Time for an Exit Strategy: Obama, Sell Off Government Motors!

It was a sad day for the United States: GM filed for bankruptcy Monday, but in my view, it should have happened before the Obama Administration basically kept it afloat, lending good money after bad, covering a globally uncompetitive compensation package without any meaningful UAW givebacks until just before bankruptcy. On a related note, we saw the Dow Jones Average replace GM and Citibank with Cisco and Travelers.

I have mixed feelings about GM. My first car was a used Chevrolet subcompact, and my most recent two cars have been models under a defunct brand. (During the 1980's I drove a Ford midsize.) I primarily view cars for functional purposes; when I was traveling last year as an employee for a higher education software vendor, I would reserve a compact or midsize and often find myself upgraded at no charge to an SUV (because the car was not available); when I joined the National Emerald Club (which has an innovative flat-pricing, choose-your-vehicle aisle concept), I often dreaded going to the aisle, because other renters would beat me to the passenger cars, leaving me nothing but  SUV's, which I didn't want or need.

Let me talk about McDonald's, because I want to make a point about management. [Disclosure: I own a few shares of McDonald's.]  McDonald's was the focus of my capstone MBA business strategy course. My project partner was interested in McDonald's because he and his wife during their courtship lived in different cities, and they would often meet halfway at a McDonald's. In doing background research, we often ran into interesting facts. For instance, founder Ray Kroc decided to focus on hamburgers ("because there's only one way to prepare a hamburger--to fry it"); he didn't like hot dogs because there are multiple ways to cook them. [I fully understand the concepts behind Taylor's management system, economies of scale, and assembly lines, but I disagree: meat packers and concessionaires sell a lot of hot dogs.] McDonald's reacts very defensively to criticisms of its offerings, particularly health-related (saturated fat, salt, carbohydrates, calories, etc.), noting that there is a strong demand for their products "as is". This is simply a state of denial or risk-aversion; in fact, when they revamped their salad offerings, their sales exploded, especially among adult women (including Oprah Winfrey).  The other point is that McDonald's has seemed completely oblivious to emerging trends, e.g., trends towards obesity and type-2 diabetes.

If I visit McDonald's today, I'll usually wait the extra time it seems to take to get a Big 'N Tasty (I do wish it came with the choice of a whole-wheat bun, fat-free cheese, and more veggies); I wish I had other alternatives, like a tuna salad wrap with a low-carb tortilla, along with fresh-brewed iced tea. During my low-carb diet a few years back, I sent McDonald's a long list of suggestions, and one of their lawyers mailed it back, saying they don't read unsolicited suggestions. (I think they were really worried about my suing them if they started offering healthier food in line with my suggestions.) I just want a healthier alternative when I'm traveling on business. But I wonder in line with health trends, if one can sue a head chef for malpractice--whomever came up with the concept of the McGriddle, which I've never tried and never will eat.

Getting back to GM, the obvious reference points for my analogy in short-sighted management in terms of product mix and long-term trends. What part of the oil shocks over the past 40 years do the major auto companies fail to understand? Do they understand we produce a constantly shrinking share of the oil we consume and Democrats have stymied our attempts to deregulate domestic exploration and production, the result being we become ever more dependent on unreliable foreign suppliers and an increasing trade deficit? In all their forecasting, did the auto managers ever think about what the impact on their products might be if, say, there was a major oil supply interruption? (Not exactly unthinkable given the hostile relationship between Israel and Iran.) Or if rapidly developing Asian markets started bidding for a limited supply of exported oil. (In fact, the auto companies have operations in the Far East.)  All of their major domestic vehicle lines--SUV's, trucks, sports utility vehicles, etc.--are fuel-intensive. I remember news stories from the late 1970's when cars were spontaneously following shipments of  fuel-thrifty Volkswagen Diesel's into dealerships. And what were the demographic shifts underlying the focus on these product lines? Was the American family increasing in size (i.e., SUV's)? Did most American need hauling capacity to justify the purchase of a truck?

It's clear what really motivated the automakers into these segments: nice margins (which did not go unnoticed by foreign competitors). But this is similar to homebuilders building homes at the high point of the housing bubble continuing to chase the high end of the market, far outstripping the reach of most homeowners under a conventional 20% down payment. Foreign automakers were the only ones that "hedged" their product mixes with passenger car hybrid offerings. (I should also note that Ford has licensed Toyota's hybrid technology, i.e., used in its Escape SUV, but its 2010 Fusion hybrid is its own patented technology.) 

Former GM CEO Rick Wagoner famously said during a July 2008 keynote address at the Dallas Regional Center, explaining why GM didn't invest in hybrids earlier: "We have to build cars and trucks that people want to buy." Fair enough: you can't force people to buy smaller, more fuel-efficient cars when oil has dipped to $10 a barrel. There's no doubt that hybrid technology was very expensive for Toyota to develop and it takes a lot of sales to achieve payback on that investment. But did Wagoner really want to bet the ranch on indefinite cheap fuel, realizing America had been a net importer of oil for decades? He knew what would happen to his sales mix when fuel became more expensive, and nobody, including myself, likes to fill up sooner between tanks. But while Toyota used its profits to focus on its first-generation hybrid technology, GM decided to double-down its bet on gas-guzzlers by buying the Hummer brand.

But it's more serious than that. The fact is that the domestic auto companies were becoming increasingly dependent on certain market niches, and their passenger car offerings, with the possible exception of the 2010 Ford Focus, with Ford's own proprietary hybrid technology, have not been competitive, rarely making lists such as Consumer Reports' Best Buys. In 2006, Consumer Reports, which evaluates over 200 models based on performance, safety, reliability, versatility, and interior fit and fit, did not rate a single domestic make in its top 10 categories, including passenger cars, SUV's and trucks.

In contrast, the Wall Street Journal Tuesday reported the following:

Ford, Lincoln and Mercury sales totaled 155,954, up 20 percent versus April and the highest sales for any month since July 2008. Sales of the Ford Fusion were 19,786, Ford Flex sales were 4,305 and sales of the company's hybrid vehicles totaled 3,906 - setting three new sales records. The previous Fusion record was set last month with 18,321 cars when Fusion cracked the foreign stranglehold on the mid-size sedan market. It was the first time since July 2002 that a domestic car was one of the top three mid-size cars selling to retail customers. Recent independent studies rate Fusion and the Mercury Milan as having the best predicted reliability among all mid-size sedans. In addition, both models are rated the most fuel-efficient sedans in America.

The record shows that Ford management made some astute moves, ensuring operating funds at least through the upcoming year. It reinforces the fact that GM and Chrysler made some mistakes that go over and beyond globally uncompetitive compensation packages. However, Ford does not have an easy road ahead; for example, many   suppliers are being affected by the woes by the other two auto companies, and Ford is having to compete against domestic competitors being subsidized with guarantees by the federal government.

Nevertheless, GM and Chrysler in the short term face an uphill battle; they can't sell models still in design. Ken Bailey posted a user comment on the businessinsider.com website this week, saying the following: "The local Pontiac dealer says that his best selling cars are the Vibe (built by Toyota) and the G6, a small car. Half his lot is covered by GMC trucks and SUVs that no one wants or can afford to drive." Moreover, as Roland Jones, MSNBC.com, comments:

A recent survey by research firm TNS Automotive shows 20 percent of customers are less likely to buy cars from an automaker that is operating with government help. That figure rises to 37 percent when bankruptcy is introduced, according to report on the findings by IHS Global Insight. Only 12 percent say they would support a car receiving government aid, with that number falling to 8 percent if the company files for bankruptcy, according to the report.

Obama insists that he has no interest in micromanaging the auto companies. But he already has by terminating Wagoner, by imposing terms that disproportionately favor the  unions and their retirees over bondholders, and by postponing the day of reckoning for Chrysler and GM at the expense of the American taxpayer. Obama is also hurting the auto companies by imposing new/modified regulations making no sense, such as the recent decision to raise national CAFE standards to the California target. Diana Furchtgott-Roth in a May 2009 RealClearMarkets.com post wrote a recommended column, but I'll summarize key points here: (1) CAFE standards are not the same as "real world" EPA standards (which are already met by many domestic models); (2) implementing the CAFE standards will increase the cost of new cars, which adversely affects lower-income Americans, whom may hold on to their current cars (with existing emissions, etc.), which doesn't help the sales of recovering auto companies; (3) if the intent is to lower driving and emissions, increasing the variable cost of driving (e.g., gasoline taxes) (just like demand-driven oil price hikes last summer)  is a better way. Finally, although more points could be raised, government pressure in terms of product mix might actually backfire from the objective to spin off the auto companies from the government. For example, there are some arguments that years of Toyota Prius sales were effectively subsidized by other, more profitable non-hybrid sales. Pricing of new subcompact to intermediate-sized models may be constrained by market demand, and limiting the sales of better-selling SUV's and trucks with better margins could slow the companies' attempts to make the government whole.

I can only speak for myself, but if and when I purchase a new car, it will not be a Government Motors car.

On a Lighter Note

I was on the autospies.com website and saw a couple of user ad libs about prospective Government Motors models: "I can't wait to see the 2013 Buick Obamarama SUV and their new Yaris rival, The Biden." "[The Biden] will get 35 gaffes per speech." Well, I have further information on the Obamarama: It requires a GPS unit to tell the driver where to go and when to turn; its job engine won't turn over; the service shop doesn't work nights or weekends; the guy riding shotgun never shuts up; the Speaker on the left side of the car doesn't work as it should; the driver is constantly changing the tune playing on the radio, except the Fox channel is blocked;  the Obamarama blows a lot of smoke out of its exhaust to obscure the road ahead of those whom follow behind it; the driver is always bad-mouthing the previous owner; only the left-turn signal works; the vehicle comes with a lot of promised features, but not a lot of direction on how to use them; the driver always goes to parties with a lot of jackasses; he pays for gas using his grandkids' credit cards; he has a tendency to flood the engine, and there's this blonde in the backseat criticizing how he's driving and insisting that she should have been The One driving the car.