Cars, Cry Babies, Crimea

By Lloyd Graff.

Robotic manufacturing of the Model S at the Tesla Factory in Fremont, California.

Automotive is back. America has become a great car-making mecca again. Almost every major builder has a manufacturing presence here. The market for cars is solid, if not exuberant. The industry has headed to the South in Tennessee, the Carolinas and Texas, and even further south into Mexico, which has integrated itself into North American manufacturing like Canada did 25 years ago. The UAW is no longer such a dominant player in the car building scene. The recent rejection of the Union by Volkswagen workers in Chattanooga is representative of its marginalization by younger workers who see the UAW as a vestige of hobbled Detroit that protects its bureaucracy and the interests of its older highly paid Northern workers, at their expense.

An interesting parallel to the UAW civil war among auto workers is the battle auto dealers are waging with Tesla. Tesla rejects the entrenched system of auto franchisees who are bestowed the right to sell cars in a given area. Somewhat like the Starbucks model of company owned stores, Tesla thinks it should own its distribution, create the selling atmosphere it wants, and keep the middleman’s profit. Cry baby car dealer groups are fighting this approach with big expenditures for clout and lawyers. While Tesla is a small player in the market, it has tremendous caché and visibility. If Elon Musk wins his right to sell from company stores, or even by mail-order or in malls, it could erode the value of traditional dealerships, which are already hurting from Costco intruding and Internet price shopping. The specter of Amazon Prime selling Honda Civics also has to be scary for dealers.

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Automotive business is strong, but not everybody in the industry is happy. Aluminum, plastics and composites are trampling on steel all over the car. Weight reduction to meet gas mileage requirements is forcing every component maker to experiment with lighter weight options. Steel is the target. Ford’s F-150’s aluminum bed is the symbol of the switchover, but weight reduction is being considered for every component.

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We are seeing better mileage everywhere, yet gasoline prices stubbornly stay high. While we are pumping more petrol out of the earth in North America, refining capacity is static. Oil is also being exported to a world market that sucks it up. Fracking has been successful but has not ramped up as fast as people expected because of politics. President Obama still sits on the Keystone XL Pipeline from Canada. The Ukraine standoff is as much about petroleum as it is about Vladimir Putin and his ego.

Crimea has enormous frackable oil reserves. Ukraine has not developed this incredibly valuable resource, but Putin may do so if Crimea ends up part of Russia, which appears likely now. Even if Russia doesn’t develop Crimea’s potential oil reserves (if it acquires Crimea), Ukraine would be at Russia’s mercy without petroleum.

Obama and John Kerry are talking tough, but if Germany, which gets much of its fuel from Russia and provides three quarters of Russia’s investment funds, does not get tough with Putin, Ukraine will be isolated and cold. Putin will probably not be a big winner in this tiff, but he will not be a forsaken loser. He will be seen as a power-hungry thug in the West, but still an important world player. Russia has a lot of negatives – decreasing population, rampant corruption, un-democratic politics, but its control of vast hydrocarbon resources will probably keep it going for at least a decade or two.

Question: Is GM still way behind its competitors?

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13 thoughts on “Cars, Cry Babies, Crimea

  1. Mike Bowling

    It is really sad that the auto workers from VW does not see the value of the union. If it were not for the unions we all would be making minium wage, even the non union workers. There will come a time when big companys will get even more greedy and the unions will return.

    +4
    1. allen

      Sorry but that dog won’t hunt.

      I just started a job as a CNC machinist for significantly more then minimum wage even though I’m a career-changer with very little experience and within rock-throwing distance of Social Security. It’s a non-union shop and I wouldn’t have it any other way.

      But you don’t even have to have skills to get more then minimum wage. A couple years ago, when the economy was hot, fast food jobs in the Detroit area were going begging for $11 to $12/hour. In a free market, for labor as for anything else, value is fixed by what the supplier demands and the buyer offers. Sometimes conditions favor the supplier and sometimes the customer but in a free market exchange the transaction only goes forward if both parties agree that it should.

      Unions, however, have nothing of value to offer in a free market exchange. Their value lies in the threat of violence that unions used to be pretty explicit about until they wised up and got legislation passed legitimizing their coercion.

      That’s all unions really have to offer, coercion and even then their coercive nature only works if the customer has no alternatives which was largely the case with the UAW. The UAW could force the auto companies to pay wages and benefits without any relationship to the value the workers produced and the car companies could charge American car buyers prices that supported the paying of those wages/benefits. And then along came real competition….

      +16
  2. Mike G

    GM should have been allowed to go bankrupt like any other company that becomes insolvent. Then sold to the highest bidder. They are getting better but I now drive a FORD they did not take bail out money and make a very good pick up truck.

    +14
    1. John M

      @ Mike G … While GM didn’t go through a formal bankruptcy court it did go bankrupt in every sense of the word. What didn’t happen was the assets weren’t thrown upon the market via liquidation so vulture capital could buy it up for pennies on the dollar. That is what pisses off so many people in the business media – it was the fire sale of a lifetime and they didn’t get a shot at buying something for nothing.

      But in a normal bankruptcy a company this large would have never been liquidated anyway – it would have found DIP financing and reorged and probably produced a result very close to the deal that was reached anyway. Equity whipped out. Worker wages cut in exchange for equity. Bond holders clipped. You can argue about how much of what to whom but that is pretty much how it is done and was done and will continue to be done whether in a bankruptcy court or some other ‘process’.

      The difference for GM [and also AIG] was that in the middle of the financial crisis there really wasn’t anyone big enough, healthy enough to provide the DIP necessary to process these firms through an orderly reorg. And fire sale liquidation really isn’t in anyone’s best interest except the vultures. So fed.gov stepped in and provided what was basically a DIP package via ‘bailout’. But it is really hard to even call that a bailout – it was every bit a bankruptcy-like reorg only that vulture capital [or pirate equity if you will] weren’t invited. I don’t see it as all that terrible given the situation at the time. Undesirable maybe but given the situation not the worst thing that could have happened.

      In a perfect world companies wouldn’t get that large and the financial climate that dysfunctional but in 2007 2008 2009 it was all of that and more.

      +5
      1. allen

        Nice story but I notice the absence of one participant, the big winner in the so-called “bankruptcy”, that came through pretty much unscathed – the UAW.

        In a real bankruptcy everything would have been up for grabs including the union’s contracts and other, long-term commitments. But in the bailout none of that happened so all those UAW retirees came through with their pensions and medical intact, the union came through with it’s current employee contracts intact and the American labor movement was saved from catastrophe as would have been the case where union promises shown to be contingent on the continued ability of GM, or whatever it’s currently called, to continue to pay.

        +2
  3. Peter@Polygon

    Commentary, Connected, Corruption! I’ve been thinking about a lot of these things but haven’t connected them the way you have. Beautiful commentary. It’s a shame how government corruption is still so pervasive in every issue on the planet.

  4. Peter@Polygon

    Mike B, I don’t think we’d ALL be making minimum wage. After about a year of that, you and me would be partnering up, calling Lloyd for a used machine, and bumping up our pay. I think the unions served their purpose but it’s probably time to move on.

    +13
  5. Nathan

    Unions have done a lot for American workers to protect them from unsafe conditions and unfair business practices. We now have organizations like OSHA, decent benefits and numerous legal prescedents to keep employers from arbitrarily firing an employee without due cause. However, that was all done about 70 years ago with only a few additions since then. The majority of what unions stand for today amounts to nothing more that fundraising for progressive (i.e. socialist) liberals seeking political office. There’s no sense in trying to deny it. Unions spent nearly 1 billion dollars to reelect the most left leaning president in our countries history. Since I’ve been alive (nearly 50 years) my earliest recollections of the unions were picket lines, slashing tires and smashing the windows of scab workers and violence against anyone within the “brotherhood” who dared to speak against forced unionism. Even in the last few years we saw the child tantrums of the unions when Michigan adopted Right to Work laws and Wisconsin allowed public workers to CHOOSE whether to belong to the union or not. We even saw politicians run away from the democratic process because they weren’t going to win a vote. REALLY!? With all of that said I do not have a problem with individuals wanting to group together and hire someone to represent them for their wages and benefits. Not everyone is good at those kinds of negotiations. Forced unionism needs to be removed from all work places. Let the people decide if they want to belong and pay the person who works harder and produces more than the person who does not. Let the people who create their companies decide if they want to sell their cars or online products in a brick and mortar store or not. We were once a nation that cherrished “Life, LIBERTY and the Pursuit of Happiness.” We need to get back to that.

    +14
  6. Gary Slack

    Lloyd, re your GM question, the 303 deaths a safety group has attributed to GM for ignoring defects may quickly supplant the steel to aluminum conversion news as well as GM being the first auto maker to appoint a female CEO. Arthur Andersen imploded for accounting abuses, and no one died.

    +2
  7. John M

    “Crimea has enormous frackable oil reserves”

    Maybe but I can 100% for sure tell you THAT is not what is behind the tension. It is much larger than that. People are not paying attention to history.

    The Crimea has been in Russia’s interest for centuries. Back before the Crimean War. It is their only credible access to a warm weather port. The Black Sea fleet home port is there at Sevastopol. There is no way they are going to allow that piece of land to remain Ukrainian UNLESS the Ukraine has a friendly [read that as puppet] government. Period.

    The Crimean Peninsula was part of Russia right up until the 1950s when Khrushchev ‘gave’ it to the Ukrainian Soviet Socialist Republic – then one of the ‘states’ of the USSR. Giving it to Ukraine was kabuki theater in every sense. Not sure why he did it but it wasn’t considered real as the whole place was run from Moscow. Ukraine. Crimea. All of it.

    After the break up of the USSR – Ukraine became independent. Russia tolerated Crimea remaining Ukrainian because the government in Ukraine was every bit the puppet and they signed a ‘deal’ making it clear the port at Sevastopol would be secure for Russia. Now with the specter of a pro-western government in Ukraine Russia has concerns. The argument that Russia citizens there might be threatened is BS but everyone winks and knows that. Its really all about the port.

    The closest analogy to us is the Panama Canal. We are fine with Panamanians ‘owning it’ so long as we have full access anytime we need it. But if there was a hostile government in Panama threatening our easy access to the canal we would act and immediately. We would take control and possibly remove the Panamanian government whether or not the rest of the world approved. Its that important. See what happened to Noriega. It would happen again – same process, same reasons. Russians are doing a very similar thing – making sure the Black Sea [Mediterranean] Fleet has access to warm water no matter what might happen going forward.

    I am not saying Russia is right but I am saying why they are doing it and that it is not about oil. Its way bigger than that.

    +1
  8. Lloyd Graff

    John M makes a good point about Russia wanting a warm water port for its Navy and Crimea long leaning toward Russia. My point is that the potential oil reserves could have made Ukraine a much more viable economy down the road and Putin’s putsch makes Ukraine even weaker versus Moscow. Germany’s close relationship with Russia cuts both ways. It is dependent for gas but Russia needs reliable solvent close by customers. The big nvestment by Germany binds them but Merkel does not want to seem like she is abandoning Ukraine because it hurts her politically. I think this duality is what we are seeing play out as the Europeans consider sanctions for Russia with further damaging their fragile economies. What I find odd is the Euro has been gaining value vis a vis the dollar recently. This will make European goods and services even pricier and push more business to America. BMWs and Audis will be even more expensive for American. We are all connected.

  9. Robert M

    The default response from the Democrats when ever the economy sinks is to raise taxes and wages and redistribute the money that is earned honestly through hard work. This is economically self defeating and unsustainable, but the Democrats cannot help themselves since they let their failed ideology come before practicality. Instead of concentrating on job creation Obama from day one started with government take over of health care, expanded food stamps use, gave away more Obamaphones, did away with the work requirement for welfare recipients, and let the printing presses go wild. All of these actions only helped to secure an increase in his non-working voter base.

    +2

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