Chrome Sweet Chrome

This week, as part of GM’s ongoing youth movement, the Board’s executive search committee bypassed Bob Lutz and named 68-year old Ed Whitacre, jr. permanent Chief Executive Officer, removing his interim status.  Mr. Whitacre has a long telecommunications background, having once engineered the purchase of AT&T by former “Baby Bell”, Southern Bell Corporation (SBC).  His automotive background stretches back to the days when he first got his driver’s license and drove a service truck for AT&T.

He joins the ranks of non-automotive CEO’s to shepherd the nation’s former bellwether industry.  So far, Bob Nardelli was not able to move the needle at Chrysler, but Alan Mulally thus far has led a resurgence at Ford.  Mr. Whitacre’s prospects cannot be judged, therefore, on the track record of those two predecessors.  

Given the spotty record of his government directed czars, Ron Bloom and Steven Rattner, the industry is permitted an opportunity to draw and hold a deep breath.   One thing Mr. Whitacre might want to put into his Blackberry’s To Do List is to begin writing 535 thank you notes to the entire U.S. Congress, who has trumped the czars and has provided a path of return for dealers whose franchises may have been unfairly cancelled in the recent bankruptcies of GM and Chrysler.

Sergio Marchionne, who is after all, a lawyer, is on record as not appreciating the arbitration legislation passed by Congress to restore franchise rights to some to be determined number of cancelled Chrysler dealers.  Mr. Marchionne was under the impression that bankruptcy courts were the final arbiters of such matters.  While one can understand his frustration on one hand, but the process undertaken by both GM and Chrysler was not only arbitrary but not in best interests of the companies nor the owners of the newly reconstituted firms.

The Chrysler process is reported as being somewhat quick and dirty, while GM’s has seemed more deliberate.  This is true to a great extent, until the Automotive News had a lead piece last week on how Cadillac franchises have been cancelled.

Oh, John, let’s not park here.

Oh, John, let’s not park.

Oh, John, let’s not.

Oh, John, let’s!

Oh, John!

Oh!

This now ancient graffito pretty much sums up the twists and turns of trying to follow the debate sponsored by The Detroit News and WJR held last January 12 at the Detroit Athletic Club entitled, “Climategate: Are Green Auto Rules Based on Flawed Science?”  What sounds like a pretty straightforward proposition was subjected to a great deal of layering, twisting, turning, implication and nuance.  The discussion of the topic headed for the weeds on the first intonation, and deteriorated from there.  Let’s peel this onion.

To the organizers’ credit, the panel was made up of a balance of climate alarmists, realists, policy makers, industry representatives, politicians, and lobbyists, ably moderated by WJR’s Frank Beckmann.  The folks on the dais were:
 George Mason University Climatologist Pat Michaels
 State of Michigan Chief Energy Officer Skip Pruss
 Director of Research from Alliance of Automobile Manufacturers Kathryn Clay
 Director for Energy and Global Warming at Competitive Enterprise Institute Myron Ebell
 Congressman Fred Upton
 University of Michigan Climatologist Henry Pollack.

Professor Pollack’s opening assertion was that the science was not flawed, despite the hiccup from East Anglia, and that there was no need to debate.  Rather than everyone get up and leave, the discussion went on.  But as the various points of view emerged, it became obvious that the debate’s title was inapt. “Science” has little to do with the multidisciplinary policy debate that swirls around vehicle CO2 “emissions”, CO2 generation for power and industry, energy independence, CO2 and toxic emissions from China and India, alternative energy development and subsidies, and exploiting ample fossil fuels within US territory, Canada and immediately offshore, among other considerations.

Part of the opening remarks included a plea that that the “science” not be sullied by “political” concerns.  While there was a great deal of sympathy to that point of view, what the issue for the auto industry is how the scientific findings are being assumed, post hoc propter hoc, to mean that draconian mileage standards be enforced upon the automobile industry.  Indeed “policy” considerations (another word for “political” to be fair) are what the fallout from the scientific finding are all about.  It’s one thing to find a phenomenon, in this case “global warming”.  And it’s another to assign an agent, “human causation”. And quite another to burden one particular industry, in this case, the Automotive Industry.

After a notable victory, Roman generals were granted by the Senate a “triumph”.  No, not an old English sports car or motorcycle, but an opportunity to parade through the streets of Rome to the adulation of cheering throngs.  During these “Roman Idol” festivities, a slave was perched near the shoulder of the hero of the moment, and the slave’s job was to whisper into the ear of the honoree, “thus passes the glory of the world”.  Sic transit gloria mundi.

We plebian journalists were all atwitter last week at the Detroit Auto Show about the prospects of the long economic winter of 2009 thawing and “green shoots” were all around.  Particular adulation surrounded Alan Mulally like a halo throughout the ceremonies.  Not that the hosannas weren’t earned for the Ford CEO and his company, as the firm had one strongly profitable quarter in a very bad year and finished the year with a flourish with a 30% sales increase in December.  It’s just that we mustn’t get ahead of ourselves.

2010 has all the makings of a better year than 2009, one of the worst in several decades.  Looking at projections, most analysts predict an 11 to 12 million-unit sales year.  By any stretch, a twelve million sales year is a very bad year indeed, relieved by being better than the 10 million or so for 2009.  The good news though for automakers and suppliers will be in potential profitability.  Aggressive cost cutting has yielded a supplier industry breakeven point at 9.5 to 10 million units, as reported by Neal De Koker of the Original Equipment Suppliers Association (OESA) at the Society of Automotive Analysts’s meeting.  OEMs themselves have trimmed staffs and assets so that the Detroit Three might squeak out profits at such low volumes, evidenced by Ford’s 3rd Quarter performance and GM’s projection for 2010.

The flip side to this, though, is that Neal’s statement that this 9.5 million unit breakeven at 50 to 60% of capacity might be optimistic.  Capital equipment in a capital-intensive industry is rarely that flexible or efficient to be profitable at that sort of percentage utilization.  More capacity will need to be sacrificed, and if true on the supplier side, it may be true on the OEM side as well.  While the worst may be behind us, considerable work is yet to be done.

In years past, I accepted a position with Ryder/PIE, a freight line that is no longer there.  I was hired in the early eighties to be their National Account Manager for Automotive.  I had acquired a knowledge of the then new art of Just-in-Time inventory management, largely through attending the U.S.-Japan Auto Industry conferences that had been sponsored by two University of Michigan operations, Dave Cole’s Office for the Study of Automotive Transportation (OSAT) and Robert Cole’s Asian Studies Program.  Hiring me was clearly a case of “in terra caecorum monoculus rex” or “in the land of the blind, the one-eyed man is king”.

Ryder/PIE was the result of a merger promulgated by the firms’ owner, International Utilities or IU.  This conglomerate owned a number of trucking companies in those days when deregulation was just gathering momentum.  In the firm’s transportation portfolio, Pacific Intermountain Express (PIE) and Ryder Truck Lines were both their largest holdings and good sized LTL (less-then-truckload) carriers.  They figured that putting these two together would result in either the nation’s third or fourth largest LTL carrier.  Roadway, Yellow, and Consolidated Freight were the other major carriers at the time.

Well, things did not go well in the merger.  Management and ownership both were to blame, and the newly merged Ryder/PIE firm did not have a handle on its cost structure, and management rather blithely ignored it.  IU ended up selling the firm to a group of asset-strippers, who had a number of issues, including buying condos and Jaguars for the CEO’s girlfriend on the company dime.  While not a good turn of events, earlier we had all been encouraged to create and join an ESOP, or employee stock ownership plan.  As part owners, a group of retirees had legal standing and filed suit against the asset-strippers and won.  In the end, the employees were granted a five-year note, and strove mightily in that five years to both manage the business and then try to find a potential owner or backer to pick up the note and carry on the business.

In the end, the firm straightened itself out, sorted the loose ends, but due to excess industry capacity could not find a buyer or guarantor and folded.  The parallels to GM today are obvious.

Earlier this week, Ed Whitacre predicted that GM would turn a profit in the upcoming year.  Not only that, but GM would begin paying back its debt to the nation soon as well.  All this is good news, and many analysts feel that given a half-decent SAAR (seasonally adjusted annual sales rate or overall sales for the year) GM may actually report a profit.  These possibilities are all good news, to be sure, but what happens when the Obama Administration tries to shed its ownership of GM?

At the turn of the New Year it is traditional to rack up the gains and losses.  In my case, I’ve spent most of the year doing the easy thing, that is, pointing out the erroneous and pretentious in both the industry and the policymakers who believe they can fly into town as “seagull managers”, make a big squawk and think they’ve solved something.  Most of this piece, though, will be devoted to those who have managed make lemonade out of the railcar load of lemons we’ve had for 2009.  Winners for the year include Subaru, Hyundai (along with its stable mate Kia), Ford and VW.

Subaru, in this annus horribilis, managed overall double digit sales growth, increasing volume by 14% through the end of November, as well as increasing its market share from 1.4 to 2.1%.  That’s a 50% increase in market presence and a considerable accomplishment that will pay dividends as the market recovers.  Hyundai-Kia similarly increased total volume, in their case by 7% to an eleven-month total of 680,282 units and a useful share bump from 5.2 to 7.2%.  Ford can’t claim to have increased volume last year, decreasing from about 1.8 million in sales through November to nearly 1.5 million.  But it has built up considerable marketplace momentum, increasing market share by 0.8%, from 15.1 to 15.9%, getting within a percentage point of Toyota, who has been flat through the year.  VW, too, has seen a dip in overall volume by about 20,000 units, but has seen an over 25% increase in share from 2.3 to 2.9%.  

In today’s world, gaining share is quite an accomplishment.  It suggests a well-rounded vehicle line up with attractive innovation, as well as managing to keep away market fears of bankruptcies and dealer closings, each of which cause buyer anxiety.  But to actually gain volume where the market has seen a 24% drop from already low 2008 levels nearly shows clairvoyance.