The Stalwart

GM Could Go to Zero, Chrysler Even More Likely. Ahh... So We Do Have a Non-Govt Mechanism for Restructuring Companies

Yes we know. We could have been more succinct with our title. Nevertheless, one of the top US business stories yesterday involved a Credit Suisse analyst predicting that GM could go to zero in its restructuring process. Which would mean that over $2bn of equity value could be wiped out as debt restructuring could lead to current equity holders being diluted to oblivion. Of course in return for equity stakes, creditors would agree to haircuts on their principal. 

Which would reduce the debt burden and help restructure GM's business for survival... at the expense of current shareholders and creditors. Wait a second. So there is a non-government method to save the automakers. And taxpayers don't need to foot the bill? Creditors and Shareholders foot the bill and provide the concessions in order to salvage the remaining value of the company? Amazing this system we have.

Wonder why our system's basic functioning eludes most who argue for a government auto bailout as if its the only choice.

Shareholders get wiped out, as they deserve to be if indeed GM is worth less than its debt, creditors convert their debt to new equity, and there you have it GM can reduce its onerous debt burden. So where's the problem?

Ah yes, the UAW. They refused to have pay rates competitive with other US autoworkers in 2009. A bankruptcy and associated restructuring as described above would force them to negotiate contracts on similar terms to most workers in the USA. Thus their fear of bankruptcy and the widespread promotion of the nonsensical idea that "bankruptcy is not an option". Not an option for whom?

Bankruptcy doesn't usually mean the death of a company, nor the firing of all its workers. Somehow these basic points, plus the point that UAW members have benefits well above the average American, have been obscured in order to persuade Americans that a government bailout is needed. Hopefully understanding why GM shares could go to zero can help illuminate the fact that we already have a system for restructuring distressed companies and making them viable gain - bankruptcy.

(Vincent)

Toyota's Labor Costs

The cost of a man-hour is creeping up at Toyota. And in Detroit, new contracts will allow the Big Three to realize labor cost reductions over the next few years. BusinessWeek cites sources at Toyota who are worried about what the cost parity will mean. Will Toyota lose its edge?

But Toyota's manufacturing success has always been about a lot more than cheap labor costs. And the struggles of the Big Three go deeper than just the union/retiree issue. To suggest otherwise is a bit too reductionist. So this issue alone won't be Toyota's death knell.

I'm eagerly await the take of the manufacturing bloggers out there.

Detroit Auto Show

The Detroit Auto Show is set to kick off... I'm pretty excited to hear about all of the fuel cell and hybrids that we'll all be driving in 2015.

For U2 Fans and Manufacturing Junkies

Found a video that will primarily appeal to U2 fans, along with those of us fascinated by manufacturing and assembly lines, which is more where I'm coming from (though U2 certainly has its place). Anyway, it's some footage of an old East German Trabant factory, the much maligned car of the old communist state. In addition to the amusing images of workers shimmying pieces into place, the video is set to a pleasant Arthur Lyman (or is it Martin Denny?) soundtrack, perfect for some Saturday evening viewing:

(Via Organizations and Markets)

Preserving the Toyota/Google Way

A lot gets made over Google's struggles to maintain its corporate culture as it grows larger and more bureaucratic. Of course, it's not just Google -- it just happens to have grown from nimble startup to large corporation in the blind of an eye, so the changes are very pronounced and visible.

Another company with a well defined culture is Toyota, which is attempting to counteract the deleterious effects of size and bureaucracy. BusinessWeek:

How's this for strange? Toyota Motor (TM), the company that has the rest of the auto industry running scared, is worried. As new hires pour in and top executives approach retirement, the company fears it might lose the culture of frugality, discipline, and constant improvement that has been vital to its success. So management has launched a slew of education initiatives, and even uses a business school in Tokyo to teach Toyota to be, well, more like Toyota. "We are making every effort not to lose our DNA," says Shigeru Hayakawa, president of Toyota Motor North America.

Peek under the hood at Toyota and you start to understand why management is worried. Rapid growth has forced this most Japanese of companies to rely more and more on gaijin (foreigners) overseas. Top brass—the ones who transformed a lean upstart into a global powerhouse—are nearing retirement, to be replaced by a generation that has never had a bad day at the office. And in the past three years, Toyota has hired 40,000 workers new to the company's culture. "It isn't an immediate problem; it's like a metabolic disease you don't know you have before it's too late," says Tatsuo Yoshida, an analyst at UBS in Tokyo.

It just so happens that the company was recently slapped with a lawsuit that cuts at the core of the company's culture:

The California auto worker who is suing Toyota and others in a whistleblower lawsuit said Tuesday she was merely carrying out the quality-conscious "Toyota way" in spotting defects when managers cracked down on her efforts and demoted her.

...

The lawsuit accuses management at NUMMI of routinely deleting or downgrading defects that Cameron found as a certified auditor -- including broken seat belts, faulty headlights, inadequate braking and steering wheel alignment problems -- and demands $45 million in damages for retaliation against a whistleblower and intentional infliction of emotional distress.

"I believed in the Toyota way. I really did. I just wanted to know why they turned their head on me," Cameron said from California in a telephone interview with The Associated Press. "Why did they look the other way when I cried out for help?"

Who knows if there's truth to the suit... it could just be a fired employee that new how to hit the company at a sore spot. And it is a major sore spot. Just check out all of the books about The Toyota Way and lean manufacturing... employee suggestion boxes are a key component to many of them. Getting fired for spotting defects? Taichi Ohno would be spinning in his grave, at a minimum.

Anyway, it would seem as though Toyota is interested in heading off its problems before the company is fully infected, which is good to see. But ultimately, nobody has really figured out the way to preserve a company's core culture in the face of size.

Rejuvinating the Automotive Idiom

Over at VentureBeat Darryl Siry of electric car startup Tesla Motors offers up a piece on what it takes to invest in the nascent alt-car market. The piece is mainly geared towards VC investors, although certainly a worthwhile read for anyone:

There’s been a surge of interest in the field of alternative fuel vehicles in the past year — the public reception to the Tesla Roadster is indicative of a very large pent up demand for exciting alternatives to the petroleum powered cars we all drive. The sheer size of the market opportunity has drawn the attention of traditional automotive OEMs as well as a growing number of startup companies. Investors of all types are asking the same question – how can I participate in the creation of value in this space?

While the acronym OEM (original equipment manufacturer) is sometimes used to describe companies like GM and Toyota (as above), it's rare. 'Automaker',  'manufacturer' and 'car maker' are much more common. OEM is basically a term used in the tech industry.

Another power-player-to-be in the auto space is Shai Agassi, the former SAP Wunderkind who recently launched his own alt-car startup. It doesn't have a name yet, but it does have $200 million. WSJ:

Mr. Agassi has no background in the auto or energy industries. His Palo Alto, Calif.-based company has 10 employees and no officially registered name. But he has an audacious idea -- some may call it foolhardy -- to change they way electric cars are sold and maintained.

Electric cars have two big limitations: They are costly and need frequent recharges. Some auto makers are waiting for technology to improve so that batteries are able to power cars for longer distances -- say, 400 miles -- on a single charge. Mr. Agassi thinks he has a more immediate solution, exploiting existing batteries that are smaller and can go about 100 miles before recharging. His company would try to get auto makers to build cars using such batteries, making it easy to remove them from the cars. Then, instead of making customers pay for the car and battery -- which drives up the cost of electric cars -- charge them only for the car.

"The thinking has been, the battery is part of the car," Mr. Agassi says. "Actually the battery is like the new gasoline."

He says his company would buy and own the batteries. It would charge consumers a monthly subscription fee to recharge the batteries, and set up a network of charging sites and service centers, akin to gas stations, that pull out depleted batteries and plug in new ones to allow users to continue driving. The subscription rate would depend on a few factors, including how much customers drive, but overall, Mr. Agassi says he expects the cost of owning and operating a car under his system to be less than that of gasoline-based cars.

I don't really have an opinion on whether it will work or not, though hats off for trying. Anyway, I thought it was amusing/telling that observers immediately repurposed the fashionable software term software as a service (SaaS) for this new venture. Vinnie Mirhchandani called it Batter-as-a-Service; Zoli Erdos called it car-as-a-service. Again, terms originating in tech creeping into the auto world.

This all reminded me of Larry Ribstein's observation about Tesla, from last year, that the real breakthrough isn't (necessarily) the technology, but in the company's organizational structure:

But here's the interesting part: the car was made possible by the wonders of outsourcing.  It's clear proof that we're no longer in the days of Ford's fully integrated Rouge River plant.  The Tesla's main product-specific design features, apparently, apart from the intuition that the thing was possible, are the body and the high-efficiency brazed copper rotor.  And the fundamental intuition or inspiration is from Silicon Valley, not Detroit -- the car's promoter is Martin Eberhard, the guy behind that blast from the past, the Rocket eBook.

The bottom line is that auto development is poised to follow the computer industry model.  Developments in laptop battery efficiency may soon produce a 700 mile range and 160 mph top speed.  Or maybe somebody in Illinois will design a commercially viable corn car.  Will we have a Moore's law for cars?

My own particular interest is in organizational form.  See, e.g., my Why Corporations?  The auto industry was the model for the large, integrated corporate form. Tesla itself is a corporation, but look for the car company of the future to be a loose affiliation of LLCs, perhaps even privately owned. (emphasis added)

The trend is pretty clear on this. Slowly, the language and institutions of the tech industry is creeping into the auto world. Don't be surprised if it turns into a roar, coming to dominate completely.

A Big Auto Merger

Zipcar and Flexcar Driven Together:

Flexcar and Zipcar, two companies seeking to change American habits by renting cars by the hour, plan to merge in a deal that would reshape the nascent car-sharing industry.

After years of losses for both companies, Flexcar, based in Seattle and controlled by America Online founder Steve Case, said it will merge with the larger Zipcar, based near Boston, in hopes of achieving profitability within the year.

I actually looked into Zipcar recently for some planned, but unfulfilled apple picking trips to the country (probably not happening this year). One are of concern though, is the company's insurance scheme, which Felix Salmon has written a bunch about.  But as Felix notes today, it looks like the insurance situation will improve post-merger.

Toyota's Tricks of the Trade

In addition to various areas of co ft savings, Toyota manufacturing widely seen as being technically superior to its American counterparts.  The vaunted Toyota Production System is often replicated elsewhere.  But it's not all robots and precision engineering.  The system has some pretty low-tech features to keep it running smoothly.

A "shadowboard" is a common method in the Toyota Production System. It is a "5S" method where an outline or solid "shadow" is drawn behind where a tool would go on a board, bench, or table. With the shadowboard, it is easy to tell where tools go and when something is missing (a key element of visual management).

Now, via the above link here's a picture of a shadowboard used for tools.

Notice,  the screwdriver-like instrument is just an outline, so a factory worker could quickly realize that the tool was missing from its proper place before leaving his or her workstation.

It's a low tech technique, but it works.  Or, you could spend millions installing a new RFID system, and attaching a tag to each tool.  Your call.

Japanese Cars Earn $2,400 More Profit Each

A latest auto industry report says that Japanese cars make $2,400 more profit per car than US ones. Most interesting was that beyond cost efficiencies and less onerous healthcare obligations, Japanese cars also just plainly sell for higher prices.

Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. persuaded buyers to pay an average $24,289 per vehicle, 12 percent more than U.S. automakers, the Harbour-Felax Group study said. The Japanese paid $1,400 less per vehicle on health care, and their workers spent more time on the job.

We summarize the article's cost breakdown below:

• Japanese spent $1,400 less per car on health care benefits. The majority of the US disadvantage comes from paying healthcare benefits to retireees, of which GM has 338,000 to support.
• Toyota spends $348 per car on warranty costs vs. $500 for GM and Chrysler
• US automakers spend $138 more per car on longer holidays
• They also spen $70 more per car on worker absenteeism
• Japanse spends $133 per car on 30 minutes of break time/day vs. $203 per car on 46 minuts of break time for US counterparts.

Another major cost advantage for Toyota has been the use of standardized parts.

Toyota saved $1,000 per vehicle over the last five years by designing components such as hinges and air bags so they can be used on a wide variety of cars and trucks, Harbour-Felax said. In an August speech, she said one U.S. automaker, which she didn't name, offers 81 varieties of side-view mirrors, compared to two for its more efficient Japanese rival.

Currency has also been an advantage.

Today's yen-dollar exchange rate widens Toyota's advantage over domestic automakers by $1,054 per vehicle

Healthcare we can blame on Unions and Japan's public healthcare system. But cost inefficiencies from using non-standardized parts and lower average selling prices seem much less excusable for US automakers. Fixing just these two things alone could close the gap.

Related stocks: Toyota (NYSE:TM), Nissan (NSDQ:NSANY), Honda (NYSE:HMC), General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler (NYSE:DCX).

Truck Protectionism and the Chicken Tax

The truck market is often considered to be one of the stronger areas for the Detroit automakers, though recent inroads by Toyota have certainly made them less dominant.  But did you know that there are special trade protections for trucks?  Via DetroitWonk, Edmonds discusses a little-known tariff called the Chicken Tax:

The Chicken Tax was instituted back in 1963, and was aimed at European (read VW) truckmakers. The long and the short of it is that there was a trade war going back then between the USA and Europe. The Europeans tripled the tax of chickens being imported into Europe, and the US retaliated by putting a 25% tax on any truck imported into the USA. That's how it came about, and we've lived with it ever since.

So now there is an effort afoot by the Bush administration for a free-trade agreement with Thailand that would substantially reduce this tariff, if not eliminate it. The UAW and Detroit automakers are fighting this tooth-and-nail not to let this happen. They fear that if the Chicken Tax is reduced or repealed, the US will be flooded with cheap pickups made in Thailand, and that their "truck cash cow" will disappear.

Obviously, it won't be good for Detroit if the tariff is revealed, but it's not good for consumers to be paying artificially high prices on autos.

Here's an article from last year, in DC political rag The Hill on the subject, which explains the significance of a deal with Thailand:

AIADA argues that removing the tariff would lower truck prices on imports and give American consumers greater choice. But Reuther said the deal would lead to a “flood of imported pickups” that threaten American jobs. Roughly 25,000 workers are employed making pickup trucks in the United States. Toyota, he said, has already moved its pickup-truck production facilities in Japan to Thailand.

But AIADA said foreign truck makers would have already chosen Mexico, with its low labor costs and ability to export trucks duty-free to the U.S. market, as their main platform.

Toyota and Nissan have already sought to avoid the chicken tax by moving some pick-up production facilities to the United States.

Given the fact that producers can already get around the tariff (US production, or in Mexico), it's possible that it won't be a big deal, but that won't stop this starving industry from fighting for crumbs of beneficial regulation, particularly one aimed at one of their strong markets.