The New Middle - Gov'ts Guiding Hands

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*Disclaimer - The thoughts expressed here do not represent those of my employer*
I have been watching the Wall Street and Auto industry bailout proceedings with keen interest. Obviously, I have witnessed many friends suffer as their jobs vanished and I have personally been pre-occupied with what amounts to nearly quarterly head count reductions.
It does seem that everyone has opinions about the mess that is the North American auto industry.

Heated debates have sprung up in a few social networks that I frequent. With the ouster of GM CEO Waggoner, some folks have used this as fodder for the cries of dictatorship, socialism, communism. It all seems pretty ludicrous to me.
People must realize that inaction is not going to solve any of the current problems. Yes, it is true that Japan and Europe suffered through disastrous economic downturns and their governments also infused cash with very little positive effect. However, the US is dealing with effects of a constant erosion of its manufacturing base. As I have stated numerous times previously, America is in the midst of transforming itself into a service based economy. I don't believe the current leadership is willing to allow this transformation to occur.

Returning to the auto-industry.. Much of what I have heard is that the auto industry is largely responsible for creating the middle-class in this country. While this is a fact, we must also consider that those jobs were likely first generation middle-class and largely located in middle-America. I'm certain that my pops did not benefit from those jobs. Unfortunately, most of those beneficiaries are nearing retirement. Moreover, the jobs which were created by a healthy auto industry are now being replaced as the manufacturing base shrinks in this country.

So the gov't has two choices: (a) Stand-By and follow the same laissez-faire practices as the previous administration or (b) Infuse capital and help guide the economy in a proper direction.

If this involvement means firing warning shots at CEOs whose companies are squandering taxpayer dollars so be it. Waggoner took a spear for his peers on Wall Street too. Methinks it was more a show of force than anything else. Wall Street does seem to be handling business with an air of impunity.

To be very clear, I am not naive. For whatever reason, gov't seems handle Wall Street very differently than it is handling the auto industry. Not taking the conspiracy theorist stance _yet_, nonetheless, it does bare watching. Since we're talking about gov't intervention. What if both GM and Chrysler go the route of Chapter 11 restructuring? Perhaps it would be best to explain what will not happen. You will not witness anything remotely similar to what occurred with the now defunct Circuit City. Despite what some pundits believe, autos are not commodity items per se. Sure you can obtain off-the-shelf replacement parts fairly easily. Auto service parts are supposed to be available for 10yrs after the discontinuation of a particular model. So, service parts are not the major concern. The supporting value stream that is the ecosystem is at risk when a major player goes bankrupt. Obviously, many people lose their jobs and supply base suffers immediate problems. Most of the suppliers have not been paid the debt owed to them by both GM and Chrysler. This was done to help address the bond holders and potentially pay back the government (senior debt). So there could be a very large sucking sound after the death of a GM or Chrysler.

IMHO, Chrysler will never be a viable company under any economic conditions. I assert that the Obama administration latest actions would suggest that my thoughts are shared. Hence. the thirty day ultimatum given to Chrysler. heir products are to monolithic and the company has done very little to improve its so-called killer app, the HEMI.

GM has been given 60 days because it would appear that the administration believes it to be more viable. The GM restructing plan actually was very instrumental in the ouster of Waggoner . Much of the change was pushed out to 2013. Not very aggressive at all. GM also projected 13.5 million sales volumes as late as 2012. That is an overly optimistic forecast considering that sales volumes for 2009 are roughly 9 - 10 million units. Competition and economic conditions will certainly keep sales volumes far lower than GM projections. You don't need a degree from HBS to see through the smoke screens and false promises.

One last point on GM, it does seem that the Volt is looking more like a failure and that is quite a shame or sham. Take your pick. There is some noise about the GM / Segway venture, but I see this as a diversion from the real issue. They are not really invested in the electric vehicle. While I know that the electric vehicle is not the only means to end dependence on fossil fuels (ie Biodiesel, hydrogen, etc). However, electric is viable today, but none of the US automakers are in position to leverage it because they do not own the patents for the technology. GM sold its NiMH battery patents to Chevron. One can draw their own conclusions, and also figure out where the once dominant US automaker placed its priorities when it produced the EV1. However, as oil prices declined and profits were plentiful they gave up leadership for the rich profits. All US automakers fell prey to this shortsighted way of thinking. Do your own research and refute me if you wish.

Anyway, what industry will spawn the next generation of middle-class Americans? The new middle as it were. Thomas Friedman has his own ideas; however, it is clear that the automotive industry will not assume that leadership role again. Perhaps it will be renewable energy? Time will tell.

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    This page contains a single entry by AG published on April 5, 2009 4:30 PM.

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