade, Chevrolet Suburban, Hummer H2 and Lincoln Navigator - vehicles that consumers who did not need their utility demanded when gas was cheap - into several fuel saving technologies that are affordable and available to the consumer right now. The Detroit automakers' gasoline engines have become more efficient. For example, the fuel economy of the Ford Focus is equal to that of the Toyota Corolla and the Chevrolet Malibu’s fuel economy on the highway is better than that of a Honda Accord. GM and Ford each offer more hybrid vehicles than Honda and Nissan. GM’s and Ford’s pickup trucks get better fuel economy than the new Toyota Tundra. GM also invested Escalade, Hummer and Corvette profits in the creation of the 2010 Chevy Volt - a plug-in hybrid that will run on electricity-only for 40 miles (no hybrid can do this today, including the Prius), will seat 4-passengers (unlike the Tesla), will do 0-60 in the 8 - 9 sec range, and will likely be priced in the high $30’s vs. the $100K+ Tesla.
US auto market, not just US auto makers, dragged-down by the credit crisis - All companies need working capital to fund their day-to-day operations. There is a lag time between when a car company for example, buys and pays for steel, turns that steel into a car and then gets paid for that car. Working capital funds that lag time. The current financial crisis has made it difficult for all companies in all industries to get access to working capital. Because automobiles are so expensive to design, engineer, produce and buy, their working capital requirements are proportionally higher than other industries. The current financial crisis has also created a crisis in consumer confidence and caused buyers to stop purchasing vehicles, from all manufacturers. For the month of October, GM sales down (45%), Toyota down (23%), Ford down (32%), Honda down (25%), etc., vs. October of 2007. Overall annual vehicle sales in the US market will be down this year from ~16.2M vehicles in 2007 to ~13.5M vehicles. As a result of the current financial crisis - cash is coming in slower and working capital loans are more difficult to come by. The external macro factor of the credit crisis, has resulted in all companies using their cash reserves at a much faster rate. A $25B loan, not a bailout as Friedman and the media positions it, to help the automakers make it through this externally driven working capital / liquidity crisis, avoid putting 3M+ jobs at risk, avoid driving our economy further into recession and keep an American company that is bringing affordable / commercially viable technology that will reduce oil consumption to market, is in all of our best interests.
Strength around the world - In 2007, GM sold more vehicles than anyone else in the world - 9.4M, about 3k more than Toyota. GM also holds the #2 market share in the fastest growing automobile market in the world, China (VW is #1, Honda is #3 and Toyota is #4). GM sells more Buicks in China than in the US. This achievement in China was also funded by Escalade profits. Governments throughout Asia and other parts of the developing world are spending billions to develop an auto industry in their respective countries because of the huge impact it can have on creating jobs and developing their economies. Why would we idly sit by and let the credit crisis destroy ours?
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