Software Nerd

Tuesday, May 15, 2007

An interesting year for Detroit

2007 will be an interesting year for the "big three" U.S. auto companies, and thus for Michigan. In 2006 and the first few months of this year:

Also, in 2006, all three companies had large lay-off programs.

The essential problem of the U.S. automobile industry has been the evasion of reality in the past. Unionization is primarily responsible for the problems. Of course, management has been less than stellar, but management's major mistakes of the past have been to go along with union demands -- taking the easy (and short-term) way out.

When the Japanese auto companies came to the U.S. they ought to have been moving some large parts of their operations into the Detroit area, for the same reason software companies locate in Silicon Valley. They also ought to have been buying up some U.S. auto-firms. This was politically impossible for a single reason: unions. Those who live in the Detroit area would have seen Union halls with "no foreign cars" signs in their parking lots. Well, the chickens have come home to roost!

While the U.S. auto industry is at rock bottom, all is not lost. They could go under, but there is also a large likelihood that 2007 will be the turning point. The most important change is that auto-workers, down to the rank and file, now understand that evasion cannot go on much longer.... and 2007 is the year when the new union contract is negotiated.

One big liability weighing on the U.S. auto companies is their retiree health-care costs. They're huge, but that's not the worst of it: they're also unpredictable and growing as the cost of health care continues to outpace others costs in the U.S. So, 2007 may be the year that the U.S. auto industry finally fixes this problem. The most likely solution is actually very simple in its elegance: let the union run the system.

Imagine how tempting it is to a union boss to say he gets to run a multi-billion health-care fund. In a sense, the workers would be lambs being delivered to their union bosses, but their trust in the union system is what got them here in the first place, so I would cheer for this approach. The automakers will set up a health-care fund that caps their liability, and the union will run it. This has been tried at Goodyear.

If the 2007 union contract can cap the health-care liabilities, and also close loss-making plants and cut superfluous labor, the automakers may have seen bottom. This would have been too much to expect even 5 years ago, but the mood among workers appears ready for it now.

So, I'm optimistic that it's up from here, and that in 2010, Michigan will no longer be near the bottom of the states in economic metrics.

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  • My own working hypothesis is that the US domestic auto industry will integrate with -- in effect, in will become an arm of -- the petroleum industry.

    The profit margin is with the blades, not with the razor that holds them. The economic significance of the razor is to lock you in to buying the blades that fit it. The economic significance of an automobile, likewise, is to lock you in to buying an endless stream of petroleum. So: why are the two industries not one already?

    The reasoning still seems sound, but ... the restructuring of the domestic auto industry has been well underway all spring, and has gone in a very different direction. There's been an auction for Chrysler of late, and none of the oil companies even stepped forward as a bidder.

    Why not? The puzzle, for me, is compounded somewhat when I look at their stock buybacks. They've been very aggressive in buying themselves of late. ExxonMobil has spent close to $48 billion over the last two years in buying its own stock. There are lots of reasons why companies do this. They might want to avoid dilution, they may want to discourage a proxy fight or a takeover.

    But another reason a company buys its own stock is ... to have it to offer again as part of the price of an acquisition, which may be preferable to a cash-only deal.

    BusinessWeek recently quoted an Oppenheimer analyst who said: "ExxonMobil could go tomorrow and buy a company for $100 billion using its own stock."

    So, why not Chrysler? It may well be hoping that the big prize yet falls into its lap -- that it can offer those shares in return for control of General Motors, the (domestic) Razor king.

    Or my theory about the synergy to be found in such an oil/auto company combination might just be wrong. That's a possibility, too.

    By Blogger Christopher, at 6:41 AM  

  • Interesting thought!

    Unlike printer-ink and modern razors, gas is fungible.

    Also, in today's world, such a combo might be political suicide: combining two industries that people love to hate.

    By Blogger softwareNerd, at 8:05 AM  

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