Something Detroit Does Well

With all that the domestic automakers have done wrong, one thing they've always done well is heating, ventilation and cooling, HVAC. In a post at The Truth About Cars about dumb moves behind the wheel, Jonny Lieberman mentioned how even when Detroit was making malaise era cars that barely ran, their HVAC systems were the "envy of the world" and more or less continue to be. Sure, Volvos and Saabs had good interior heating and defrosting systems, not to mention heated seats, but Detroit gave the world automotive air conditioning. Detroit also pretty much invented functioning ventilation systems.

The city of Detroit has always affected the nature of the cars that the domestic automakers produce. In European cities streets are narrow and go in all directions, so small cars, handling and cornering were important. Detroit's streets are broad and for the most part on a 90 degree grid, so suspensions were calibrated more for comfort than precision handling and the cars were large boulevard cruisers.

Likewise with HVAC. Every year when the NAIAS rolls around people question the wisdom of holding a big auto show in Detroit in January. It gets cold in Detroit. Real cold. Maybe not Fargo or International Falls cold, but cold enough to evoke mention of brass monkeys' balls, witches' tits and well diggers' asses. Single digit Fahrenheit temperatures are not uncommon and subzero temps can happen any winter. The coldest it's ever been that I recall is 20 below and in the 1990s, there was a four day period when the air temperature never got above zero.

From the perspective of a Detroit automobile executive in the 1960s, it's understandable how the Volkswagen Beetle could have been dismissed. Even a pristine Beetle back then had inadequate heat. There was no electric blower on the heating system, just the engine cooling fan. Pressurized air was ducted off of the cooling shroud into the headers/heat exchangers. Heat, then, was speed sensitive under the best of circumstances. After a Michigan winter or two, with the salt on the roads, the heat exchangers and heat ducts were perforated with rust. Small wonder that VW offered a gas heater, a self contained 18,000 btu gasoline fired furnace.

Those same Detroit auto execs and their contemporary counterparts may have had access to company motor pool cars so they never experienced the joy of dealer service managers and warranty work, but they still had to deal with Michigan weather on the way to and from work. Like I said, it gets cold in Detroit and the auto execs don't like to be cold. Neither do engineers. At the same time while Detroit's not in the desert, in the summer it gets real hot, with temps sometimes reaching the high 90s, now and then up to 100 degrees. There are places in the United States that get colder than Detroit, there are places that get hotter, but there are few places outside of the Great Lakes region that have as wide a temperature swing. Staying comfortable was a Detroit imperative. It was also a way to make more money on a car. Heaters were extra cost optional equipment into the 1960s.

Also by the 1960s the domestic automakers were improving the ventilation systems. Cars had air vents in the fender wells, with cable actuators on the kick panel. Flow through ventilation integrated into the heating system followed. In the 1960s, air conditioning became a factory option on popularly priced cars, though some folks went with aftermarket units that hung under the dash. What was introduced by Packard in 1939 as an ultimate luxury item ultimately became standard equipment.

My dad, may he rest in peace, loved air conditioning. In the summer he'd keep the house at 68 degrees. American Motors used to label the maximum A/C setting as "Desert Cool". They must have had my dad in mind. Though he liked his options, as far as A/C was concerned, they could have had a single setting: max cool, max fan. In the 1970s he switched from Oldsmobiles to Mercurys and you could have cooled your drink on the dashboard of his 1974 Grand Marquis.

As Jonny pointed out, Detroit still is pretty much the standard when it comes to keep you comfortable in an automobile, temperature wise. I've never driven a Detroit product that couldn't blast full heat in subzero weather, or that couldn't keep you comfortable on a blistering hot summer day. Just about every automaker in the world now makes fairly sophisticated climate control systems but I think that's a case of meeting a high standard that Detroit has set.

Read More & Comment

Scottsdale Auctions - Detroit Once Had Mojo And Made Cars That Are Still DesirableCan Detroit Get Its Mojo Back

The last hammer has fallen at the mid-winter Scottsdale, Arizona collector car auctions. I'm no expert about the collector car market but it seems to me that while prices are down from their high marks during the cheap credit bubble, they aren't cratering. What I find fascinating is that while the domestic automakers struggle to stay alive today, their products from the 1950s, 1960s, and early 1970s continue to draw interest from collectors. Detroit had some serious mojo going on back then. It wasn't, as some Detroit bashers would have us believe, that Detroit was just feeding us crappy cars because we had no choice. There was a time when Detroit made products that were so desirable then that they continue to be desirable today.



When I was in high school in the early 1970s and got my driver's license, I drove a hand-me-down 1966 Impala SS. Like many cars Chevy has badged with the SS designation over the years, it had all the look fast parts, bucket seats, console shifter, SS badges etc. but had none of the go fast parts, just a two barrel 283 V8 and a two-speed Powerglide. It had a MSRP of $2,789 in 1965-66.

You're not likely to find many "2 barrel 2 speed" combinations at Barrett-Jackson or the other Scottsdale car auctions, but the mid 60s full size Chevys are still popular. Indeed this year's B-J auction saw six 1966 Impalas go on the block, with prices ranging from $14,300 for a non SS Impala with the small block 283/Powerglide setup to $39,600 for an Impala SS equipped with a 427cid/425hp big block V8 and a four speed Muncie transmission. Like I said above, their appeal endures.

In 1966, GM delivered about half the new cars sold in the US. Chevrolet was its best selling brand. The full size Chevy, the Impala, Caprice and the less costly Biscayne and Bel Air, was arguably the best selling car in America. It sold well because it satisfied customers' needs. Available with everything from an inline six to a big block V8, the Chevy was comfortable, fast (well, depending on what was under the hood), stylish and big. Maybe not as big as a Cadillac, but certainly big enough to pile in two adults, three or four kids, and a trunk full of luggage, and it was fast enough to cruise on the Interstate at 80mph all day long. They were competitively reliable and when they did need repairs, they were simple enough that just about any service station mechanic could get it back on the road. In a nutshell it was a good value, a family car with some power and style.

In 1966, Chevy used four different nameplates for its fullsize cars. The more expensive models gave customers the options and stylish trim they wanted without getting too far away from the value of the base Biscayne. They were, after all, buying a Chevy, not an Oldsmobile or Buick.

Today only the Impala name survives. An SS package is still available, giving customers the option of a 303 hp 5.3 liter V8, a better handling suspension package along with the de rigeur 18" chrome wheels and SS trim. With fuel injection and electronic ignition it starts more reliably than the 1960s car, gets comparatively outstanding gas mileage, and even with that V8 sitting over and powering the front wheels it is a much better handling car than the '66. The '66 barely had seatbelts. The '09 comes with a plethora of air bags, air curtains, collapsible steering columns and crush zones. Instead of an AM-FM 8-Track stereo, the '09 Impala has surround sound, satellite radio and On-Star. By any measurable standard except for 0-60 time, the 2009 Impala SS is a superior automobile to it's 1966 antecedent.

So why does a 1966 Impala SS fetch strong auction money while the 2009 Impala is relegated to rental fleet duty? Because the current Impala is a boring car. I often find myself defending the Impala or Chevy Cobalt since they are perfectly adequate cars, if not class leaders. Still, they are boring cars with little about them that evokes any passion. Adequacy rarely evokes passion.

While a car buff in 1966 could have distinguished an Impala from a Bel Air just by the trim, today's fullsize Chevy has such nondescript styling that even a car guy like me sometimes confuses the Impala with its midsize stablemate, the Malibu. All of the big Chevys were and are instantly identifiable as Chevys. Fords, Chevys and MOPAR products had styling that was hard linked to their brand. That link between brand and styling is no longer. If you took the badges off, could anyone not a car buff be able to tell an Impala from a Sonata?

Who's to blame? Toyota. Well, more accurately, Detroit trying to imitate Toyota. The Camry is a very competent transportation appliance but nothing about it is exciting. Even the tuner rice rocket boys turn their noses up at the maytagmobile. There are probably more than 20 tuned and winged Tercels for every Camry that's been hopped up. Detroit sees people buying Camrys and Accords by the half milion and rather than going with their strengths, the domestic automakers say, "yeah, I can hit that" and end up making another boring car. Under "what's new for 2009" for the Impala, bullet listed along with the 18" wheels and standard 4 wheel disc brakes with ABS, is "revised cup holder design". Call me crazy but I don't think anyone ever got excited about a cup holder.

Detroit forgot what its mojo was and then tried getting it back by imitating the competition. The question then is does Toyondissandai have mojo? Yes, but it's not the same. Detroit's mojo was once an amalgam of style, size, speed and value. Toyota's mojo is reliability, boring reliability. While the Asian manufacturers are capable of making a Civic Si or a Sentra SER, you'll never see a Camry get the Biscayne>Impala SS treatment. Toyota thinks the market wants a boring maytagmobile and everyone else, chasing the Camry, queues up in the same line. Cars that evoke passion are the opposite of appliances. To inspire passion, positive or negative, you have to take a stand, take a chance. Toyota doesn't take chances.

As long as the domestic automakers see the Camry and the Accord as their benchmark for what consumers want, Detroit will never get its mojo back. There are, however, hopeful signs. It's been slow in coming, but the domestic automakers, or at least GM and Ford, have recognized that a "me too" copy of the Camry or Accord isn't going to win back market share. They have to somehow leapfrog the competition. Since technology is pretty much the same from automaker to automaker, and since they all know how to implement statistical quality control, quality is less and less of a distinguishing characteristic, so it gets harder and harder to make your product different and better in the eyes of buyers.

So what's Detroit to do? Go back to its strengths. Euro design houses like Pininfarina and Italdesign notwithstanding, automotive styling was pretty much invented in Detroit by Harley Earl and Edsel Ford. There's nothing wrong with a maytagmobile, but giving an appliance some style is one way to make it stand out in a crowd of white enamel. As long as the substance is there, there's nothing wrong with a little style.

There's no question that there are talented designers in Detroit. GM particularly has raised the bar on exterior and interior design. Cadillac's "art & science" design language has been very successful and its no coincidence that the Cadillac CTS is regarded by Detroit boosters and critics alike as proof that Detroit is capable of building desirable cars. The CTS is instantly recognizable as a Cadillac, a very good looking Cadillac. If GM decides to make an upmarket version of the Chevy Volt, it could do much worse than the Cadillac Converj concept, a very pure distillation of Cadillac's styling cues.

Ford also seems to have some focus on style. While its critical to their survival to federalize some of their small Euro cars, the heart of the sedan market will remain midsize and fullsize cars. Even before hybrid sales collapsed with the financial crisis and cheaper oil, Toyota sold more than twice as many Camrys as Priuses. Ford's decision to restyle the 2010 Taurus, taking it from a boring albeit competent sedan, to a distinctive upmarket look, will set it apart from the bland competition that includes, yes, the Impala.

Read More & Comment

Would A Guaranteed Resale Price Help DetroitHarley Guarantees MSRP Trade-In

The Detroit automakers have a steep hill to climb. Even if they avoid financial meltdown and liquidation, and the challenge of coming up with world class product across their full lines, their still is the problem of their shrunken market share and how to attract customers who haven't considered domestic brands in years. You've read or heard the stories. Someone has either bought or had a family that bought a POS car or a series of them from the Big 3, switched to an import brand and overwhelmed with their reliability and value never has stepped foot in a domestic showroom since. Sometimes I think that had as many families bought Japanese cars 30 years ago that say they did their market share would have been much higher then it actually was. It's undeniable though that a combination of the Big 3 screwing up and the import brands doing well has resulted in a large fraction of the market that is convinced that Detroit can't build a good product and back it with good customer service.

One way the domestics have alienated buyers was through fleet sales, often to captive rental car companies. While it kept sales numbers high it wasn't very profitable and resulted in depressed resale values for their retail customers. A while back I suggested to Peter Delorenzo that the Detroit automakers could use a guaranteed resale value and it looks like Harley-Davidson is trying that out with a new promotion. If you buy a new '08 or '09 H-D Sportster before the end of March, you'll get full MSRP value if you trade it in within a year on one of Harley's Big Twin or VRSC bikes. What's interesting is that they're also offering MSRP trade in value on any already purchased 2007-2009 Sportster that's traded in on one of the more expensive Harleys.

H-D can afford to do this because their bikes do indeed hold their value, at least they did until the current financial meltdown, but before Wall Street screwed up the demand for new Harleys was so high used models were selling for almost as much as new ones. Still, there is some risk so H-D is probably managing the program as they would warranties.

There's no reason why it couldn't work for the domestic automakers. It's really not a new idea, dealers have used trade-in value promotions to sell new cars probably since car dealers and trade-ins began. It would immediately raise actual resale values. Some owners won't trade them in on the same brand, but with that as an option they'd demand more money from used car buyers or non brand dealers.

Detroit has to get very smart and very good very fast. Obviously the same old way of doing business can't last. Hyundai bought back customer loyalty after entering the US with cars of dubious quality with a 10yr/100K warranty. Before that, when Chrysler was bailed out the first time, Lee Iacocca used a 7/70 warranty to convince buyers that K-cars were worthy. At this point, I think the warranty idea is a bit played out so maybe a resale value promotion would be attractive enough and novel enough to catch consumers' attention.

Read More & Comment

Good News, For a Change, About DetroitHint: It's Not the Bailout

Last Friday was a good news day for Detroit. No, I'm not talking about President Bush's loan package that was announced today. That wasn't so much good news as a stay of execution with a case still on appeal. Perhaps the good news then must be reports that previously invicible Toyota and Honda are losing money and cutting production. Prius sales are down 50% so Toyota has suspended work on their proposed Prius plant in Mississippi and the company will have a loss this fiscal year, the first in 71 years. Toyota and Richard Shelby's "New American Auto Industry" suffering? That's normally a shadenfreude twofer for Michiganders but it really is just a reminder of how auto sales have tanked globally. Nationally it got lost in the news about the bailout and locally in Detroit it dropped to the bottom of the news - below genuinely good news out of Lansing and Detroit.

What kind of good news? This is the end of the year and the end of legislative sessions. The US Senate wasn't able to finish a deal on a Detroit bailout by the end of their session, leading to President Bush's loan package. The Michigan legislature, though, did manage to pass legislation funding projects that could help the city of Detroit recover economically. What got the most attention, both from the general media and from car folks was a $288 million dollar plan between the state, Wayne, Oakland, and Macomb counties, and the city of Detroit for the much needed improvement and expansion of Cobo Hall by 166,000 sq. ft. to a total of 866,000. This will provide more space for exhibitors, allow Detroit to keep the North American International Auto Show, as well as attract trade shows and conventions that passed on Detroit because of the size of Cobo or its older amenities. The newly renovated Book Cadillac hotel, now managed by Westin, is part of that same effort to increase Detroit's convention business. I know it sounds counterintuitive to those who believe that Detroit is a third world wasteland, but the primary obstacle to getting more conventions here hasn't been Detroit's reputation but rather a lack of hotel rooms downtown and a lack of floor space at Cobo.

In other development news, the legislature also funded a 3.5 mile light rail transit system to link the New Center area and downtown. This will also help in getting convention business, but the primary goal is to nurture the nascent development that has happened along the Woodward corridor in recent years.

Still, the NAIAS is the biggest trade show or convention held in Detroit and generates about $500 million in business for the region.

Speaking of the NAIAS, it hasn't been a good year for the Detroit show. Nissan/Infiniti and Mitsubishi dropped their factory displays and will instead support displays by their local dealer groups. Land Rover, Ferrari and Rolls Royce have pulled out entirely, notwithstanding the success of last year's "Gallery" program that gave hundreds of well-heeled guests from around the country a private showing and resulted in luxury marques selling about $3 million worth of cars. Earlier Porsche also decided not to display in Detroit this year because of its low sales in the region. In a speech to the Detroit Economic Club Joe Serra, senior co-chairman of the NAIAS acknowledged the "dire times" facing the auto industry but said that despite losing those six exhibitors, the total number of exhibitors on both floors will increase by two and there will be more world premieres than last year. The manufacturers who pulled out made space available to other companies who wanted in. That's shows how needed a Cobo expansion is, that even in tough economic times there's still demand for floor space at the NAIAS this year.

Still, the NAIAS will be a low key event this year. The NYT coined the cliché that you can tell how the domestic auto industry is doing by the size of the shrimp at the Detroit auto show media preview. The shrimp and other perks for the 6000 journalists in attendance will be few and far between this year. Chrysler will not have one of their showbiz introductions and all the manufacturers will have simpler displays. Only a few years ago GM and Ford were outdoing each with things like two story displays. Bottom line: fewer pretty girls, less glitz, and more focus on product and business plans.

That being said, that increased number of exhibitors includes some cars of particular interest to car enthusiasts. The Bugatti Veyron will make its first ever NAIAS appearance, and Lotus will have its first factory NAIAS display. Lotus is a much more substantial company than it ever was. The success of the Elise and derivatives, as well as Lotus' involvement in the development of Chrysler's EV sports car makes a NAIAS booth for Lotus a natural idea. Another technology partner of Lotus, electric car pioneer, Tesla, will have a factory booth with their roadster as well. This is also the first time Tesla will be showing at Detroit and Tesla CEO Elon Musk will be speaking to the Society of Automotive Analysts at a NAIAS related event on January 13, 2009.

Also in the electric car front, Chinese automaker BYD plans to use the NAIAS to introduce a serial hybrid with a 60 mile range on batteries. BYD produces about 25% of the world's cell phone batteries so they may have a leg up on other manufacturers' electric plans. China's Brilliance Auto will display for the first time and along with BYD will be the first Chinese manufacturers to display on the main floor in Detroit.

GM's turnaround is predicated on becoming the technology leader in electrically driven cars. To keep Michigan in the battery game with BYD and other battery developers, the state legislature also passed one other piece of legislation that got lost in the flood of automotive news today that may turn out to be the most significant item. That is, providing the bailout loans work and there is still a functioning domestic car industry.

The Michigan legislators on Friday approved a tax credit package intended to make the state a national center for the development of batteries for transportation. The bill will provide up to $335 million in tax credits from 2001 to 2016.

Cobasys, a joint venture between Energy Conversion Devices of Troy, MI, and Chevron produces Nickel Metal Hydride (NiMH) batteries for GM's current generation of hybrids. However, Chevron's association has raised the controversy that the oil giant may be using its involvement to suppress alternatives to gasoline. At this time the US has no large scale facilities making the advanced lithium-ion batteries that will be needed for the next generation of hybrids and electric vehicles.

Legislators and Gov. Granholm hope that the tax credits will allow Michigan to become the locus of battery development and production in the US and give state businesses access to the $1 billion the federal government is investing in battery research.
While it would be better if the news was about private sector investment instead of government funding. However many of Detroit's problems are at least partially attributable to the hand of government and it's nice to see state and federal government helping for a change instead of hindering.

Read More & Comment

The New Arsenal of DemocracyIf President Bush Used FDR's Speechwriter

Detroit has many nicknames. The "D", popular with the hip hop generation, the traditional Motor City, and later, Motown, where Barry Gordy mixed great American music to sound good on car radios. Some, like Murder City, perhaps a play on Motor City, are less endearing. One nickname for Detroit was adopted from one of FDR's fireside chats in late December of 1940. Europe was under the Nazi boot, Britain was at risk and Germany, Japan and Italy had formalized their alliance as the Axis powers. In that speech, Roosevelt explained the risk to the United States and our way of life, of democracy itself, in support of converting US industry to munitions and defense both to help Britain and defend the United States in case it was attacked from the east or from the west. "We must be the great arsenal of democracy," FDR said, and when Detroit turned from making cars and trucks to bombers and tanks, the region took on that name.

At a time when the president of the United States announces loans to allow the domestic auto industry to survive and reorganize, at a time when the domestic auto industry and Detroit faces an urgency akin to war, it's interesting how so many of a previous president's words apply today. FDR was calling the American people to war. Detroit, the car companies and the people in the region alike, must restructure to survive just as we did in World War II. Roosevelt's words inspired a nation to address the task at hand and many of them ring true to Detroiters and those working in the domestic auto industry.

If GWB Used FDR's Speechwriter:

"Let me speak now to the people of Detroit and to the domestic auto industry. We are at a time when the wheels of American industry seem to be grinding to a full stop, when the whole banking system of our country has ceased to function.

Let not defeatists tell us that it is too late to save your industry. It will never be earlier. Tomorrow will be later than today.

This great effort requires great sacrifice.

As the Government is determined to protect jobs, so the Nation has a right to expect that the men and women who build our cars will discharge their full responsibilities to the urgent need to restructure the auto industry and make it profitable.

The Nation expects and insists that management and workers will reconcile their differences and work to make their costs competitive with foreign owned assembly operations.

I appeal to the stockholders and bond holders, to the managers, to the workers, to our own Government employees, to put every ounce of effort into making this plan work and return our automotive industry to profitability.

Detroit can once again be the great arsenal of democracy, leading the economic recovery of our nation. For us this is an emergency as serious as war itself. We must apply ourselves to our task with the same resolution, the same sense of urgency, the same spirit of patriotism and sacrifice, as we would show were we at war.

We have no excuse for defeatism. We have every good reason for hope. The possible consequence of failure of our efforts now are much more to be feared.

We have the people the skill, and above all, the will.

I have the profound conviction that the American automakers are now determined to put forth a mightier effort than they have ever yet made.

As President of the United States I call for that effort. I call upon our people with absolute confidence that our common cause will greatly succeed."

Read More & Comment

Idiocy of the Day:If the Vendors Go Broke, We Can Still Get Parts At NAPA

There's been so much arrant nonsense concerning the domestic auto industry that we're starting a new feature on Motorobilia, The Idiocy Of The Day. Sometimes it's a grandstanding politician, sometimes it's a mealy mouthed automobile executive and sometimes it's just plain folks perpetuating automotive urban legends or some kind of propaganda. Either way, since reason rarely persuades, all you can do is laugh. And with that, we give you today's Idiocy Of The Day:

From commenter flytier on the political blog HotAir comes this gem, referring to Michigan Gov. Jennifer Granholm:

This argument that Granholm has been going around spouting off that if the Big 3 go bankrupt that no one will buy one of their cars because they won’t be able to get parts. Anyone ever hear of After-market parts? NAPA, etc……

It's unclear exactly what flytier means exactly. I'm not sure if he means Granholm is saying that in a Chapter 11 consumers wouldn't risk buying domestic automobiles out of a fear of not being able to get replacement parts, or if he means the governor is saying that if the automakers file Chapter 11, the automakers themselves won't be able to buy parts themselves. Either way, the comment about the aftermarket and NAPA is equally idiotic.

So few Americans are involved in manufacturing that they have no idea how anything is made and ends up on a shelf in a NAPA store or on the floor of a Ford dealership. They really don't know what the automotive "supply chain" is. Sure, there are companies that make aftermarket replacement parts, usually wearable parts like brake pads, but many of the 20,000 or so parts and components of a modern automobile are never available in the aftermarket. Some replacement parts are only available from a dealer. Many repairs done by independent repair shops use dealer only parts. One of the big costs of running an automobile company is stocking OEM replacement parts for a long time. Also many, perhaps most of the "aftermarket" parts are made by the same OEM vendors that supply the automakers. If the Detroit automakers go out of business, you simply won't be able to fix your car for many repairs you now take for granted.

A Chapter 11 bankruptcy by the three Detroit automakers would financially distress most US automotive suppliers. A chapter 7 liquidation would wipe most of them out.

Perhaps flytier thinks that if GM and Ford file for chapter 11 bankruptcy, and their vendors go out of business that Alan Mulally can run over to the NAPA store on Telegraph Road in Dearborn Heights, go up to the counter and ask them if they have a quarter million Fusion alternators in stock. That's not the way it works.

Read More & Comment

Is Detroit Being Astroturfed?

Those of us who value a domestically based auto industry are derided for 'blaming the victim', putting the onus for distorted perceptions on consumers who are justifiably angry over poor products from the domestics. I'm not trying to blame dissatisfied consumers but do have a low tolerance for bovine excrement, regardless of whether it comes from the Glass House, the RenCen or from Detroit haters who are gleefully piling on. The truth is still the truth regardless of who says it or whom it makes look good or bad.

A lot of misinformation about the auto industry is not malicious. It's the product of conventional wisdom and urban legend, like the frequently heard "nobody buys American cars - Detroit doesn't build cars that people want" - at odds with the 55% market share the domestics still have. After reading Ed Niedermeyer's post on the debate bailout as a continuation of the recent election, though, I'm wondering if some of the online comments are not part of a deliberate effort to exaggerate Detroit's shortcomings and sew fear, uncertainty and doubt about the domestics in the minds of consumers and to demoralize Detroit supporters.

Note to reflexive Detroit bashers: I did not say that there aren't legitimate criticisms of the domestics. See "justifiably angry" above. However some criticism is not factually well founded. Unfortunately, actual facts make little impression on those who want people to believe them, not my own lying eyes.

The term "astroturfing" has been coined to describe how the internet can be used by interested parties to give the impression that there is grassroots support for or opposition to a particular subject. Keeping with Ed's post on electioneering, Barack Obama's campaign manager, David Axelrod, is an acknowledged master of astroturfing. During the recent campaign, for example, action alerts would go out via text or email and suddenly radio shows hosting writers critical of Obama would get swamped with outraged calls. Potentially damaging information would be posted on conservative or libertarian blogs, and there'd be a host of new commenters all repeating the same pro-Obama talking points. I say that not as a partisan but rather as simple acknowledgement that astroturfing exists. It's not just in election politics either. The Detroit automakers themselves have been accused by environmentalists of astroturfing in regard to CAFE standards and other proposed regulations. Parenthetically one wonders how companies that were supposedly lobbying juggernauts 18 months ago are now almost impotent in Washington today, but like I said, there are a lot of cow pies being flung around.

Ed refers to the "PR gaffes, emotionally-charged arguments and outright lies" in the bailout debate. If the analogy with election campaigns runs true, then Ed's examples should be found on both sides of the debate, just as they are in politics. Or are "emotionally-charged arguments and lies" only the province of Detroit defenders?

Believe it or not, I like to use facts and try to be intellectually honest. At the very least I try to avoid being embarrassed by making a statement that can easily be refuted by information that pops up on the first page of a Google search. As I said in my caveat above, many of the attacks on Detroit are legitimate and factual. However, some of the criticisms of and myths about Detroit are so frequently repeated and so easily rebutted by readily accessible facts that I'm beginning to think that they are not simply reflections of consumer dissatisfaction but rather part of an organized disinformation campaign.

Lawyers use a Latin phrase, cui bono, "to whose benefit?". I can understand the need for unhappy consumers to vent but the level and volume of the malevolence towards the domestic car companies has no comparison with other consumer issues. It's true that cars are usually the second largest consumer purchase people make, but you don't see people venting spleen about poor new home quality, or wishing for builders on the scale of Kaufman & Broad to go bankrupt.

So who benefits from Detroit bashing? A lot of self-interested groups, that's who. As the site linked to above shows, Detroit is a favorite whipping boy of the environmental movement. That might explain some of the over the top Detroit bashing at a site like Autobloggreen. When The Progressive runs an article titled What's Good For General Motors Is Killing America, that says more about their own left wing politics than about the crisis in Detroit. On the other end of the political spectrum are conservatives and libertarians who passionately despise organized labor and frequently mention "$70/hr UAW workers". While they may not benefit financially, those groups have political agendas that are served by misinformation.

Again, who will benefit? Proponents of a bailout warn of collateral damage if the domestics fail, that even Toyota, Honda, Nissan and Hyundai will take a huge hit because they share vendors with Detroit, particularly for their North American assembly operations. Bailout critics say that that's an exaggeration, that the transplants can easily find replacement suppliers, if not here, than in their home markets. We're told that if GM, Ford & Chrysler go away, that Toyondissandai will take up the slack and fill the market's demand. If that's truly the case, then the foreign brands will reap a financial windfall if the domestics die.

Cui bono indeed.

Read More & Comment

No Wonder the Detroit CEO's Were a PR Disaster in DCLook @ Their Advertising

Even defenders of the domestic auto industry have panned the Detroit CEOs' performance in Washington. The same companies that environmentalists attack for having lobbied to stall CAFE regulations now seem impotent in Washington, scorned and mocked, rather than respected or feared. Worse, in a world with C-SPAN and YouTube they did an appalling job of public relations during the congressional hearings. It shouldn't surprise us, considering the state of their advertising.

I don't know who is more at fault, the car companies or their advertising agencies, but for decades, the Detroit car companies haven't seemed to be able to make commercials that can tout their "new and improved" products without reinforcing the negative impact previous models have made on consumers, or worse, giving their competitors positive publicity, or yet even worse than that, make their own customers look like idiots.

This isn't a recent phenomenon. For years, dating back to the mid 1980s, Ford tried to recover market share lost to the Japanese brands with "Have you driven a Ford lately?" ad campaign.


"We used to build crap cars but, honestly, we're competitive now, really, so check us out, please?"
Actually, it wasn't just a slogan, Ford had an entire jingle written for the campaign.


Ford eventually retired the slogan, but old insecurities die hard and they reprised the slogan and updated the music for their full-line ads for the 2007 model year. Someone in Dearborn must really like the slogan because they produced both a short form version

and the extended play version:


There are echoes of it to be found in their "Drive One" marketing campaign, started earlier this year. One part of that campaign features ads titled "Ford asks people to Drive One" with people who hadn't considered Ford products but were impressed after extended test drives. One of them has a potential car buyer saying, "There's a little skepticism going forward because, well, Ford doesn't have the best name as far as reliability goes."



While it's admirable for Ford to acknowledge reality, I'm not convinced that reminding your customers about your bad reputation for quality is how you change that reputation.

That insecure mindset must be deeply ingrained in Dearborn. Ford can't even tout good news without sounding like, "hey, what about us? We make good cars now too." After recent data showed Ford being in a statistical dead heat with Toyota (and Honda) in terms of initial new car quality they started running commercials saying pretty much that - only they shot themselves in the foot by saying that Ford has quality equal to Toyota, mentioning their competitor by name. Everyone already knows that Toyota is the gold standard of quality so why mention them? Also, saying you're as good as the competition doesn't really do much to convince people to switch to your product. If you're only as good, why should consumers switch? It seems to me that saying "Ford has industry leading quality" (without a "now" in there) gets the improved quality information to potential customers without mentioning either Ford's prior poor reputation nor would it enforce Toyota's already stellar reputation in consumers' minds.

Insecurity must be contagious in Detroit. Saturn, arguably the GM brand with the best consumer reputation, has been trying to widen its appeal beyond folks who frankly, don't like cars that much. Two years ago, to highlight Saturn's expanded lineup, Saturn's ad agency, Goodby, Silverstein & Partners, produced a commercial around the tag line, "That's a Saturn?", with people expressing surprise when they see the Aura, Sky and Vue.

The agency must have thought didn't have enough edge, so they also shot, for online distribution, a R-rated version, "That's a $%&^ing Saturn?", using the same actors.

Find more videos like this on AdGabber

With or without profanity, the message was the same, "we don't make just boring cars anymore." Just like Ford and quality, the ad simply reminds people about boring cars Saturn has sold. It's also derivative of the 70's vintage "That's a Matador" ad from AMC.

[Matador ad is @ 2:35]
Considering the level of the Matador's success, I'm not sure that's a good thing.

While "That's a Saturn?" didn't appreciably increase showroom traffic or sales, it's another mistake from which GM apparently hasn't learned a thing. With manufacturers and dealer groups running seasonal end of year sales, GM is now running ads announcing Saturn's "Red Tag" event. A customer steps into a Saturn store, glances at a Sky roadster and a Vue compact SUV, looks surprised and steps back out of the showroom to look at the Saturn sign. He returns to the showroom and asks, "These all…?" and the saleslady says "Saturn? You got it! Happens a lot lately," with her male counterpart chiming in, "People do that", followed by a voiceover saying, "Meet the new Saturn, at the Red Tag event."

Humorous? Yes. Clever? Perhaps. Will it sell Saturns to people who hadn't considered them before? I doubt it. Will it make current Saturn owners think that GM is calling them dorks? Perhaps not, but only because they probably don't pay any attention to car commercials. They are, after all, that segment of GM's customer base that doesn't really care about cars other than as an appliance.

Advertising that makes fun of customers does happen to be a pet peeve of mine. Chrysler excels at that. I can understand Durango ads implying that men are idiots who don't ask for directions and who'd never be able to function without wise, all-knowing wives. So many commercials follow that misandrist theme that Chrysler's not unique. Women make about 80% of consumer purchases. However, even the very popular and successful "That thing got a HEMI?" Dodge Ram truck campaign took a swipe at loyal customers. The knuckle-dragging rubes asking that question, played by actors Jon Reep and Todd Giebenhain, drive a ratty looking 30 year old Duster with a hood scoop.

Why have them driving a MOPAR product? If they're going to get smoked by the guy with the HEMI, might as well have them drive a competitors product, maybe a really rusty 70s vintage Corolla.

At one of the media previews I asked some Chrysler marketing folks about that swipe at old MOPAR guys, but I got the same blank looks as when I asked the Mitsubishi folks why they used an Iggy Pop song about sex hustlers, drugs and booze for the music in their commercials. Maybe advertising cluelessness isn't restricted to Detroit.

If the Detroit manufacturers want to let consumers know that it's not business as usual, they should build superior cars and tell people about what makes them superior. Apologizing for poor products in the past or saying that you're just as good as the competition isn't going to end the red ink or increase market share. Humor has a place in advertising. So does comparison with competitors. However, if Detroit is truly interested in changing the way they do business, they need to take a hard critical look at all elements of how they make and sell cars, including how they advertise.

Read More & Comment

Of Apples and Automobiles

Nobody buys Apple computers. People have voted with their wallets and they just don't like Macs. They're disenchanted with recalls, years of poor customer service and now won't even consider an Apple product. Apple's share of the personal computer market is a fraction of what it once was. What's that you say? "Apple sold about 8 million computers last year, how can you say nobody buys Macs? Apple has one of the best consumer reputations in the world." It's true that Apple sells millions of computers, about a 3% share of the personal computer market, and has exceptionally loyal customers. How could it be that a company that sells so many products could be seen as a complete failure? Of course it's not true, but bear with me.

Apple isn't perfect. People have complained bitterly about poor support after paying for extended service plans. Apple recalled 1.8 million laptop batteries in 2006 because of a fire hazard. Of course you won't find the word "recall" on the Apple web site, just instructions for their "Battery Exchange Program" for batteries "supplied to Apple [that] did not meet our high standards". It's not just computers, even their flagship product, the iPhone, has had consumer issues. Apple's deal with ATT means that if you want an iPhone in the US, you have to buy an expensive service contract from ATT. The iPhone's software only allows applications sold through Apple to be installed on the phones (unless you use a hack), even going so far as to have the phones disabled if unapproved software (read, software for which Apple doesn't receive a cut of the revenue) is installed. Just a couple of months ago the new 3G iPhone's power adapters were recalled because of a hazard of electrical shock.

Despite those problems Apple continues to have one of the best images of any consumer product companies in the world. Nobody hates Apple, except maybe Microsoft.

Now let's look at the domestic automakers. Nobody buys American cars anymore. People have voted with their wallets and they don't like the products offered by GM, Ford and Chrysler. After years of poor customer service, planned obsolescence, and product recalls so many people have become disenchanted with American cars that they would not even think of stepping foot in a domestic car dealer's showroom.

With the triple whammy of the burst housing bubble, $4/gallon gasoline this past summer, and now the credit and banking meltdown, US car sales are down over 30%. Even Toyota is feeling the pain, now offering 0% financing to sell cars at a time of tight credit. Toyota though, was not the auto sales leader in October. If not Toyota, then who? It must have been Honda, a company with a consumer image right up there with Apple, right? Toyota sold a little more than 152,000 cars in the US in October. Selling 170,000 units, in first place was not Honda, but rather General Motors. General Motors??!! I thought nobody bought American cars. Well, if GM managed to eke out more sales than Toyota, surely Honda must have been in third place. Guess again. Both Ford and Chrysler each sold more cars than Honda.

Remember that 3% market share for Apple computers and how ridiculous it sounded when I said that nobody buys Apple computers? Well, somehow 55% of car buyers, 400,000 people, must not have gotten the memo saying nobody buys American cars anymore because that was the market share of the domestic brands in October. When 97% of consumers choose other products, Apple, with their cutesy Mac vs PC commercials, is regarded as a marketing success with a great consumer image, but when 55%, a majority of car buyers, choose domestic brands, those brands are presumed to have the stench of death about them.

People say things about the American car companies that would be laughed at if applied to other industries. Apple suspended their battery exchange program earlier this year. Imagine the outcry if one of the Detroit car companies no longer would repair at their own expense a known fire hazard in their cars.

The anger at Detroit is palpable, but it's not based on current facts and reputations die hard. Advocates of the Detroit 3 say that they have a perception problem, that consumers just don't know how competitive many of their products now are. The perception problem, though, extends far beyond the automotive market. People have distorted perceptions, not just negative, of many consumer products and the companies that make them. Perceptions that can be at odds with reality.

American cars are junk. A large number of consumers are convinced so. That 55% is a fraction of the market share the domestics used to have. After all, someone's dad had an unreliable 1985 Pontiac so they'll never even think of buying an American car, but does anyone not shop at Sears because their mom had a bad experience with a Kenmore vacuum cleaner 20 years ago? GM's market share has dropped in half, that's true, but Apple's market share of the pc market has dropped by 80%. The iPod too, has lost market share. The truth is that had Apple not developed the iPod and and then the iPhone they'd be iPhucked, cutesy commercials or not. When Apple has competed in a mature market, as the auto industry is, they don't look any more clever than Detroit.

Today, quality control from the domestics is pretty much on par with Japanese, Korean and European cars. Measured in defects per 1000 new cars, the very best, Toyota, Honda and, yes, Ford, are just over 10 DPT. The very worst are about 13 DPT. So 99.7% of consumers never see a difference. Cars are not built the same way they were built 5 years ago, let alone in 1985. All the domestic companies have instituted Demming style quality controls and their vendors have made even greater strides in quality. Every automaker, foreign or domestic, is building quality cars but many consumers are so convinced that Detroit makes junk that they don't even bother to comparison shop.

It's not just American cars that are said to be bad. People say that they're treated so much better at foreign car dealers than at a domestic 'stealership'. There's something, though, that perplexes me about the perception that foreign dealers have better customer service. Many, if not most, car dealers today own stores from more than one brand and it's pretty common for a dealer to hold franchises for both domestic and foreign brands. I don't see Roger Penske or Rick Hendricks deciding to send all of their worst employees to work in their Chevy and Ford shops, saving the ones with the best customer service skills for the Toyota and Honda stores. The most recent J.D. Power survey of customer satisfaction with car dealers had GM, Ford and Chrysler dealers ranked above average and Toyota, Honda, Hyundai, Nissan and VW stores ranked below average.

Like I said, it's not just cars. People buy consumer electronics that are literally irreparable with no serviceable components and no replacement parts available. Forget about "no user serviceable parts". Nowadays there are no service technician serviceable parts. Whether it's a $25 mp3 player or a $1000 HDTV, it pretty much can't be fixed. Nobody hates LG or Panasonic, though, they just throw away the old one and buy a new one.

Here too it's interesting to look at Apple. Who has a better consumer reputation than Apple? Say something negative about Apple online and the acolytes of Cupertino will barrage your comment section with questions about your parentage. But is the total Apple customer experience truly outstanding? Apple products, unlike most consumer electronics, can actually be repaired, but when an iPod is out of warranty and the customer finds out how expensive service will be, what do they do? They usually choose to replace it with a newer model. They rationalize that the new model has a bigger hard drive, can play videos, and comes in stylish colors, never giving a thought to the fact that what they've done is join a club with annual or biannual fees. Does the phrase "planned obsolescence", something supposedly invented by the Big 3, ring a bell?

And what of the banks and insurance companies with their credit default swaps and mortgage backed securities putting people's entire life savings at risk? Citibank has already gotten $45 billion in direct aid, not a loan like Detroit is asking for, and guarantees that the government will cover $300 billion of Citibank's loses, and people treat it like business as usual with hardly a hint of anger. Nobody says, like they do about the auto companies, let them go bankrupt and to hell with them.

Economics assumes that people are rational actors when it comes to money. People may be rational but consumers are not. Whoever said they were rational has never worked in retail. Perceptions and conventional wisdom are more important than reality, at least when it comes to buying decisions and, apparently, bailouts.

Read More & Comment

$73.21 & GS-13s, Jobs Americans Will Do

You've probably seen a figure lately, $73.21. That's the total hourly labor costs for union autoworkers at the Detroit 3. That figure has gone viral and keep popping up in virtually every discussion of bailing out the failing domestic automakers. I've even seen mention of "$140K jobs", as though all that money ends up in autoworkers' pockets. Some people are glad that workers they see as featherbedding loafers with job banks and fat paychecks are getting their comeuppance. The schadenfreude is normal. Even former UAW president Walter Reuther told George Romney, chairman of American Motors, “Getting more and more pay for less and less work is a dead-end street.”

Unfortunately, in addition to the natural desire to see people take responsibility for poor decisions, there's also an unhealthy dose of class bias and disdain for working class Americans in some comments. People are angry and indignant that "uneducated" and "unskilled" people were earning a good living. Nobody could mistake me for a union sympathizer, at best they are a necessary evil, like stock markets and commercial credit. Of course there are many union excesses but that has little to do with people who disdain autoworkers because they do industrial labor and didn't go to college. Some of those "skilled trades" in the UAW work rules are indeed highly skilled, like millwrights, and a modern assembly plant is a relatively high tech facility with a lot equipment that is a bit more sophisticated than just tightening lug bolts. UAW members also build the Corvette ZR1's LS9 engine at the Warren Tech Center and I doubt many of the college educated critics of the "uneducated" and "unskilled" autoworkers could do something like that.

Even if much of the work is semi-skilled or unskilled, what ever happened to respect for labor? Is manual labor now something that is despised? It brings to mind a phrase from the immigration debate, "work Americans won't do". Maybe that's why we've allowed our manufacturing base to essentially disappear - many Americans have no respect for manual labor or for making things. Maybe that's why people dismiss the national security implications of the failure of the Detroit 3 with reference to our dedicated defense industry. They really don't know that you can't build F-22s without machine tools and machine shops. They've never met a machinist and have no idea of the kind of mathematics and other education someone needs to be a competent machinist.

Then there is the issue of the benefit of the labor done at the Detroit 3. There are those who say that labor is labor, just a tool or commodity and irrelevant the creation of wealth. However, there's an obvious difference between the labor to turn a raw material or components into a finished product and labor pushing paper around a government bureaucracy. While it's difficult to say that the labor of the domestics' autoworkers creates wealth when their contract creates costs that prevent profits, the simple truth is that managed effectively, autoworker labor, like any manufacturing labor will indeed create wealth. The same can never be said for government employees.

Yes, $73.21 is a disturbing figure, but there are other figures just as disturbing, 1.6 million, $66,371, $77,488, 288,000, $200 billion, 400,000 and $0.81. Figures that have contributed at least as much as UAW contracts to the economic problems in Michigan and the industrial midwest.

There are more than 1.6 million civilian federal non-postal employees. They made, in 2006, an average salary of $66,371/year, plus benefits. A typical assembler at a GM plant makes $27.81/hr plus benefits (2007). That works out to an annual salary of $57,845, about $9000/yr less than the average federal employee. Skilled trades make about $5/hr more, $32.32/hr, $67,225, about $800 a year more than the average federal employee.

So the highest paid skilled laborers in a domestic auto plant make just about the same as the average federal employee and the average federal employee makes about 12% more than a typical autoworker.

Now let's look at those other figures. $77,488 is the 2008 annual base salary for a federal employee at the GS-13 level. With progressions, that can rise to $100,972/year. Ten percent of the federal workforce is ranked at GS-13. Another 4.9% of the federal workforce is GS-14, with salaries of $91,566 – $119,312. The highest General Services rank is GS-15, which is paid $107,709 – $140,021, and represents 3.2% of the federal workforce. Eighteen percent of federal employees are GS-13 and above, a bit more than 288,000 people. In 2007 there were about 180,000 UAW members employed at the Detroit 3. That figure has been reduced by layoffs and is closer to 150,000 now.

So there are 288,000 federal employees who make at least $10,000/year more than the highest paid union autoworkers. Of them, almost 79,000 make at least $24,000 in salary more than the highest paid union autoworkers, and more than 51,000 make at least $40,000 a year more than a skilled tradesman in a GM factory.

People get indignant about 150,000 autoworkers who make $67,000 a year or less, but they don't get indignant about 130,000 federal employees who make $91,000 or more. Maybe it's because, while they don't do much work, they did go to college, they're 'educated' and 'skilled'.

Total salaries for the 288,000 GS-13s and above are at least $25 billion/year. There are regular increases every year, last year was 2.5%.

That's just salary. Remember $73.21/hour? That was calculated by adding the total cost of UAW worker benefit package and employer paid taxes like FICA and Medicare to the hourly wage rate, ~$30.00/hr. It includes pensions and health plans, everything else that can be put under the heading of non-wage compensation and benefits and possibly even the cost of those notorious job banks. It also includes the cost of retiree pensions and health plans.

A rule of thumb when estimating total compensation is that a good benefit package will usually cost an employer about the same as wages, so you can see that the UAW package, with benefits about 33% more than the value of wages, is indeed a generous package.

So let's look at benefits for federal employees in the GS system. The Civil Service is rather proud of how it treats the people who supposedly are working for you and me and you can find a list of standard federal employee benefits on a handy website, http://usgovinfo.about.com/blbenefits.htm. Most Americans can't get benefits like federal employees who have a benefit package that would make the UAW jealous:

Federal Employees Retirement System, Thrift Savings Plan, Federal Employees Health Benefits Program, Federal Employees Group Life Insurance, 13 days sick leave each year; 13, 20, or 26 days of vacation leave each year, depending on years of service; 10 days paid holiday each year., Flexible Work Schedules; Telecommuting; Family Friendly Leave Policies; Employee Assistance Program (EAP); Part-Time & Job Sharing Positions; Child & Elder Care Resources Adoption Information/Incentives; Child Support Services. Nursing Mothers Program, On-site/near-site Day Care, Day Care Tuition Assistance;
Child care/Elder care support groups, Employee Assistance Program, Recruitment Bonus Program, Relocation Allowance, Retention Allowance, Incentive Awards (Monetary, Time off, Honorary, Non-monetary), Career Resource Centers; Training Opportunities, Inter-agency Transfers, Student Loan Repayment, Long Term Care Insurance Program, Tuition Assistance.

Where to start? Really, do most people in the private sector have access to benefits like Retention Allowance (continuing payment to retain departing employees; up to 25% of basic pay) or Student Loan Repayment?

With such a generous benefit package, those GS-13s and above must cost the taxpayers at least double those employee's salaries so when you consider total compensation, it's most likely about $50 or $60 billion a year contributing to the Federal deficit. Remember, $50 billion/year is just for 18% of the federal workforce. While there's at least a small chance the Detroit 3 won't come back and ask the taxpayers for another $25 billion next year, there's no doubt that those Federal employees will be paid next year, and the year after that, etc. unless you expect the Federal bureaucracy to shrink under a Democratic administration and Congress. At least those UAW members are being paid out of voluntary purchases, not coerced taxes. Those autoworkers' labor helps create wealth and contributes to the growth of GDP. A good deal of federal employees' labor is of dubious value and only contributes to the growth of the federal deficit. How much of the federal workforce is not much different from the UAW's job banks, where people get paid not to work? At least the UAW is honest about some members getting paid not to work. Just try to question a public employee's work ethic and you'll find out that you're not the boss of them.

I'm not saying that all federal employees don't contribute. Border enforcement agents are important and so are the scientists at the Center for Disease Control, but does anyone believe that all 288,000 of those GS-13s and above are really doing productive work that serves taxpayers? Highly paid federal employees have come forward describing how there are thousands of their co-workers who have no productive work. They sit and read newspapers or surf the net all day. They get paid for doing nothing because getting rid of them would mean cutting department budgets and no supervisor wants a smaller budget. The more people they 'supervise', the higher their own GS rank will be. Even if they are doing productive work, they're getting compensated unfairly generously, at least compared to the salaries of most taxpayers who are paying for those high salaries.

That brings up another question, where does the money come from to pay all those highly paid Federal employees? That has to do with that other figure: $0.81. That's the average amount of Federal spending in Michigan for every dollar in taxes the state sent to Washington over 1981 to 2005. During that period Michigan has always been in the top half of states in terms of per capita gross tax revenues. All those high paid autoworkers paid a lot of Federal income tax. Over the same time, Michigan never ranked higher than 43rd in per capita Federal spending. Over the past 25 years the federal government has drained Michigan of $200 billion and sent it to elsewhere.

A lot of it, of course, goes literally to Washington. Well, Washington and its suburbs in Virginia and Maryland. So many highly paid Federal employees live in the Washington, D.C. area that 9 of the 20 highest-income counties by median household income (2006) are in just two states, Virginia and Maryland. Maryland is the wealthiest state, per capita, in the country. Per capita Federal tax revenues from Maryland have typically been in the top ten states. Still, at the same time, every year, Maryland received more in Federal spending than it paid in taxes, averaging $1.25 per dollar of tax. Michigan saw a net loss of just under $200 billion, Maryland saw a net gain of $190 billion. Over the past 30 years the federal government has transferred about $800 billion dollars of wealth out of the industrial Midwest.

Imagine if that $200 billion was still in Michigan. Perhaps new jobs would have been created to replace the 400,000 jobs lost over the past decade or so.

It's not just the Washington area that received Michigan's tax dollars. Most of the sunbelt, the states in the south and southwest, has had a net gain in term of Federal tax dollars over the past 3 decades.
In general there has been a huge transfer of wealth from the industrial midwest to the sunbelt, paying for water systems, roads and other infrastructure, military bases and defense plants, as the same things in Michigan deteriorated or went away. Two Air Force bases in northern Michigan have been closed and tank production moved out of the state. Ironic for a place associated so closely with cars, Michigan's roads are in infamously poor shape. Michigan has lost 400,000 jobs while the federal government took money from Michigan to facilitate job growth elsewhere. The automakers haven't exported jobs out of Michigan, it's the federal government that's effectively done that.

When it comes to who has gotten fat off of others' hard work, though, Federal employees, and folks around Washington and in the sunbelt are closer to the front of the line than Detroiters.

Read More & Comment

None of This Makes Sense to Me

There are pros and cons to both sides of bailing out the domestic auto industry, though if I had $5 for every inanity on the subject I could afford a nice new American car.

A caveat: I live near Detroit and I'd like to see my neighbors avoid abject poverty. My location must mean I'm stupid, lazy, greedy, backward looking, clueless and on crack. Those are quotes from online comments.

I wonder about all those industries that pretty much no longer exist in the United States: shoes and apparel, textiles and steel, consumer electronics and machine tools. The list is long. Were those industries also run by shortsighted knaves, eager to rob their customers by selling them junk, with lazy incompetent workers, grabbing every cushy benefit, hindering productivity? Or has the US allowed our manufacturing base to wither for lack of a coherent industrial policy and Wall Street's focus on short term profits?

We're told rewarding bad behavior with no guarantees that the bailout will work is bad policy. The domestics, critics say, will return for more cash again and again as they burn through billions. That is possible. The free marketeer in me says that creative destruction is the way capitalism works and I'm actually still undecided about the bailout. I'm opposed to corporate socialism but fear that a collapse of the domestic auto industry would take down most of their supply chain, and irreparably harm what little remains of our industrial and manufacturing bases. That would put our high tech, information, and defense industries at risk. With today's dedicated defense industry, nobody will expect F-22 Raptors to start rolling off the assembly line instead of F-150 pickups at Ford's Dearborn Truck Plant in the Rouge complex, but without a general industrial manufacturing base the F-22 can't be built. Weapon projects have already been stalled because machine tool companies have gone out of business or have been sold to Chinese companies. If bailing out Detroit allows us to maintain a strategic edge, I'm for it. Considering we let our strategically vital machine tool industry wither and die to buy cheap stuff from Walmart, I'm not optimistic. Most Americans don't seem to care as long as it's not their business that's closed. Furthermore, there's tremendous class bias at play. The disdain in the media and some blogs for autoworkers reveals an attitude that if people working in industry had any brains, they'd have gone to college. Anger is stoked towards "uneducated" autoworkers with the audacity to make a good living.

People object to rewarding bad decisions on the part of management and labor. Put aside the financial bailout and how competent Wall Street is. That's a once in two generations' debacle. Instead look at how the federal government responds to more mundane bad decisions. FEMA operates the National Flood Insurance Program to provide taxpayer backed policies for people who cannot get flood insurance from a private carrier. Why can't they? Well, some might say that building your home on a flood plain is a bad decision, but we taxpayers have been subsidizing bad decisions like that over and over. There's no guarantee a bailout of Detroit will work but there's also no certainty of failure. The domestics have made radical changes and they just might pull it off. However with FEMA's NFIP, there is no chance of 'success'. Homes damaged in the great Mississippi River floods of 1993 were repaired at taxpayer expense then and then again after severe flooding this past spring. Floods are literally as regular as rain. General Motors may not end up failing. Those houses will flood again. Like that Cajun guy used to say, gare-own-teed!

Speaking of floods and Cajuns, is it wise to spend $300 billion rebuilding a city already located under sea level? Are Bourbon Street and the French Quarter more vital to our national interest than our manufacturing base? Will we throw beads to our rivals and enemies and then tell them to show us their boobs?

Where do all those billions come from? For the past three decades the wealth of the industrial midwest has been transferred to the sunbelt and the D.C. suburbs of Virginia and Maryland via the IRS, paying for federal salaries, water systems, roads, infrastructure, military bases, and defense plants, while bases and defense plants in the midwest were closed and our infrastructure allowed to deteriorate. Since 1981 Michigan has gotten $0.81 in federal spending for every dollar we've sent to Washington. Mississippi gets $1.68 on the dollar and Alabama gets $1.38. That amounts to a drain on the Michigan economy of over $200 billion. What would $200 billion do for the Michigan economy? Maybe help rebuild our industries here, diversify, start new businesses and grow our economy without asking for a "handout" of what is our money in the first place.

Some say the domestics should declare Chapter 11 bankruptcy and reorganize, jettisoning their surplus dealers and UAW contracts with expensive health care and pension costs. Airlines, after all, have come back from bankruptcy. Does anyone buy a ticket on a flight a year or two from now from a bankrupt airline? What kind of warranty do you get from an airline? Does anyone spend $25,000 on airfare? Airlines sell a service, not a product, and most people keep their cars for more than a year or two. Warrantees are absolutely vital to selling cars. Be honest, would you buy a car from any bankrupt manufacturer?

We’re told that bailing out the domestics would be like putting money in the pockets of already overcompensated UAW workers. Frequently mentioned is a figure of $73.21/hour in wages and benefits. The only figure that's gone viral faster is that of Britney Spears when she's forgotten her underwear. Autoworkers have generous benefits in part because of the hand of government, which doesn't tax those benefits. If the choice is a non-taxed benefit or higher wages, most workers and employers would choose paying less income and FICA taxes.

Besides, that $73.21/hour is a red herring. To begin with it's not wages, but the total cost of the labor contract divided by the number of union employees and includes all the money spent on retiree pensions and health benefits. In any case, the NUAW renegotiated its contracts with all three of the domestics recently, giving concessions that pretty much level the playing field with the other manufacturers in terms of labor and structural costs. Health care will shift to VEBAs managed by the union, and there will be two tier wages and benefits, with new employees getting lower pay and 401Ks instead of a defined pension. The problem with the contracts is that the significant savings won't kick in until 2010 and the domestics don't have enough cash to last till then.

I'm not a fan of organized labor but UAW members do actually produce goods for their wages and help create wealth by turning raw materials into higher valued finished goods, assuming their managers are doing their jobs as well.

In comparison, there are over 1.6 million federal civil service employees paid an average salary of $66,371 (2006), matched to a benefit and pension package more generous than anything available in the private sector. You can see it here. Just one example: federal employees are eligible for a "retention fee" of 25% of their salary to keep them from leaving. Almost 20% of Federal civilian employees make over $77,500 a year in salary, 288,000 people sucking hard at the federal teat, about twice the number of autoworkers at the domestic auto companies. Because of all those highly compensated federal employees, Maryland is now the wealthiest state, per capita (about 50% higher than Michigan) and 9 of the 20 wealthiest countries in the country are in the Virginia and Maryland suburbs of D.C.. UAW members make things for wages paid out of consumers' voluntary purchases. Most federal employees don’t do much of anything productive, and they are paid by taxes coerced from the general public. Which is a greater drain on our economy, UAW members making $73 an hour with bennies or all those GS-11s and above taking $45-$50 billion a year out of the tax coffers? For all its sins, the UAW doesn't increase deficit government spending. Autoworkers contribute to the GDP, federal employees contribute to the size of the federal deficit. Who's more likely to be unemployed next year in the new Obama administration, an autoworker or a federal employee?

American cars are junk. Or so a large number of consumers are convinced. After all, their dad had an unreliable 1985 Pontiac so they'll never even think of buying an American car (while forgetting about that rusted out 1978 Honda). Does anyone not shop at Sears because their mom had a bad experience with a Kenmore vacuum cleaner 20 years ago?

Today, quality control from the domestics is pretty much on par with Japanese, Korean and European cars. Measured in defects per 1000 new cars, the very best, Toyota, Honda and, yes, Ford, are just over 10 DPT. The very worst are about 13. So 99.7% of consumers never see a difference. Cars are not built the same way they were built 5 years ago, let alone 25 years ago. All the domestic companies have instituted Demming style quality control and their vendors have made even greater strides in quality.

Bailing out Detroit is said to be a poor investment because the domestics are hemorrhaging cash. Yet not long ago they were very profitable, making billions of dollars a year, enough for GM to buy Saab & Hummer and Ford to buy Volvo, Jaguar, Land Rover, and controlling interest of Mazda. At the time Daimler bought Chrysler, Chrysler was more profitable than Mercedes Benz. Now, however, the domestics are pilloried for those profits because they sold SUVs and pickup trucks and didn't invest in fuel-efficient small cars or new technologies. The domestics are criticized for not selling the cars people want now and criticized for in the past selling the cars that people wanted then.

Speaking of consumer demand, another inanity is that people are voting with their wallets and don't want American cars. From the way people talk, you'd think that hardly anybody buys an American car anymore. The truth is that GM, Ford & Chrysler sold just about 400,000 units in October, 55% of total vehicle sales. Yes, a majority of American car buyers last month bought cars from the American companies. I guess they must be as stupid as the folks who live in Michigan.

I may live in Michigan but it seems to me that the supply and demand still works. Remove companies selling 55% of something and I'm pretty sure that prices on that something, any something, will go up. Toyondissandai will be severely impacted by the collapse of the vendors they share with Detroit's supply chain and some of their assembly lines will go on hiatus while they find replacements for those components. Even if they don't have supply chain issues they don't have the capacity to meet the demand of the current 10.6 million unit market, let alone the 16 or 17 million units of a normal market. It takes time and money to build a plant or convert an existing one to a new model and money is in short supply right now. In the meantime expect prices to rise, content to be decreased, with cheaper appointments and trim, and fewer standard equipment features. Without GM & Ford spending $15 billion a year on R&D, you can also expect the pace of technological innovation to slow. That's what happens when you reduce competition.

It's not just the cars at the American car companies that are said to be bad. The domestic dealers are worse. You're treated so so much better at a foreign car dealer than at a domestic 'stealership', as one anti-domestic blog puts it. While there are too many sleazy dealers, both foreign and domestic, there's something that perplexes me about the perception that foreign dealers have better customer service. Many, if not most, car dealers today own stores from more than one brand and it's pretty common for a dealer to hold franchises for both domestic and foreign brands. I don't see Roger Penske or Rick Hendricks deciding to send all of their worst employees to work in their Chevy and Ford shops, saving the ones with the best customer service skills for the Toyota and Honda stores.

Concerning customer service, we're told that the domestic car companies have alienated a generation of customers tired of bad service and poor quality who won't even consider an American product. I'm not sure, though, that the "millenials" and their parents are the best arbiters of determining good service. They both buy consumer electronics that are literally irreparable with no serviceable components and no replacement parts available. Forget about "no user serviceable parts". Nowadays there are no service technician serviceable parts. Whether it's a $25 mp3 player or a $1000 HDTV, it pretty much can't be fixed. Nobody hates LG or Panasonic, they just throw away the old one and buy a new one. Who has a better consumer reputation than Apple? Say something negative about Apple online and the acolytes of Cupertino will barrage your comment section with questions about your parentage. But is the total Apple customer experience truly better than GM's or Ford's? Apple products, unlike most consumer electronics can actually be repaired but when an iPod is out of warranty and the customer finds out how expensive service will be, though, they usually choose to replace it with a newer model. Their rationalization is that the new model has a bigger hard drive, can play videos, and comes in stylish colors, never giving a thought to the fact that what they've done is join a club or subscription with annual or biannual fees. Does the phrase "planned obsolescence", something supposedly invented by the Big 3, ring a bell? At least you can keep a '94 Ford Tempo running and it has at least minimal residual value. How much residual value does a 3 year old iPod have? Hell, even if the Tempo is completely trashed it's worth 50 or 100 bucks at the junkyard for the scrap metal. What's an iPod that doesn't work anymore worth?

Economics assumes that people are rational actors when it comes to money. People may be rational but consumers are not. Perceptions and conventional wisdom are more important than reality, at least when it comes to buying decisions and, apparently, bailouts. But what do I know? I live in Detroit.

Read More & Comment

Native Sons - Romney & Payne Thumbs Down on Bailout

Nobody can accuse Mitt Romney or Henry Payne of not being a car guys or of being anti-Detroit. Romney's dad ran a car company and Henry Payne works for the Detroit News and yesterday they both came out against bailing out Detroit with a blank check.

Romney may be a politician, but he's a businessman first. Born in Detroit, Mitt's father, George Romney, ran American Motors and practically wrote the book turning around an automaker. Romney senior's embrace of compact cars returned that company to a healthy enough state that it survived the 1950s collapse of all the other small auto manufacturers and lasted until 1987, when it was absorbed by Chrysler. It's not just car companies that Mitt knows about. He took what he learned from his father and became a turnaround specialist with the Bain companies and later the Salt Lake City Olympics. Ironically he was asked to return to Bain when it ran into it's own difficulties, brought that company back to health and is now said to be a billionaire. So if anyone can speak knowledgeably about bailing out and turning around Detroit, without any anti-Detroit bias, it's Mitt Romney. Also, the fact that he's probably not going to run for president in 2012 allows him to speak his mind freely without worrying about Michigan's electoral votes. That's why his call for the Detroit 3 to go through a structured bankruptcy carries a lot of weight.

In an Op-Ed in yesterday's New York Times, Romney says the Detroit 3 and the UAW got themselves into this mess and can only extract themselves through a structured Chapter 11 plan. He thinks that going through Chapter 11 gives them a chance at success while a bailout will guarantee their demise. He says all current stakeholders must take a hit for their bad decisions: current management, labor, stock and bond holders alike, and that a completely new corporate culture must take root in Detroit if it has a chance of succeeding.

Romney minces no words:

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Meanwhile, Henry Payne says that receivership may be the only solution. Like Romney he's a car guy with strong ties to Detroit and the car industry, living in Bloomfield Hills and working as an editorial cartoonist and writer for the Detroit News. Writing in the National Review, in a piece titled Auto-Bailout Mechanics, Paine quotes an industry insider from a major GM supplier as saying, regarding General Motors specifically and the Detroit 3 in general, “burn them down and start over.” Payne touches the usual bases, labor wage and benefit costs, how fuel mileage standards have and will continue to handcuff the domestics, the need for structural and management changes, and how the changes the Detroit 3 and the UAW have admittedly made so far will not be enough to avoid an eventual collapse.

He does, though, address a perspective of the crisis that has not gotten a lot of attention, the view from GM's supply chain. Nobody knows the problems of General Motors and the other domestics as well as their tier 1 suppliers. With a reputation for delaying payments, reducing payments, blaming suppliers for their own mistakes, and not giving suppliers sufficient time to develop components, not to mention the Inaki Lopez debacle in the early 1990s that may have permanently soured GM's supply chain, the relationship between vendors and GM is at best one of love-hate.

Payne writes:

"General Motors is not competitive.

That is the conclusion, not of conservative D.C. critics or Wall Street investors, but of officers with the Detroit auto-parts suppliers who do business every day with America’s largest car company — and with its Japanese competitors.
It is an open secret in the Motor City that — even leaving aside its high labor costs, surplus of brands, and bloated dealer network — GM’s manufacturing culture is inefficient compared to foreign rivals Toyota and Honda. Conversations with numerous supplier reps confirm an antiquated Detroit culture that does not thoroughly engineer products before contracting production with suppliers. As a result, production runs for Detroit automakers like GM are frequently interrupted to change specifications. Those interruptions add costs — costs that Japanese manufacturers rarely incur. The problem is so prevalent that employees for JCI — major international supplier Johnson Controls, Inc. — often joke that their acronym stands for “Just Change It” because its American clients routinely run up unnecessary costs by altering production contracts.

Can a $25 billion taxpayer bailout help General Motors change its culture? “No,” says one supplier executive. “You have to burn them down and start over."

While his supplier executive source may want to blow them away and start over, Payne suggests a middle course short of bankruptcy.

"But if bankruptcy is out of the question, its government-ordained cousin — public receivership — has precedent. A receivership modeled after the airline stabilization board that helped rescue U.S. airlines in the aftermath of 9/11 could have the effect of both restructuring GM as well as assuring its survival after reorganization."

Meanwhile I'm going to add Mitt Romney to Roger Penske on my short list of people I think are competent enough to take on turning around General Motors and Chrysler. I didn't include Ford because I think that Alan Mullaly has genuinely changed the corporate culture at Ford and appears to have a handle on turning things around there. Ford may have just barely avoided demise by turning the corner and implementing necessary changes as the multiple whammies of the housing bubble bursting, $4/gal. gasoline, and the financial/credit crisis hit. At the time, mortgaging Ford assets to have enough cash to survive their burn rate seemed incredibly risky. After the credit meltdown, it seems prescient.

Read More & Comment