Showing posts with label Ford. Show all posts
Showing posts with label Ford. Show all posts

Friday, December 12, 2008

NPR on Japan and Cars

Someone from NPR called me this morning. She asked my opinion about why the Japanese stock market had dipped when the auto bailout did not happen. Intuition would indicate that the Japanese car companies would be better off because of less competition.

I told her there were two major reasons for the Japanese stock market's dip.

1. The Japanese yen's strength. Yesterday, the American dollar dipped about 2.5% against almost all other major currencies (FXC, FXF, FXE). Basically, America's citizens lost about 2% of their international purchasing power overnight. This is major news, but you wouldn't know it from the lack of media attention. (Quite frankly, pictures of Weimar-Republic-branded wheelbarrows carrying the American dollar should be on the front page of every major newspaper.)

The Japanese yen is strong in part because Japan has a high savings rate and is the world's second largest economy; however, in a perverse result, Japan's high savings rate works against them because they export so many products to the United States, where our currency is becoming weaker. Basically, Japanese products are going to be too expensive for Americans, so Americans will either buy fewer Japanese cars, CDs, and Nintendos, or the Japanese will have to reduce their prices. Either action will cause lower profits for Japanese companies, which is one reason the Nikkei declined by over 5%.

2. A chain reaction disrupting the global auto market. Car companies are more connected than you might think. A GM bankruptcy impacts a wide array of other companies, like steel manufacturers, chipmakers, etc. Companies that had the Big Three as primary customers would have to lay off workers and stop hiring, which puts less money in the hands of potential car buyers worldwide.

Also, in addition to joint ventures, such as NUMMI, car companies buy materials from the same suppliers. If one supplier, let's say Delphi, loses a major customer like GM, their cash flow is reduced, and they may need to lay off workers, delaying projects, new orders, and even existing orders, further disrupting the auto market.

Globalization means more and more companies, especially large ones, are interconnected. This has advantages and disadvantages. One major disadvantage is that if one large company is reckless, it creates problems for numerous smaller companies. Delphi still exists, but has been in Ch 11 bankruptcy since October 2005. Delphi's bankruptcy filing was probably the writing on the wall for the Big Three.

3. I also said any value left in GM, Chrysler, and Ford was in their finance arms. In plain sight, American car companies became subprime banks. They were practically giving away their products in exchange for a stream of steady cash payments, with interest. All those 0% financing commercials? That's the equivalent of a "no money down," ARM home mortgage, but on a smaller scale. Car loan interest is where the Big Three receive a large chunk of their income, because margins on non-SUV autos have been consistently declining. Like the banks, GM and Ford took on too many subprime borrowers and overestimated expected income streams. The result is now all too predictable.

Tuesday, December 9, 2008

An Auto Bailout is Unjust


Here's an audacious question: How is an auto bailout not preferential corporate welfare?

There is no contention that America suffers from an automobile shortage. Honda and Toyota are perfectly capable of increasing production to fill in any gap caused by a GM and Chrysler bankruptcy (I don't mention Ford, because it appears to be the healthiest of the Big Three). Meanwhile, Japanese car companies have created thousands of jobs in the South and are schooling Americans in how to run an efficient, profitable auto manufacturing operation.

To its credit, the UAW has responded to charges that it is asking American taxpayers to subsidize the Big Three's inefficiency. Unfortunately, its arguments are misleading. For example, the UAW has mentioned state incentives given to Japanese car companies as support for a federal bailout (See Autonews Article).

First, states like Alabama provided incentives to Japanese companies because the UAW was opposed to relocating to the deep South. (Southern states generally favor "right-to-work" laws, which are code for anti-union laws.) The UAW's refusal to support American production in the deep South allowed the Japanese to enter those states without competition. The UAW and the Big Three could have requested Southern state incentives, but they failed to do so on reasonable terms. As a result, any tax incentive given to other companies was due to the UAW's own unwillingness to be flexible. It's akin to losing a war because you refused to go to the most advantageous territory to fight--and then calling the other side dirty for going where you wouldn't.

Second, speaking of the Japanese, we criticized them for years because they bailed out their banks after their speculative bubble. Indeed, almost every American economics study found that bailing out inefficient companies exacerbated the Japanese recession. Just google "Japan's lost decade" for more. (Here's one particularly relevant link from a google search result: http://www.guardian.co.uk/business/2008/sep/30/japan.japan)

Third, the Japanese car companies received only $3 billion since 1992--far below the UAW's request for $25 billion (see penultimate paragraph of Autonews article). The disparate amounts of incentives requested indicate that subsidies aren't the reason for the Big Three's woes. In addition, while it's easy to forget now, the Japanese took a major risk in coming to the South to do business. Just fifteen years ago, no major entity was considering investing billions of dollars in the deep South because of its less-than-cosmopolitan reputation. This reputation required the Japanese to take major risks, such as opening manufacturing plants in places where some residents had never met a Japanese person and where pro-white groups still exist.

There's a happy ending to the Japanese and their risk-taking. Although various Americans continue to refer to Southerners as uneducated and backwards, it is now apparent that these so-called "backward" Southerners have outworked the Midwestern UAW. (It will be interesting to see if Southerners will return the favor and call non-Southern workers lazy and handout-prone). In short, the Japanese should be lauded for taking a risk when the Big Three and UAW refused to consider the South as a viable business destination. Moreover, $3 billion is not what the UAW is demanding, making their reference to the South irrelevant.

The UAW's remaining argument is based on emotion. It talks about the loss of thousands of jobs, implying that without taxpayer monies, the Big Three's employees will be in breadlines and bankruptcy courts. By resorting to this argument, the UAW has taken a page out of Naomi Klein's Shock Doctrine. The UAW fails to mention any other option except demanding billions of dollars in taxpayer monies. For example, it fails to advocate increasing the length of time and amount of payments given to unemployed workers nationwide. Yet, the $15 to $25 billion requested could be used to extend unemployment benefits for all Americans, and at higher amounts. Using this method, no industry receives preference, and taxpayer money benefits Americans nationwide. After all, it's not just the auto workers being affected by this recession, but engineers, accountants, and food service workers. Don't these workers have families to support, too? By demanding money only for auto employees so they can continue in an inefficient business, the UAW is essentially admitting it wants preferential treatment over every single American worker who has been laid off and those who will be laid off. Its attitude is unacceptable if you believe that government should consider the welfare of all its people, not just one particular group.

The UAW's selfishness exposes another issue with an auto company bailout--the slippery slope. What will Congress do when other industries come knocking? Will taxpayers be forced to support all affected industries that happen to have highly paid lobbyists? Once Americans understand that Congress probably wouldn't take seriously a bailout request from restaurants waiters and waitresses, they have to ask why their government is focusing on the Big Three to the exclusion of other industries.

The only reason to provide an automobile bailout is because of the Big Three's legacy costs, which may be shifted onto taxpayers anyway through the PBGC. Unfortunately for taxpayers, it seems that all roads lead to pillaging of their wallets.

Update on December 21, 2008: a 12/20/08 WSJ letter pointed out that the Southern states didn't get loans--they received tax deductions, which are useless, unless the companies actually invest in a particular state and expect to make a profit. In other words, without the tax breaks, a state like Kentucky would get 0 dollars for its residents. But with the tax deductions, a company might come to Kentucky and bring jobs and other positive benefits--none of which would have happened without the tax incentives. So Kentucky and its residents received a net gain because of the tax incentives. GM and Chrysler, on the other hand, are asking for loans directly from taxpayers, which force Americans to own a stake in American car companies and which do not create new jobs. The loans are high-risk and it remains to be seen whether American taxpayers will come out ahead.

Update on 12/23/08: Madoff's investors are already asking for a taxpayer bailout:

"There's no doubt that hearings will be held on this, and some government aid is a very logical request," said Robert Schachter, an attorney with New York-based Zwerling, Schachter & Zwerling, which is representing several Madoff victims. "If we're bailing out Wall Street and the auto industry, maybe these individuals should be bailed out too."

Can you say, "slippery slope"?