Sixty To Zero - An Inside Look at the Collapse of General Motors...

I just finished reading "Sixty to Zero", an engaging and insightful read by Alex Taylor III on the collapse of General Motors.

He succinctly articulates what I've always thought. The reasons why Detroit has produced so many duds is because the companies have mistakenly tried to satisfy right brain desires of the market using left brain answers, filtered through a host of other management issues on top of that.

...Band-Aid solutions like needs segmentation provided only mechanistic solutions to emotional problems: creating cars that people wanted to buy.

They had not figured out how to offer usable fantasy as well as their competition.

Think for a moment about the world of fashion. Imagine a company that makes pants, and they make them from burlap sacks and use rope for a belt. They do this because it's cheap and the pants work. But would you ever buy them?

Pretty much the same thing happened with cars in Detroit. The people who ran things didn't "get it". These days they're turning out better cars than ever but it remains to be seen if the Detroit 3 can really turn things around.

Saab Turnaround

Following its acquisition from General Motors by Spyker, Saab has been on the move with a number of notable projects:

• Introduction of the new 9-5 for 2011.  Much of the development was done by GM prior to the transition.  The results look promising.
• Saab recently signed Jason Castriota, formerly of Bertone and Pininfarina, as design director.  Some of his works include the Ferrari 4/5 one-off and the Maserati GranTurismo.
• Beginning in 2012 BMW will be supplying turbocharged 1.6 liter 4 cylinder engines.
• The 9-3 will be updated for 2012, presumably with the BMW engine as one of the engine choices.
• There is a smaller 9-2 model now under development. 
• And Saab also began researching a fully electric 9-3 project with a Swedish coalition, with batteries coming from Boston-Power.  The EV is expected to reach the market mid-decade (2016).

With all of these changes, it looks like the venerable brand may have a future yet.

The Next Big Thing Is About 1.4 Liters

Future engines are getting downsized for cost and environmental reasons. But due to increasing efficiency, there shouldn’t be much if any reduction in performance. Why do with 5 what you can do with 3? Classic engineering progress.

According to this month’s AEI (Automotive Engineering International), Nissan, Chrysler, VW, GM and a number of other automakers will be releasing engines in the 1.4 liter range. These will supplant current engines in the 2.4 liter range, and will feature a variety of efficiency enhancing features such as Direct Injection and turbocharging.

Coupled with more efficient CVT or dual clutch transmissions, or with just more speeds these powertrains will find their way into vehicles expected to return over 40 mpg, in an effort to raise each manufacturer’s fleet average fuel economy above the nominal 2016 CAFE target of 35.5 mpg.

Daytime Running Lamps Will Not Be Required

Back in 2001 GM had petitioned NHTSA (National Highway Traffic Safety Administration) to require vehicles to be equipped with daytime running lamps (DRL). It took a while but today the agency published a denial of the petition.

Here's the official summary:

This document denies a petition for rulemaking submitted by General Motors on December 20, 2001. The petitioner requested that the agency amend the Federal motor vehicle safety standard (FMVSS) on lamps, reflective devices, and associated equipment to require the installation of daytime running lamps on passenger cars, multipurpose passenger vehicles, trucks, and buses that have a gross vehicle weight rating under 4,536 kilograms (10,000 lbs). NHTSA has reviewed the petition and performed an extensive analysis of real world crash data. Based on the results of our study we were unable to find solid evidence of an overall safety benefit associated with daytime running lamps and are therefore denying the petition for rulemaking. The agency maintains its neutral position with respect to the safety benefits from the use of daytime running lamps.

Links to full document: Text and PDF formats.

Hitachi Improves EV Batteries

Hitachi is now up to the 4th generation of its lithium ion batteries. They are claimed to be 50% more powerful than the current version, and will be shipping samples to automakers this fall for evaluation. The company hopes to have them in mass production circa 2013.

Earlier this year GM ordered 100,000 battery packs from Hitachi for hybrid vehicles.

Source: Automotive News

Is GM Learning Disabled?

An article in Automotive News reports GM has been working on a project for four years to standardize the designs of its factories so that it can build vehicles of the same architecture anywhere, reduce costs and actually turn a profit. Furthermore, it projects the plan will be 82% complete by 2012. GM calls the concept "interbuildability."

We call it "obvious". That's what their competitors have been doing for decades. McDonald's figured it out in the 1950s. Michael Gerber wrote a book about it (The E-Myth Revisited), and millions of copies have been sold. It's not a secret.

This is another example of GM's idea du jour. Now just wait for them to botch up the execution of the plan and try something else. GM should just stop talking and concentrate on doing things right.

Source: Automotive News

Penske Acquires Saturn

This is a huge boost for the 350+ Saturn dealers. As I suggested in December, this was a probable opportunity.

Roger Penske operates the second largest auto dealership group in the country (Penske Automotive Group) as measured by revenue. In addition to the auto group, Penske is also the U.S. distributor of the Smart ForTwo by Mercedes, owner of a
reknown racing team (they've just won their 15th Indy 500 last month), and operates one of the largest truck leasing fleets in the world (over 200,000 trucks). Pretty much the midas touch.

Penske's plan is to import cars based on Renault-designs manufactured by Samsung in Korea starting some time in the 2012 time frame. Until then they hope to continue selling the current most of the current models.

While it's a move GM has to make to focus on its core, it's another case of selling tomorrow for today. Clearly Penske is likely to succeed with the project. Not only that, he's starting with one of the better dealer networks within GM. Saturn has long been known for great service, no pressure sales and no-haggle pricing.

What GM is doing is creating a tough new competitor for itself in a few years (perhaps along with Hummer).

I haven't seen any further mention of the Sky roadster and the Delware plant where it's built along with the Pontiac Solstice. But don't be surprised if Penske picked these to flesh out the future product line as well.

The Day Comes

Too late to short GM. GM filed for bankrupcty protection today citing assets of around $82 billion and debts of $172 billion. Automotive News reports the company employs 92,000 people and supports about 500,000 retirees. Ouch.

The US Government will provide an additional $30 billion in financing to keep GM going and will take a 60% stake in the reorganized company, while the United Auto Workers (UAW) will receive 17.5%, the Canadian and Ontario governments 12%, and existing bondholders 10% (60 + 17.5 + 12 + 10 = 99.5%). No mention of that last 0.5%.

Lutz Wants Permanent Gov Auto Task Force

Automotive News reports Bob Lutz (GM Vice Chairman, possibly next in the firing line if it weren't for his upcoming retirement) is calling for a more permanent form of the automotive task force, to establish ongoing dialogue with the automakers and help the industry become more competitive through fuel economy regulations, trade rules, and currency issues. He claims these are advantages that Asian manufacturers receive through their governments. No mention of European (German) companies who've also taken significant US marketshare.

That's all fine and dandy. But this is another clear indicator that Detroit hasn't learned its lesson (Bob, it's not them. It's Detroit). In a free market economy the most successful companies produce the best cars, cars that the market wants in sufficient quantities. GM and Chrysler haven't done enough, and aren't doing enough. Calling for more government assistance in the form of trade protection is not going to improve the product.

Federal Government To Invest $30b In GM

In an effort to get bondholders to agree to terms, the Federal Government is willing to invest a further $30b in GM, on top of the nearly $20b it's already funded.

So far it seems the Government is going to own 72.5% of GM, the United Auto Workers (UAW) union's trust fund will own 17.5% (with a possible 2.5% increase in its stake later), and the bondholders (who hold $27b in GM debt) are expected to receive the remaining 10%, with warrants to buy an additional 15% share at a later date.

Current stockholders would essentially see their investments rendered worthless as GM is nationalized. They would also likely get nothing should the company file for
bankruptcy protection.

No word yet on whether GM will file bankruptcy.

GM Likely To File Bankruptcy Next Week

Multiple outlets are reporting GM may file for bankruptcy next week (CNN for example). Speculation is that the "bad" assets will be cut out and the "good" assets packaged into a new company which would emerge. Automotive News (subscription required) reports GM's bankruptcy plan calls for another $30 billion in Federal loans, bringing the total close to $45 billion.

This begs the question (sort of tongue-in-cheek), why couldn't they just go bankrupt with the debt they already had? Isn't this just trading one mountain of debt for another, with added strings and loss of control?

A lot of people (bondholders, shareholders, dealers, employees and the American public taxpayers to name a few) are getting a raw deal. Is it necessary? No one knows but it IS going to get uglier before it gets better, if it ever does.

It's also interesting that the Chrysler filing was likely a test case (see my earlier post), it's not yet out of bankruptcy, and GM is getting ready to file already. The urgency of the government deadlines is rushing decisions which should be made at a more prudent pace.

Waste Heat to Electricity

Lots of interest lately in capturing the energy in exhaust heat from internal combustion engines. Converting that energy to useful work makes a lot of sense - if it can be done cost effectively.

Last week I sat in on a presentation by John Fairbanks of the U.S. Department of Energy about thermoelectric applications in vehicles. He estimates a there's enough waste heat generated by a Chevy Suburban (and space under the chassis for the system to fit) to produce up to 800 W of power. Efficiently capturing such energy would enable the vehicle to power accessory loads such as the cooling fans, navigation and entertainment systems, and so forth. This is intended to help enable the "beltless" vehicle in which the engines don't have the parasitic loads they're currently saddled with.

Air conditioning is a big load so there are also proposals to eliminate R134 (a big source of greenhouse gas emissions) and shift to "zone air conditioning", which would blow cool air from individual seating positions. This would only require a fraction of the power needed to cool the entire cabin. So perhaps a thermoelectric generator would have enough power to handle it.

GM, BMW and Rolls-Royce (owned by BMW) are all currently developing such systems and are targeting the year 2012 for production. Something else interesting was said. If the efficiency of such systems reach more than about 35% efficiency, the IC engine could be replaced by an external combustion engine that burned anything, since that would be a more efficient method.

White House Statements On Viability Plans

The White House basically told GM and Chrysler their plans won't work ("are not viable"). Both companies are uncompetitive, have too high of cost structures to survive and compete, and rely too much on large vehicles and SUVs. And both have overly optimistic outlooks on marketshare retention and pricing power.

Specifically, the summaries say GM's assumptions are break-even at best by 2014, with legacy liabilies reaching approximately $6 billion per year by then. This says it all: "Even under the Company's optimistic assumptions, the Company remains breakeven, at best, on a free cash flow basis throughout the projection period, thus failing the fundamental test of viability." Further, "Under its own plan, GM generates $14.5bn of negative free cash flow over its 6 year forecast period."

As for Chrysler, the statements included "...every single one of Chrysler's brands are in the bottom quartile based on JD Power APEAL scores", "... about 40% of quality issues (IQS/100 vehicles) are design related...", and "...in the first quarter of 2008, approximately 34% of buyers were subprime or near-subprime..."

The summary cited excessive costs due to a lack of scale, falling marketshare, overly optimistic assumptions, low quality image, and low odds of keeping up with CAFE standards.

Read the GM summary here.

Read the Chrysler summary here.

Finally, the White House goes on to back the warranties of vehicles purchased from these two companies during the restructuring period.

I'll leave you with this thought. Might GM and Chrysler products experience a decline in quality? Will it be hard to pinpoint if it's because low employee morale results in lower product quality, or struggling dealerships submit every little fault as a warranty claim? After all, it's backed by Uncle Sam. Just a thought.

What's Wrong With the Auto Industry?

So the big news of the day is Rick Wagoner was forced out of GM. Of course GM and Chrysler are both in a big pickle and it's a very complicated problem.

But the fundamental issue is that they are not really in business. They are cash-devouring problems that the US government now control and support. I view this move as Washington asserting its grip and making an example of current/past management. But that's not going to solve what's wrong with the industry.

First and foremost the problem with the auto industry is poor management. Management that does not understand automobiles.
Cars are not widgets nor are they commodities. Consequently they cannot be treated as such. If they were there would not be nearly as much variety nor emotional attachment to them. They are not just "needs" but they are to a large extent "wants".

Is it coincidence that the two companies in most trouble now are not run by engineers? Did you know that Honda, Daimler, VW, Nissan/Renault, BMW, and Ford (don't need Uncle Sam's money at the moment) are all headed by engineers? Toyota is one of the major exceptions. But incoming CEO Akio Toyoda is a diehard car enthusiast. The management at these companies have a keen understanding of automobiles and what their customers want.

Secondly, it is again poor management in the larger sense. No long term strategy. How many reorganizations and reshufflings have GM and Chrysler announced over the years? How many times have those companies said the next time they'll get it right? How many times have they exchanged one ill-conceived strategy for another mid-stream? More times than a cat has lives. They have never had any viable long term strategy and then properly executed it. It's always one quarter to the next.

Thirdly, they depended too much on the availability of easy credit (so did the economy as a whole) for people who were not creditworthy. In other words, the market for automobiles was smaller than it appeared, which further exacerbates the problem of overcapacity now that the market has shrunk.

Lastly, it is ineffective and counterproductive government regulations that have contributed to the mess. Healthcare costs are a part of it. Labor unions another (and they are getting more sway with card check). CAFE (Corporate Average Fuel Economy) on the surface doesn't seem too bad. But today's 262 page final rule for Model Year 2011 is full of errors and poor assumptions (more on that later).

So the question now is how can these two companies turn out good product when they're worried about going under in a matter of days? The answer is that they can't.

And that's why any pretension that GM and Chrysler are businesses should be put to rest. Business implies profits. And any hope that these organizations will ever turn one again is pretty slim. They should be allowed to go bankrupt and reorganize or dissolved. Throwing good money after bad is not the solution. Nor is a government task force or nationalizing these companies going to solve any more problems in the long run.

Saturn: A Different Kind Of Company?

Automotive News reports that GM has been approached by competitors about selling their cars under the Saturn brand. At this point, Saturn has no products planned for after 2011.

A possible spin-off (as previously mentioned) could also provide the new buyer/partner with assembly capacity in addition to the dealer distribution network, since there is excess capacity available.

AN is also reporting that the new company could use some light design capability to give the vehicles a family resemblance. Last year Saturn produced somewhere around 250 thousand units, which works out to about 625 units per dealer. A new company would need to be able to obtain a significant amount of volume to make the transition work. It's a tall order but by far the best alternative.

EV Flashback

Speaking of General Motors, a quick glance down memory lane to the February 1994 issue of Automobile Magazine reveals a test of a prototype of the GM Impact electric car. One reason it was developed was because of California’s optimistic requirement from the early 1990’s that 2% of each major manufacturers’ vehicle sales in the state would be made up of Zero Emissions Vehicles (ZEVs) by 1998.

Looking back the Impact had amazing specifications for its time: Drag coefficient of 0.19, a 70 gasoline mpg equivalent range on the EPA cycle, regenerative braking, a top speed of 80 mph, 0-60 mph in 8.5 seconds, and a curb weight of 2,910 lbs. That’s including 1,100 lbs of lead acid batteries, and functional air conditioning, anti-lock brakes, and airbags.

The magazine praised the car’s handling, developed with the help of former Lotus engineers, despite the low-rolling resistance tires that were inflated to 50 psi. GM estimated that with volume production the price would be $24k, though more like $17.5k with tax incentives.

Granted the batteries were hoped to last 1,000 charge cycles and last four years, about 20k to 30k miles, but the idea was brilliant. If they had the will to stick with it, GM would be leading the electric car segment today, and it would probably be a lot bigger than it is.

Saturn Scenario

Automotive News reports this week that GM cannot close down unprofitable Saturn without spending a lot to buyout the 400+ dealers. Figures north of a billion dollars have been bandied about.

What does Saturn stand for, what does it represent? From the beginning it’s been a no-haggle, “friendlier” kind of company. That implies trust and honesty, which doesn’t seem like much of a stretch to position it as socially responsible and thus environmentally sensitive.

Perhaps it would be in everyone’s best interest if another manufacturer (or even a well funded upstart), especially one without a U.S. presence, took the brand off of the General’s hands to produce and sell a new line of vehicles that would resonate with the market, and help distance the brand from GM’s troubles. In one move such a company would obtain nationwide distribution.

Who could use one? Renault, Peugeot, or a Fiat brand (Alfa Romeo, Lancia, etc)? Maybe even an importer.

GM would get out of the deal without having to pay big bucks, the dealers would have another shot at staying in business, and maybe the market will have more and better choices.

What Happened to Detroit?

After decades of mismanagement and mediocrity, we’ve all seen many of the overarching issues laid-bare in the past several weeks. In a nutshell here are the Detroit 3's problems:

1. Poor Management, Perpetual Reorganization, No Solid Long-Term Strategy

Actually their long term strategy essentially amounted to lobbying to keep the status quo in terms of fuel economy and regulatory standards. Cheap gas spurred big profits in SUVs and other vehicles that were not necessary in the numbers in which they were produced, and also put the manufacturers at the mercy of fluctuations in fuel prices.

All the while they went from one failed plan to another with no consistency in long term outlook. Every couple of years each manufacturer would roll out a new initiative but the outcome was usually more of the same: Shrinking market share and decreasing profitability, while spreading their marketing too thin on far too many brands.

2. Producing Vehicles the Market Doesn't Want

The domestic manufacturers produce 8 of the 11 worst cars of 2008 according to Consumer Reports. That becomes even more of a problem when demand is constantly shifting and their plants are geared to only producing a few models, with little flexibility.

Because of continued production of less desirable vehicles they’ve hurt the value of their brands. Sure, by many objective measures the domestic manufacturers have made great strides in productivity, cost, and quality.

But they missed the boat on building exciting, interesting, and desirable vehicles. The reason for this simply is that the executives do not understand cars. They may understand some of the numbers, but until the cars are what people want to buy, they’ll never make the numbers.

3. Excessive overhead (labor cost, healthcare, etc)

Not much of the fault is with the labor unions. They negotiated what they could. Sure it was shortsighted and the results helped dull America’s competitive edge and drove jobs to Mexico and overseas. But the real fault lies with management that would be so inept as to ALLOW the unions to push them into the agreements that they did.

The reason they're in crisis now is because they have been losing so much money, and then the credit crunch sharply reduced sales (many buyer's can't qualify for loans) AND reduced the credit available to the companies, especially since their existing debts (bonds) have continued to be downgraded. It's a vicious cycle resulting from the 3 points above.

By the time they realized this it was all too late. We’re now at a stage where it looks unlikely that GM and Chrysler will be able to stave off bankruptcy without government support (and even then it’s not looking too bright). The reason is because their businesses are not strong enough to survive in good conditions, much less to weather the storm.

Chevy Volt

An article in Automobile magazine (Dec. 2008) speculates on tax incentives for purchasers that I estimate would put the full retail sticker at around $45,000.

The car itself will feature a 1.4 liter iron-block gasoline engine, producing 53 kW (71 hp), and the batteries will be kept in a 30% to 80% state of charge. The generator will only be used to power the car, not charge the batteries.

Reading between the lines, this is a way to obtain the maximum fuel economy rating and save money.

In theory the mpg rating will be determined by the distance traveled divided by the amount of electricity and gasoline used. But if the EPA is using the term miles per gallon I could see them not counting the electricity used. For example, if the car travels 70 miles on one battery charge and a gallon of gasoline, and the battery range is 40 miles, it is possible the mpg would be calculated as 70 miles / 1 gallon = 70 mpg, which as I’ve stated before would be misleading and inaccurate. I’ve seen articles guessing 100+ mpg.

Anyway, since electricity is less costly than gasoline, it makes more sense not to use electricity generated by gasoline to charge the batteries. Instead the electricity from gasoline is only used to propel the car once it runs out of battery electricity obtained via the power grid.

The motor, generator, and engine form one assembly. This indicates the architecture is intended to be modular and scalable for other vehicle models and platforms. Future developments will likely include running HCCI (Homogeneous Charge Compression Ignition) at a constant RPM. According to Automotive Engineering magazine, that’d be worth about 15% additional efficiency without the added expense and complexity of a diesel engine’s emissions control system.

It’s likely tuners and small volume manufacturers will offer upgrades and performance projects, provided parts and components are available and not too scarce. Can you imagine, say a mid-engine sports car, using a powertrain based on the Volt?

This car is a game changer. There’s plenty of risk as it is, but I’m concerned that it could be game over for General Motors if they don’t survive the current downturn. Hope it makes it to market and GM is around to continue development.

Too Big To Fail?

Not to be too much of a cynic but see what I meant last week? There's no business case for a GM/Chrysler merger but.... maybe taxpayers will foot the bill.