Chrysler turns down Government Loan for Guarantee to keep Minivans in Windsor

Posted by PITHOCRATES - March 8th, 2014

Week in Review

Cities and governments have long loved big industry.  Unions, too.  Because they’re big.  And are difficult to move. Such as an automobile assembly plant.  They take a lot of real estate.  Require a lot of specialized production and assembly equipment.  And a lot of infrastructure to support them.  Making them very difficult to move.  But not impossible (see Chrysler spurns government money, Windsor to build minivans posted 3/4/2014 on CBC News Windsor).

Chrysler will continue to build its popular minivan in Windsor, Ont., and has withdrawn all requests for government financial assistance in relation to the redevelopment of its assembly plants in Windsor and Brampton…

At the Detroit auto show seven weeks ago, Chrysler CEO Sergio Marchionne said that changes at the Windsor plant alone would cost at least $2 billion, and that Chrysler needed government help to finance the project.

Chrysler said in a media release Tuesday it will now “fund out of its own resources whatever capital requirements the Canadian operations require.”

Industry Minister James Moore said the government’s commitment to the auto industry is strong and he was surprised by Chrysler’s decision.

Essex Conservative MP Jeff Watson, whose riding is just south of Windsor, said he believed talks were going well.

“We were prepared to invest in exchange for guarantees for Canadian production and a Canadian supply chain,” Watson said.

Money from the government doesn’t come without strings.  And the string here was a guarantee that Chrysler wouldn’t leave.  No matter how costly the government or union contracts made it to stay in Windsor.  Costs that Chrysler has to recover in the sales price of their cars.  Which can’t be so high as to price them out of the market.  So Chrysler chose to spend their own money.  So they didn’t get stuck in an adverse economic situation when trying to compete in a global market.

“It is clear to us that our projects are now being used as a political football, a process that, in our view, apart from being unnecessary and ill-advised, will ultimately not be to the benefit of Chrysler,” the company said in a news release.

“As a result, Chrysler will deal in an unfettered fashion with its strategic alternatives regarding product development and allocation, and will fund out of its own resources whatever capital requirements the Canadian operations require.”

The government wanted what was best for them.  Economic activity they could tax.  While Chrysler wanted what was best for them.  Being able to sell cars at market prices.  And leaving their options open in the future.  Should it become too costly to continue to build cars in Canada.  Due to the cost of labor.  Or new regulatory policies.  Or higher taxes to fund a welfare state struggling under the costs of an aging population.  Governments are desperate for new tax revenue.  And will make almost any promise to get it.  Making long-term deals with governments risky.

According to the Ontario government, the auto sector employs 94,000 Ontarians, and supports as many as 500,000 families through indirect jobs…

Unifor Local 444 president Dino Chiodo, who represents hourly employees in Windsor, said he wasn’t completely surprised by Marchionne’s announcement…

Chiodo said Tuesday’s announcement is short of the $2-billion retooling and flexible manufacturing line employees were looking for in Windsor…

Chiodo said a $2.3-billion investment would secure three generations of minivans, which could secure jobs for decades…

Marchionne also wants union concessions.

Yes, they love the jobs these corporations create.  And all that economic activity those jobs create.  Economic activity they can’t create.  But they still hate corporations.  That’s why they tax them.  Regulate them.  Call them greedy.  Exploiters of labor.  And that the only way they can get them to do something decent is by making deals with them that favor them and not these evil corporations.  But sometimes these evil corporations don’t enter agreements that may harm them in the long run.  And when they do governments and unions panic.  As they fear they may have let a cash piñata slip through their fingers.  Which is a problem for them.  For they can’t create a single job those evil corporations can.

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Chevys and Jeeps appear to be Catching on Fire while being Driven

Posted by PITHOCRATES - April 1st, 2012

Week in Review

More cars are catching on fire.  What these car companies need is more government help.  Active government intervention to help make their cars safer.  Like we know GM and Chrysler cars will now be.  Thanks to the caring and profit-less motives of our kind and loving government.  So exactly whose cars are catching on fire (see Fires in Chevrolet Cruzes, Jeep Wranglers spark probe by feds by Jerry Hirsch posted 4/1/2012 on the Los Angeles Times)?

Federal safety regulators have launched an investigation into the cause of fires in the Chevrolet Cruze, General Motors’ bestselling passenger car.

According to complaints made with the National Highway Transportation Safety Administration, there have been at least two incidents in which the small sedan has caught fire while being driven.  GM said it is researching warranty claims involving fires for at least 19 Cruzes…

The NHTSA launched the Cruze probe only two months after closing a similar investigation into fires that broke out following safety tests of the Chevrolet Volt, GM’s plug-in hybrid vehicle.  GM fixed the problem by adding structural reinforcement that better protects the Volt’s battery pack from punctures or a coolant leak in a severe side crash…

In one incident, a driver said they had a 2011 Cruze Eco – a model with a special factory-installed set of options that increases the sedan’s fuel economy – with about 11,000 miles on the odometer.

The driver complained of a slight smoke smell while driving and brought the vehicle to a stop.  A flame appeared out of the hood and the car was completely engulfed within five minutes. It was only after the first flames appeared that a warning light appeared on the dashboard…

The agency also has received eight reports alleging fires originating in the engine compartment of the 2010 model year Jeep Wrangler vehicles.

Seven of the 8 complainants allege the fire or symptoms of the impending fire began while driving.

Oh.  The cars are from the companies the government bailed out.  The ones with the caring and profit-less motives of our kind and loving government.

These numbers of cars catching fire are almost statistically insignificant.  Unless, of course, it was your car catching on fire.  And you were driving it at the time.  It doesn’t change anything statistically.  But it does change the significance of it.

I guess this is what we should expect now that the government has taken an active part in these companies since bailing them out of bankruptcy.  This may have nothing to do with these fires.  Though it is interesting that so far there haven’t been any Fords catching on fire.  And if you recall, the government didn’t bail out Ford.  So their management is still government-free.

If it’s not the government’s fault there’s still one thing you can say, though.  The government hasn’t made these cars safer than the ones built by the companies that didn’t receive any bailout help.  At least based on the cars that are catching on fire.  So government doesn’t automatically make things better.  While there’s even a case to be made that they make things worse.  Again, based on the cars catching fire.

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FDR, Wage Ceiling, Arsenal of Democracy, Benefits, Big Three, Japanese Competition, Legacy Costs, Business Cycle and Bailouts

Posted by PITHOCRATES - February 14th, 2012

History 101

After the Arsenal of Democracy defeated Hitler the Wage Ceiling was Gone but Generous Benefits were here to Stay

FDR caused the automotive industry crisis of 2008-2010.  With his progressive/liberal New Deal policies.  He placed a ceiling on employee wages during the Great Depression.  The idea was to keep workers’ wages low so employers would hire more workers.  It didn’t work.  And there was an unintended consequence.  As there always is when government interferes with market forces.  The wage ceiling prevented employers from attracting the best workers by offering higher wages.  Forcing employers to think of other ways to attract the best workers.  And they found it.  Benefits.

Adolf Hitler ended the Great Depression.  His bloodlust cut the chains on American industry as they tooled up to defeat him.  The Arsenal of Democracy.  America’s factories hummed 24/7 making tanks, trucks, ships, airplanes, artillery, ammunition, etc.  The Americans out-produced the Axis.  Giving the Allies marching towards Germany everything they needed to wage modern war.  While in the end the Nazis were using horses for transport power.  This wartime production created so many jobs that they even hired women to work in their factories.  Bringing an end to the Great Depression finally after 12 years of FDR.

The Arsenal of Democracy defeated Hitler.  U.S. servicemen came home.  And the women left the factories and returned home to raise families.  With much of the world’s factories in ruins the U.S. economy continued to hum.  Only they were now making things other than the implements of war.  The auto makers returned to making cars and trucks.  The ceiling on wages was gone.  But those benefits were still there.  Greatly increasing labor costs.  But what did they care?  The American auto manufacturers had a captive audience.  If anyone wanted to buy a car or truck there was only one place to buy it.  From them.  No matter the cost.  So they just passed on those high wages and expensive benefit packages on to the consumer.  Times were good.  The Fifties were happy times.  Good jobs.  Good pay.  Free benefits.  Nice life in the suburbs.  All paid for by expensive vehicle prices.

The Big Three could not Sell Cars when there was Competition because of their Legacy Costs

But it wouldn’t last.  Because it couldn’t last.  For those factories destroyed in the war were up and running again.  And someone noticed those high prices on American cars.  The Japanese.  Who rebuilt their factories.  Which were now humming, too.  And they thought why not enter the automotive industry?  And this changed the business model for the Big Three (GM, Ford and Chrysler) as they knew it.  The Big Three had competition for the first time.  Their captive audience was gone.  For the consumer had a choice.  They could demand better value for their money.  And chose not to buy the ‘rust buckets’ they were selling in the Seventies.  Cars that rusted away after a few snowy winters.  Or a few years near the ocean coast.

The new Japanese competition started about 30 years after U.S. workers began to enjoy all those benefits.  So the U.S. car companies paid their union auto workers more and gave them far more benefits than their Japanese competition.  And those early U.S. workers were now retiring.  Giving a great advantage to the Japanese.  Because those generous benefits provided those U.S. retirees very comfortable pensions.  And all the health care they could use.  All paid for by the Big Three.  Via the price of their cars and trucks.

Well, you can see where this led to.  The Big Three could not sell cars when there was competition.  Because of these legacy costs.  Higher union wages.  Generous pension and health care benefits that workers and retirees did not contribute to.  (By the time GM and Chrysler faced bankruptcy in 2010 there were more retirees than active union workers).  The United Automobile Workers (UAW) jobs bank program where unemployed workers (laid off due to declining sales) collected 95% of their pay and benefits.  (You can find many quotes on line from a Detroit News article stating some 12,000 UAW workers were collecting pay and benefits in 2005 but not working.)  The Japanese had none of these costs.  And could easily build a higher quality vehicle for less.  Which they did.  And consumers bought them.  The Big Three conceded car sales to the Japanese (and the Europeans and South Koreans) and focused on the profitable SUV and truck markets.  To pay these high legacy costs.  Until the gas prices soared to $4/gallon.  And then the Subprime Mortgage Crises kicked off the Great Recession.  Leading to the ‘bankruptcy’ of GM and Chrysler.  And their government bailouts.

The U.S. Automotive Government Bailout cut Wage and Benefits once Set in Stone

The Big Three struggled because they operated outside normal market forces.  Thanks at first to a captive audience.  Then later to friends in government (tariffs on imports, import quotas, union-favorable legislation, etc.).  All of this just delayed the day of reckoning, though.  And making it ever more painful when it came.

During economic downturns (when supply and prices fall) their cost structure did not change.  As it should have.  Because that’s what the business cycle does.  It resets prices and supply to match demand.  With recessions.  Painful but necessary.  Just how painful depends on how fast ‘sticky’ wages can adjust down to new market levels.  And herein lies the problem that plagued the Big Three.  Their wages weren’t sticky.  They were set in stone.  So when the market set the new prices for cars and trucks it was below the cost of the Big Three.  Unable to decrease their labor (wage and benefit) costs, profits turned into losses.  Pension funds went underfunded.  And cash stockpiles disappeared.  Leading the Big Three to the brink of bankruptcy.  And begging for a government bailout.

Well, the bailout came.  The government stepped in.  Gave the union pension fund majority control of the bailed out companies.  Screwing the bondholders (and contract law) in the process.  And created a two-tier labor structure.  They grandfathered older employees at the unsustainable wage and benefit packages.  And hired new employees at wage and benefit packages that the market would bear.  Comparable to their Asian and European transplant auto plants in the right-to-work states in the southern U.S. states.  And put the market back in control of the U.S. auto industry.  For awhile, at least.

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Looking at the Economic Data it’s getting hard to tell who’s President, Barack Obama or Jimmy Carter

Posted by PITHOCRATES - August 22nd, 2011

Keynesian Economists’ Poor Forecasts suggests their Keynesian Economics doesn’t Work

More bad news for the housing market.  Not that this is a surprise.  That was a pretty big housing bubble that the Fed created.  With their stimulative low interest rates.  And the bigger they are the harder they fall.  Or pop, as it were.  And as the market corrected the Fed’s damage, it threw a slew of people out of work (see Early Mortgage Delinquencies Rise to Highest in Year as U.S. Economy Slows by Kathleen M. Howley posted 8/22/2011 on Bloomberg). 

The percentage of U.S. mortgages overdue by one month rose to the highest level in a year in the second quarter as homeowners who lost jobs were unable to make their payments…

The gain in early delinquencies signals a slowing economy may increase foreclosures, said Jay Brinkmann, chief economist of the trade group. The unemployment rate in the three months ended June 30 rose to 9.1 percent from 8.9 percent, the first quarterly increase since 2009, according to the Labor Department. Jobless claims jumped to an eight-month high in late April, government data show.

For the quarter ending June 30 unemployment was at 9.1 percent.  Ouch.  Remember why it was so urgent to pass the Obama Keynesian stimulus?  To keep the unemployment rate under 8%.  That was in February of 2009.  That’s two years ago.  Guess Keynesian economics doesn’t work.

The world’s largest economy grew at a 1.3 percent annual rate in the second quarter, the Commerce Department said on July 29. That was less than the increase of 1.8 percent forecast by economists surveyed by Bloomberg. A Federal Reserve report last week showed manufacturing in the Philadelphia region contracted in August by the most in more than two years as orders fell and factories fired workers.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. lowered their forecasts for U.S. gross domestic product last week. The U.S. will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, according to Goldman economists in New York. JPMorgan predicts 1 percent growth in U.S. GDP in the fourth quarter, down from an earlier projection of 2.5 percent, the bank said last week.

And the news just keeps getting better.  And by better I mean worse.  Again another record.  This one for manufacturing.  And actual GDP numbers are coming in under economists’ estimates.  The numbers are so bad these economists are revising their future projections down.  It should be noted that the vast majority of mainstream economists are Keynesian economists.  Which suggests their Keynesian economics doesn’t work very well.

Inflation Growing at a Greater Rate than Wages equals Real Pay Cuts

These mainstream economists said the Great Recession ended by July 2009.  Said that the Obama administration followed their Keynesian advice.  Kicked that recession in the behind.  And launched the recovery with a Recovery Summer.  Yay said the Keynesians.  Everything was going to be all right.  And yet two years later here we are.  Where things are still not right (see Survey: US companies say they’re planning another year of small raises for workers in 2012 by the Associated Press posted 8/22/2011 on The Washington Post). 

After increasing salaries by 2.6 percent this year and last year, companies are planning a 2.8 percent bump in 2012, benefits and human resources consultancy Towers Watson reported Monday.

That’s somewhat smaller than raises in the last decade. From 2000 to 2006, the year before the Great Recession began, salaries rose an average 3.9 percent for workers who were not executives.

And the modest bump may not help add much buying power for shoppers. In the 12 months through July, prices for consumers have risen 3.6 percent, according to the government’s latest calculations.

Those lucky enough to have a job are taking real pay cuts to keep those jobs.  Inflation is growing at a greater rate than their wages.  Which means as prices go up their pay checks will buy less.  Despite those raises.  High unemployment.  And rising inflation.  The last time the economy saw numbers this bad was during the Seventies.  When we called it stagflation.  And blamed Jimmy Carter.  Who became a one-term president because of it.

Obama Cares enough about the People to Hide from them on the Golf Course

President Obama is aware of the nation’s woes.  He is even thinking about them while on vacation.  On Martha’s Vineyard.  Playground for the uber rich (see President keeps low profile on Martha’s Vineyard by Mark Shanahan & Meredith Goldstein posted 8/20/2011 on the boston.com).   

But it was later, at the Vineyard Golf Course in Edgartown, where the president’s recalcitrance was most evident. Approaching the eighth tee in a golf cart with friend and frequent golfing buddy Eric Whitaker, the president noticed three TV cameras and a Globe photographer across the street. Rather than stop and be photographed teeing off, the president skipped the hole.

That’s how much he cares.  He’ll skip a hole during a round of golf just so we don’t see him living well during these bad economic times.  Talk about sacrifice.  He’s just not playing 17 holes instead of 18.  Skipping that hole may have an adverse affect on his handicap.  He called for fair-share sacrifice.  And he, too, is sacrificing.  Walking it like he talks it.  So think about this noble act before you start bitching about another tax hike.  He skipped a hole of golf.

Obama bailed out General Motors and Chrysler and put Detroit back to Work

But it’s back to work after Martha’s Vineyards.  Just like the rest of us after our vacations.  Though our vacations are a bit more Spartan these days.  And rarely venture farther than our own backyards (see Obama to join unions’ Labor Day festivities in Detroit by Aaron Kessler posted 8/22/2011 on the Detroit Free Press). 

WASHINGTON – President Barack Obama will join thousands of union members at Labor Day festivities in Detroit, the Free Press has learned,

Obama will deliver remarks at a Labor Day event sponsored by the Metro Detroit Labor Council, according to a White House official with knowledge of the trip.

While no other details were immediately available, it is likely he would again use the opportunity to tout his administration’s role in the rescues in 2009 of General Motors and Chrysler.

So the president is going to Detroit to celebrate Labor Day.  It makes sense.  I mean, he bailed out General Motors and Chrysler, didn’t he?  And put the good people of Detroit back to work.

With 13.7% Unemployment where’s the Summer Recovery in Detroit?

Then again, looking at the U.S. Bureau of Labor Statistics, it would appear that he has not put the good people of Detroit back to work (see Metropolitan Area Employment and Unemployment Summary posted 8/3/2011 on the U.S. Bureau of Labor Statistics). 

Eleven of the most populous metropolitan areas are made up of 34 metropolitan divisions, which are essentially separately identifiable employment centers. In June 2011, Miami-Miami Beach-Kendall, Fla., and Detroit-Livonia-Dearborn, Mich., registered the highest jobless rates among the divisions, 13.9 and 13.7 percent, respectively. Nashua, N.H.-Mass., reported the lowest division rate, 5.4 percent, followed by Bethesda-Rockville-Frederick, Md., 5.8 percent. (See table 2.)

No wonder Maxine Waters is so angry.  He skips Detroit on his ‘listening’ bus tour.  And vacations on the very exclusive Martha’s Vineyards.  While the Detroit area is suffering double-digit unemployment.  If he was listening anywhere, it should have been in Detroit.

The Detroit area unemployment rate is 13.7%.  While the national rate is only 9.1% for the same period.  Yes, the national rate is bad.  But it’s not Detroit bad.  And this after the automotive bailouts.  That put the good people of Detroit back to work.  On top of the Obama stimulus.  So where’s the Summer Recovery in Detroit?  What’s happened to the Motor City? 

So this is what a Second Jimmy Carter Term would have been Like 

In a word, Obamanomics.  His Keynesian policies that were supposed to save jobs have killed jobs.  In Detroit.  And across the nation.  Worse, on top of high unemployment these policies have ignited inflation.  Unemployment plus inflation equals stagnation.  Misery.  And malaise

So this is what a second Jimmy Carter term would have been like.  Makes one want to say, “Welcome back Carter.”  But not in that warm nostalgic way like in that Seventies sitcom (Welcome Back Kotter).  Of course you never saw Jimmy Carter living it up like Obama.  So there are some differences.

This economy will not help Obama in 2012.  Worse, the American people will get no relief until after 2012.  For it’s like Ronald Reagan said in his campaign against Jimmy Carter (see President Ronald Reagan – Liberty State Park [Pt. 1] at 5:26).  A recession is when your neighbor loses his job.  A depression is when you lose yours.  And recovery is when Barack Obama loses his.

I’m paraphrasing, of course.

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LESSONS LEARNED #43: “If business ain’t selling, business ain’t hiring.” -Old Pithy

Posted by PITHOCRATES - December 9th, 2010

Before Competition, the Big Three were Living Large

President Obama bailed out GM and Chrysler in 2009.  And why did they need financial help?  The same reason any company needs financial help.  They weren’t selling enough.

I had a finance professor who said few companies have a debt problem.  Companies struggle because they have a revenue problem.  They’re simply not selling enough.  And when a company goes into bankruptcy reorganization, they emerge with the same revenue problems.  Which is why so many still fail after reorganizing and slashing their debt costs.

For decades, the Big Three had a monopoly on the automotive market.  Wherever you lived in the world, if you wanted a car you bought a Ford, GM or Chrysler product.  So the Big Three could charge whatever they wanted for their cars.  That is, until the Japanese entered the market.

Unskilled Line Workers Living Better than Doctors

It was their great success that led to their downfall.  Selling cars with fat profits allowed the Big Three to pay fat wage and benefits.  And they did.  Then the UAW got greedy.  An unskilled line worker could own two houses, a boat, 2 new cars, take expensive vacations, own the latest in toys, etc.  They lived better than doctors.  And doctors were highly skilled.  They spent 8 years in medical school.  And spent a decade of their life paying off the debt from that medical school.  And to add insult to injury, doctors worked 80+ hours per week during that decade when they lived like paupers.  Line workers worked only 40.  And lived like kings.

It was nice work if you could get it.  And many did.  Before the Japanese.  But it all started to come apart in the 1970s.  When the Big Three were selling junk.  Cars that rusted out in a few years.  Unreliable.  Ugly.  These just screamed “we just don’t give a damn anymore.”  More money went to the workers.  Less into making quality cars people wanted.  No problem for the UAW.  I mean, who else were you going to buy a car from?

Hello, what’s this?  Honda?  What’s that?  I’m not sure but it costs less.  And looks pretty good.  Nice quality.  So why should I continue to pay more for less and buy this junk from the Big Three?  Or so went the thinking.  Yes, the Japanese had arrived.  And they were selling something the people wanted.

Fat Wage and Benefit Packages come back to Bite the Big Three in the Ass

So that was the beginning of the end.  Those fat wage and benefit packages for unskilled labor required higher sticker prices than the market was willing to pay.  So they sold fewer cars.  And the Japanese (and, in time, the other imports) sold more.

But it got worse.  Not only were their revenues falling, but their costs were rising.  The Big Three were around for awhile.  They had an aging work force that was retiring.  And getting sick.  Pension and health care costs soared.  Costs per car soared.  While the Japanese were enjoying economies of scales (the more you sell the less each unit costs to make), the Big Three were bleeding red ink all over their balance sheets.

I was in a meeting one time on the floor of an assembly plant.  I was staring at the part of the line where a worker threw insulation into the bottom of the trunk.  She threw in a pad.  Walked over to her coworker at the next station.  Chatted a bit.  Walked back to her station.  Talked to someone else.  Then threw a pad into the next car on the line.  I could just see the red ink bleed.

The Big Three screwed themselves.  In order to cover those fat wage and benefit packages for their unskilled workers, they have to sell cars for a whole lot more than their competition was.  And they couldn’t.  Imagine McDonald’s workers receiving the same wage and benefit packages as the UAW.  And cooking hamburgers at the same pace.  You’d have to wait in line for 45 minutes for your burger.  And you’d pay over $20 for a Quarter Pounder with Cheese.

Buying American is not Necessarily American

I often see those bumper stickers that ask, “Unemployed?  Keep buying foreign.”  Or something like that.  What these people don’t understand, or choose not to understand, is that more people buy cars than make cars.  Paying more for less helps the few people that build cars.  While they enjoy a very good life, the greater number of buyers of those cars have to get by on less.  So the economy as a whole gets worse.  To help a group of unskilled workers live a better life than our own.

Is that fair?  Making the majority subsidize a minority elite?  Unless you live in North Korea or Cuba, the answer is, of course, ‘no’.  So we choose to buy what gives us the most value for our money.  Which is why the Japanese upstart Toyota would see the day when they would sell more cars than GM.  And why did they reach this remarkable milestone?  Because they were selling what people were willing to buy.

Interestingly, the GM and Chrysler bailouts were not your run of the mill reorganizations.  By the power the government gave itself, they walked all over the Rule of Law.  These companies didn’t have a debt problem.  Not anymore, at least.  Because the government screwed the bondholders.  And who did they reward?  That’s right, those unskilled UAW line workers.  The reorganization gave them shares in the new company for no other reason other than being politically loyal to the Democrat Party.  They weren’t even in the line of secured creditors, but that didn’t stop them from jumping to the head of that line.  Remarkable, really.  The Rule of Law had become merely a suggestion.

And when the union sold those ‘gift’ shares of stock they funded their unfunded pension liabilities.  While retirees who invested their life savings into GM bonds lost everything and had to get a job at McDonald’s.  Because McDonald’s is always hiring.  Because they are always selling something people want to buy.

McDonald’s can still Hire during Bad Economic Times

Like my finance professor said, no company fails because of a debt/cost problem.  A debt/cost problem happens when something happens to revenue.  And the biggest reason a business has a revenue problem is because of competition.  Someone somewhere is selling more for less.  Giving the people more bang for the buck.

During bad economic times, revenue problems quickly turn into cost problems.  For some.  Auto manufacturers may idle a shift at an assembly plant, laying off hundreds.  Because there’s no point in making cars no one is buying.  And these manufacturers simply cannot afford to pay these fat wage and benefit packages if they’re not selling cars.

But not everyone has the same financial problems during a recession.  Some still hire during bad economic times.  McDonald’s for one.  Why?  A couple of reasons.  Their workers don’t belong to the UAW.  Because of this we can still call McDonald’s fast food.  And your typical McDonald’s worker doesn’t own two houses, two cars and a boat.  So we don’t have to pay $37.50 for a #2 combo meal. 

We’re buying what McDonald’s is selling.  So they can hire people.  Even during bad economic times.

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FUNDAMENTAL TRUTH #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - June 29th, 2010

LOW PRICES.  GOD help me, I do hate them so.  I hate them with every fiber of my body.

Who says this?  Do you?  I don’t.  Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices.  I’ve heard people bitch about high prices.  But never about low prices.  When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon.  Let it approach $4/gallon and they’ll want Congress to take action.  To attack Big Oil.  To seize their oil and their profits and give us cheap gasoline in return.  But when gas was cheap, no one ever bitched about it being ‘too’ cheap.  It just doesn’t happen that way.  People bitch about high prices.  Not low prices.

So who bitches about low prices?  Competitors.  There’s a saying that competition makes everything better.  And it does.  It lowers prices.  And raises quality.  And who is looking for lower prices and higher quality?  Consumers.  Who isn’t?  Competitors.  Especially competitors with political connections.

WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could.  I mean, who else were you going to buy a car from?  So what if your car breaks down and the fenders and quarter panels rust away?  That just means you gotta buy another car sooner rather than later.  A pretty sweet deal.  Especially when there are only three places to go to buy a car.  And each of the Big 3 is selling the same crap.

Then the Japanese had to go and ruin a good thing.  They started selling cars in America.  These cars were smaller than your typical American car.  But there were other differences.  They didn’t rust like the American cars.  They didn’t break down as much.  And the imports were cheaper than the American cars.  Lower price and higher quality.  More bang for the buck.  Exactly what consumers were demanding.

So what was the response of the Big 3?  Did they rise to the level of their new competitors and deliver what the consumer wanted?  No.  They ran to government for help.  For protection.  And they got it.  Voluntary Export Restraints (VER).  The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States.  Or else.  So they did.  To avoid worse protectionist policies.  Problem solved.  Competition was limited.  And the Big 3 were very profitable in the short run.  Everyone lived happily ever after.  Until the Japanese refused to play nice.

The problem was what the Big 3 did with those profits.  Or, rather, what they didn’t do with them.  They didn’t reinvest them to raise themselves up to the level of the Japanese.  Protected, they saw no incentive to change.  Not when you have Big Government on your side.  And how did that work for them?  Not good. 

So look, the Japanese said, the Americans like our cars.  If the American manufacturers won’t give them what they want, we will.  While honoring the VER.  We won’t export more cars.  We’ll just build bigger and better cars to export.  And they did.  The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share.  Now their mid-size and large-size cars had competition.  And this wasn’t on the fringe of their market share.  This was their bread and butter.  What to do?  Build better cars and give Americans more bang for their buck?  Or run to government again?  What do you think?

The Big 3 assaulted the Japanese under the guise of ‘fair trade’.  The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports.  To protect American jobs.  To protect the American worker.  To protect the children.  This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making.  (Let’s not forget the reason Americans were buying the Japanese cars in the first place).

The Japanese response?  They took it up a notch.  They entered the luxury markets.  They launched Acura, Lexus and Infiniti.  They competed against Cadillac and Lincoln.  And well.  The quality was so good they even affected the European luxury imports.  More attacks followed.  Americans were losing their jobs.  Soon there would be no more American manufacturing left in the country.  So the Japanese built plants in America.  And Americans were now building the Japanese cars.  The Japanese actually created American jobs.

SON OF A BITCH!  So much for the loss of American jobs.  The Japanese threw a wrench in that argument.  So now the argument became about the loss of ‘high paying’ American jobs.  For the Japanese plants were non-union.  Didn’t matter that their workers were making better pay and benefits than many in their region.  No.  What mattered was that they were building a better product.  And they didn’t want THESE jobs in America.  But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more.  To make them a little less appealing to the American consumer.  So far they have been unsuccessful in this endeavor.  The workers are happy as they are.

Well, these cars just weren’t going away.  So the Americans surrendered car manufacturing to the Japanese.  They couldn’t beat them.  (Of course, it’s hard to do that when you don’t even try).  They, instead, focused on the higher profit truck and SUV markets.  Then the Japanese entered those markets.  And at every level they competed with the Americans, the Japanese gave more bang for the buck.  And the consumers responded.  With their hard-earned wages.  It just wasn’t fair.  The Japanese kept giving the American consumer a better product.  No matter what political action the Big 3 took or demanded.

And there’s the problem.  They sought their answers from government.  Instead of making a better car.  They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less.  All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3). 

Fast forward to 2008 and we see the ultimate consequence of their actions.  Bankruptcy.  GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch.  Ford survived on her own.  As did the Japanese.  You can bitch all you want about costs, but if you have the revenue you can pay your costs.  And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure.  By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.

IT’S ALL POLITICS.  Political cronyism.  And crony capitalism.  It all comes down to political spoils and patronage.  That’s what happens when politics enter capitalism.  Big Business partners with Big Government and they enter into relationships.  You scratch my back and I’ll scratch your back.  But when government protects a business for political expediency, the industry suffers in the long run.  As the U.S. automobile industry has.  Ditto for the U.S. textile industry.  And the U.S. steel industry.

So what goes wrong?  When you protect an industry you insulate it from market forces.  You can build crap.  The problem is, consumers don’t buy crap.  So, for awhile, politics intervene and makes the crap more favorable.  Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win.  Big Government is there.  If your prices are too low, government will intervene.  If prices are too high, government will intervene.  If prices are too similar, government will intervene.  To make things ‘fair’.  And by fair they mean to reward those who play the game and to punish those who don’t.  And the spoils go to those large voting blocs they need.  And in return for their votes, they can count on patronage.  Government jobs.  Political positions.  Favorable legislation and regulation.  If you got the vote out, you were rewarded quite nicely. 

And consumers be damned. .

www.PITHOCRATES.com

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