The recent announcement that auto industry magnate Roger Penske was backing off an agreement to buy the Saturn brand from GM puzzles me. It had me wondering about plant capacity utilization (Look at Federal Reserve data here and go to page 11.) as well as Saturn market share googled here.
The Federal Reserve data talks about capacity utilization which in lay terms is the amount of output generated as a percentage of what could be generated. If you can make 10 million cars and are making 5 million, then you are running at 50% of capacity. For Motor vehicles and parts, it has run between 37% and 47% for the six months of Mar 09 through August 09.
Less than 50% capacity.
Standard economics rules of thumb suggest plant capacity should be managed to run between 80% and 90% of capacity. You need downtime on that production line for basic maintenance. So, you start falling below, you close or wind down and do retooling, maintenance, and moth balling, and when you get into the 80s, you break ground or "de-mothball" to get ready based on rolling average forecasts.
The 1972 to 2008 average capacity utilization was 76.7%. The high hit in 1994-1995 at 88.7%, and the low hit in 2001-2002 at 69.2%. Clearly the current 47% utilization suggests excess capacity for which someone could benefit by picking up a quirky, albeit reliable line in an outsourcing deal with an industry player, Roger Penske, handling the marketing side of the equation.
So what is up with the Saturn brand? The December 2008 statistic cited above put Saturn at a 1% market share. In theory taking on the assumption of manufacturing the cars in 2011 ought to sop up someone's excess capacity in a manner that will not crowd out growth of existing brands in any appreciable way. Sounds like a reasonable way to drive economies of scale for a manufacturer looking at low capacity utilization rates and accepting of the notion that this economic recovery is going to be slow and gradual based on the drilling consumer confidence has taken thanks to the equity losses in 401Ks and home values.
The fact that most tax payers took their modest refunds and retired debt rather than spend it corroborates this statement.
So what is the mindset that rejects picking up a little, nominal manufacturing demand at a time when plants are running at less than 50% of capacity?
The answer may lie in an analysis of the great depression in the book The Forgotten Man written by Amity Shlaes. Near the beginning of this book I have yet to finish, Ms. Shlaes discusses the economic gyrations early in FDR's administration that in part contributed to the economy worsening during this period.
And this goes to the hidden hand of government in the economy.
Government policy seeks to assign cost into the free market. A standard line there is to assign the externalities. The simplest way to think of this is to look, say, at a paper mill dumping waste into rivers. Cheap for the paper mill, but it has a societal cost. So EPA fines on the paper mill, if you will, place the hidden cost back on the manufacturer and consumer of same, with government as the aggregator.
That's a fair assignment. Only libertarian extremists reject this kind of action as a valid role for government in our free markets. Life is not black and white though, so a lot of policy debate is in this gray area of what is justifiable government policy exertion in the market.
But in the great depression, there was a period where FDR was bandying about higher corporate income taxes, and it froze economic activity. If you do not know your tax rate, you cannot forecast an accurate return. If you cannot forecast an accurate return, then you cannot do your Return on Investment (ROI) modeling to make your go/no-go decision on a new venture.
So capital sits on the sidelines in low returning instruments rather than being put at risk for higher returning ventures, given government signals about altering the cost factors make forecasting impossible.
Good or bad, the government intervention into GM has shaken investors. The intervention hammered suppliers and investors alike. It has added economic uncertainty in a market already in turmoil through legacy union agreements, pension obligations, and all of the rest.
Now, this should in no way, shape, or form be construed as a partisan effort to dope slap Obama. It is merely an effort to illustrate the need for caution and tempered rhetoric whenever public policy makers seek to exert government influence into free markets. It is necessary, as morals do not drive free markets , but we live and die by our economic activity and wealth creation and that fundamental need for economic productivity and wealth creation to provide for a strong society has got to be respected and acknowledged.
I glibly describe these situations as the unintended consequences of well intended programs. Saving GM was well intended, but it sent shock waves throughout the capital markets inclined to risk money in that industry segment. Capital owners do not know the rules, anymore, so they are inclined to sit on the sidelines.
(Same goes for banks sitting on mortgage securities worth probably 85% of face value assuming about 15% mortgage defaults when the government offers to buy them at about half that. Why get the liquidity at such a loss, when you can ride out the instrument without further risk extended to the home mortgage market? Why sell performing bonds at non performing prices just to get into a market where government changes in regulation make placing the discounted capital at risk, well, riskier than just hanging onto the bond until maturity? Why lend?)
Therefore, it is as if government has torn up the automotive industry play book on how to forecast contracts and risk, so who in their right mind intends to take risk to sop up a mere 1% of the automotive capacity out there?
So Saturn dies a slow, painful death. A noble marketing experiment by woeful marketer GM to take back the market from foreign competition slides into oblivion.
And so, too, does an opportunity for manufacturing jobs to continue to exist in an industry running at less than 50% of capacity today. It's not that we do not have the participants willing to put in the work, it's that we have public policy in flux, and we do not have a play book, so we do not need to recruit the players.
That's what happens when public policy steps in and breaks contracts. It adds risk to commerce and shakes investor's confidence.
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Comments
When all of the trouble was brewing at GM I had read that they went from 33% market share to 25%. I wondered how a company with 25% of the US market share was on the verge of bankruptcy,
Finally, shouldn't big business support single-payer health care as a way to better compete with other countries that do that? (I know I'm wandering off subject).
RATED.
I wrote about this a couple weeks ago, and you can take a look at that here: http://open.salon.com/blog/gwool/2009/09/03/current_corporate_gaming_strategies_on_healthcare
Even Kaiser automobile (read "The Last Onslaught on Detroit") went south, when Henry refused or was unable to put a V-8 engine into his cars in the mid 50s and was unable to compete with Ford, GM, Chrysler and Nash-Hudson (American Motors).
Penske had the sales and marketing savvy and a distribution channel to make this work. What he lacked was a source for new products and no new product development team. Here's were a partnership with a Tesla, or with a Chinese Manufacturer might have been saved the Saturn brand.
Otherwise it's curtains. Would like to read your response. Rated.
R
CAD design systems have greatly reduced R&D life cycles and allow for the vision of the few to be spread across the keyboard machinations of the many. Lee Iaccoca had it. Perhaps Penske does, as well. The challenge for visionaries in the automotive segment (The Tucker, the Bricklin, etc) had been channel access and production capacity. There's a glut of that today.
-J
Jared: The risk is in public policy uncertainty around the market. Scale still drives the automobile industry as it is a classic manufacturing environment. Smaller entrants rarely, if ever, succeed without deep pockets behind them.
What you have going on here, is that the public policy uncertainty makes ROI forecasting next to impossible. GM broke contracts, cramming down suppliers (Little Michigan suppliers of OEM brake parts, etc, etc,) as well as blindsiding investors thinking they were preferred debt holders.
So who wants to sign on to invest in an industry where the rules of the game are not clear?
That risk seems to me to be the lack of clarity in current public policy around contracts within the segment, no?
As you say "Capital owners do not know the rules, anymore, so they are inclined to sit on the sidelines." However, the reason they do not know what the rules are is because there are none at the moment; laissez faire Randian ideologues in and out of govt eliminated the rules, in large part because of legalized bribery by garden variety criminals in expensive suits.
Who would loan money on a house or a car -- let alone a risky business venture -- when no one knows the real value of that house or car? However, for the most part, that is not the govt's fault, and where it is, it is the fault of ideologues who believed govt's role was to get the hell out of the way of rabid mad-dog businessmen. When Bush the First called Reaganomics Voodoo Economics, it was the truest thing he ever said.
So who is to blame? How about Standard & Poor or the other so-called rating agencies? How about the the deregulated and privatized IndyMac, FreddyMac and FannieMae? How about the huge conglomerated financial institutions and the banksters who run them like personal piggy banks? These troubles were cause by those who wanted-- and got -- the rules removed so that they could be have like the jungle ethicists they are.
To hell with it -- let's name names -- how about Don Regan, George W. Bush, Phil Gramm, Alan Greenspan, Hank Paulsen, Ken Lay, Jeff Skilling, Bernie Ebbers, Joseph Cassano, Jimmy Cayne, Richard Fuld, Rick Scott, Tom Frist, Angelo Mozillo, Bernie Madoff, et al, and hundreds, if not thousands, of other co-conspirators to be indicted later -- if we're lucky (I'm not holding my breath).
Back to the auto industry -- it was not the govt that invented "planned obsolescence", nor signed expensive union contracts, nor invested in a foolish "lights-out" manufacturing theory, nor failed to understand what Henry Ford understood a century ago -- there are no customers for very expensive consumer products like automobiles without good wages.
That's what happens when you project 16-17 million units and sell less than 10 even with huge rebates. God only knows where those projections came from -- it doesn't take an economic genius to figure out that if wages remain flat over a decade while consumer prices rise, demand for automobiles will fall precipitously. Keep in mind, the non-domestic auto companies are having a hard time right now, too.
But I digress ... while you're reading, check out The Reckoning written by David Halberstam in 1977 for a prophetic expose of why no one wants much to do with Detroit these days -- including Roger Penske.
Most free market indicators would suggest someone, somewhere would pick them up. So it begs the question as to why not, and the biggest uncertainty surrounding that industry right now happens to be what the public policy changes are going to be like shortly after an intervention that hammered a lot of investors.
This is the problem with strident rhetoric demonizing capital owners. They do not have to put their money at risk. They can sit on it quite nicely with nary a peep gladly taking 2% returns on T-Bills figuring a 1% to 2% reduction in purchasing power through inflation beats wholesale investment into something where the public policy individuals could sweep in and wipe out the whole thing, or leave them with considerably less than half.
How we got here is for the policy folks to figure out and to PRUDENTLY impose guidelines as I made great pains to point to as being JUSTIFIED in my piece by discussing the easy example of a paper mill dumping waste at no cost.
It seems to me you're suggesting capital is sitting on the sidelines simply because they're frightened off by govt intervention, and I'm suggesting a lot of capital is sitting on the sidelines because a few capitalists at the top of the heap (see Goldman Sachs for one glaring example) gamed the system. I think that's fact, not rhetoric.
I understand the function of capital as the oil that greases the machine -- but when it instead greases the pockets of those in power, it's the machine that breaks down. GM and Saturn are a perfect example of that sad fact.
Geoff: Your analysis uses the myth of a "free market." Free markets are an invention of propaganda. They dont exist and they cant. Something as simple as fraud bursts the "free market" myth bubble, and you will always have fraud, influence trading, etc. Govt intervention is a reasoned, prudent approach to dealing with the market relative to unfettered greed, and fraud. An argument against govt intervention which uses the concept of a "free market" is still born.
I am no theoretical ideolog, Bill, and, frankly, I would be more interested in your thoughts on why Saturn can't find someone to build their cars consisting of 1% market share when we are at 47% of capacity.
Very interesting post Gwool and a good question to ask. The answer to your question is that there is noting that really distinguishes Saturn from other brands that aren't selling. While Saturn may advertise that their cars sell for less, in a market where most people are having trouble getting financing for a 10k car, the fact that you can get a Saturn for $20,500 instead of $21,000 for a similar Chrysler product is not enough of a cherry to lure a buyer.
If Saturn could crank out a 4 cyl. diesel that got 60mpg (anyone remember VW in the late 70's---we've had 30+ years to improve on that technology and yet most sedans only get highway mileage in the 20's) and cost $9500.00 then they may find a buyer.
Bottom line, Saturn could easily find someone to build their cars, but there would be no one to buy them.
Out whole industrial base in this country was about to collapse. The government could not just stand by. We need a manufacturing sector. Right now our economy is unbalanced, too many low-paying service jobs, and only government and medical jobs. We have not been investing in our own country. People thought they could get something for nothing. Buy bargain basement goods made by slave labor with no environmental regulation elsewhere. And let our whole industrial base collapse. It is finally catching up with us. Manufacturing is a key to middle class jobs, and technological innovation, also restoring our trade balance. We can't buy everything from elsewhere and continue to import millions of immigrants to compete with Americans in the job market, and then expect our country to thrive. It ain't going to happen. Just giving away our auto market alone was like handing other countries billions upon billions of money that used to come here and stay here. The neglect of our manufacturing base will be shown later to be one of the biggest mistakes Americans ever made.
Mcgarrett: Capital going on strike is a great way to think about this, as well as the financial sector at the moment. It reminds me of a Paul Tsongas comment in 1992 when running for president when he said too many liberals like employment but not employers.
Kathy: There is a lot in that post, and I am not sure how it relates to the Saturn situation. Yes, we are transitioning from a manufacturing economy to a services/information one. Government cannot stop inexorable market forces. This, frankly, is also at the center of the Amity Shlaes book analyzing the Great Depression. That was a transition from an agrarian economy to a manufacturing one. Aggregating labor around plants rather than out in fields thanks, largely, to technology automation in the agrarian sector. (Bigger combines, etc, larger economies of scale, etc).
Well technology automation has hit manufacturing and development. Less need for those aggregated labor pools. I thought of my barn office as an analogy of this. In the agrarian economy it housed farm equipment and livestock. In the manufacturing economy, it lay empty, and in the technology/information age, it housed two men and three computers doing knowledge work and electronically transmitting the product to a F50 company 200 miles away who then distributed the content across it's global employee information network.
The point of this piece was clarity of policy in economic markets. Not that policy was unnecessary to the equitable performance of said markets, but that lack of clarity in that rule setting by government did more harm to the markets it sought to regulate than good. I.E. The unintended consequences of well intended programs.
If Penske sees it the same way, and I suspect he does, there is simply no way to bump capacity at Saturn to the 70%+ figure you mention as being necessary to profitability. That is especially true since auto production remains a labor-intensive business, in spite of Roger Smith's foolish attempt at "lights-out" manufacturing.
The only way any of those facts are affected by the govt is if govt continues to favor policies that reduce wages relative to productivity -- as was clearly the case with "supply-side/lower taxes" economics which has dominated American politics for the last 30 years -- regardless of which party has been in power. The most glaring example of this failure of govt was that the minimum wage was not raised for ten years.
In short, someone would have to be a fool to believe the market for automobiles can grow while the wages of the poor and the middle-class are declining. Roger Penske is no fool.
1) The bigger issue within the auto industry was they made more reliable cars. People were holding them longer. Leasing became the strategy to get them into the show room for a decision every three years when the average time holding a car had gone to 7. It was a business review case study.
2) The 70% capacity is not to Saturn. It is to the industry as a whole.
3) The market for automobiles will remain strong as we do not have sound mass transit to offset this. (Blame IKE for that if you want. His reaction to moving military vehicles through the European system drove his desire to create one here, made suburbia possible, and tanked mass transit as a viable alternative given we went away from dense living zones.) So, a demand exists. This would suggest the declining wages, for whatever reason, means cheaper cars will be in higher demand just as lower priced homes drive the current uptick in housing demand. Saturn fits that niche.
It was also widely-acknowledged that US car companies, especially GM, were over-branded and over-dealered -- neither of which can be laid at the feet of govt or unions. In fact, GM was only to happy to blame the "evil" govt for the opportunity to dump contracts with dealers -- some of whom had been with the company for nearly a century.
GM was equally pleased to shit on bond-holders in the process. But I fail to see how that was the govt's doing -- how much would bond-holders have received if GM had gone completely belly-up and been subjected to a fire sale of its assets? Maybe then Penske would have bought Saturn.
You probably dont' want to hear this, but GM/Chrysler was yet another example of Bush/Paulsen ducking a problem and leaving it for Obama. It is foolish to argue, as some loonies do, that Obama wanted to takeover the auto industry -- who the hell would want it under the circumstances -- just ask Roger Penske.
What Obama courageously decided to do was try and protect our manufacturing base and what few good-paying blue-collar jobs are left in this country. Time will tell if that was a good decision, but it is simply idiotic to say, as some do, that Obama is out to nationalize this or any other industry.
As for your projections, while there is little doubt many vehicles -- my '97 Olds included -- are in desperate need of replacing, there is little chance of that happening while jobs and credit remain tight. Thus the every 3 yrs standard that became the every 7 yrs standard is rapidly becoming the every 10 yrs standard, and I predict it will become the every 15 yrs standard unless our economy makes a dramatic turnaround no one expects.
That's a statement of mathematical fact. Not a condemnation of policy. A condemnation of policy CLARITY.
Gotta run. Daughter needs primping before the dance.
securitized mortgages, ratings agencies and credit default bets were shown to be hollow shells, half crooked, half stupid. the whole finance system was exposed as a three-card game. my guess is that's why people were not in a hurry to buy any paper.
And here I've been laboring under the misconception that Saturn was a division of GM. I know you're trying to limit this discussion, but that isn't possible once you start painting govt as the boogeyman. The fact is Roger Penske likely decided against buying Saturn -- the impetus of your original point -- for a lot of reasons having nothing to do with govt -- far from your original point.
@al loomis
That's exactly the point I made in my first comment here. It is simply a false argument to suggest nobody wants to get involved with GM because of a govt cramdown -- investors have been shying away from GM for years for all the reasons I enumerated, and capital is "on strike" for all the reasons we both enumerated.
There's a reason Toxic Assets are still toxic.
The GM deal broke contracts. The government has said it reserves the right to review contracts and intervene. In short, you do not know if what you agree to will be allowed to stand. No one in their right mind makes investment decisions with that level of uncertainty.
Read this article: http://money.cnn.com/2009/10/01/autos/death_of_saturn.fortune/index.htm?postversion=2009100110
It goes through how Saturn was an effort to do it differently. You will like it, in that it says good riddance to Saturn, but it illustrates why I am saying that Saturn is NOT business as usual at GM, and hence why Penske likely did have interest in pulling it out of that morass and working it. He could not find interest in manufacturing the cars in an industry with 47% utilization RIGHT NOW when all he seeks is a modest 1% utilization. A Saturn OEM deal will not crowd out other more profitable brands. Parts suppliers got badly burned in this thing. Hence reluctance?
The article offers what MIGHT be the root cause which is GM went against industry practice with a tightly integrated plant into which they invested tons of money. Maybe the only way the thing works is to have that plant. Maybe GM intends to retool it for the Volt, which looks Dead On Arrival if the article is accurate.
"The demise of Saturn is a good thing for the new General Motors. tt was a living, breathing reminder of the arrogance that permeated this company for years, in the belief that GM brains, combined with an endless supply of money, could solve any problem. It wasn't true then, and it isn't true now. GM needs to learn its lesson from Saturn and say goodbye."
Like I said, if you're looking for a villain in this piece, it ain't the govt, it's former masters of the universe like Roger "Rabbit" Smith.
http://online.wsj.com/article/SB10001424052748704471504574447122719252350.html?mod=googlenews_wsj
Far as I can tell, Saturn was an experiment that failed because the product was not as good as its marketing. That was the fault of the designers and engineers, not the "technicians" who built the cars. They took a 20% pay cut with the promise of a share of profits that never materialized, so the initial "warm fuzzy" relationship between mgmt and labor quickly deteriorated.
Perhaps if Roger Smith hadn't blown billions on "lights-out" manufacturing and other fiascoes while he was running GM, there might have been enough money available for to have made the Saturn project a success. But we'll never know.
What we do know is Roger Penske never had any interest in building cars, only selling them, and it seems to me, that's exactly what got GM in trouble in the first place. RIP, Saturn.