Trend Analysis GM and Toyota 2005—2008

Posted by PITHOCRATES - January 29th, 2013

History 101

GM’s Problems were caused by Franklin Delano Roosevelt and his Ceiling on Wages

The GM bailout is still controversial.  It was part of the 2012 campaign.  It was why we should reelect President Obama.  Because Osama bin Laden was dead.  And General Motors was alive.  But the bailout didn’t fix what was wrong with GM.  Why it went bankrupt in the first place.  The prevailing market price for cars was below their costs.  And what was driving their costs so high?  It was labor.  It was the UAW wage and benefit package that made it impossible for GM to sell a car profitably.

GM’s problems go back to Franklin Delano Roosevelt.  The country was suffering in the Great Depression with double-digit unemployment.  He wanted to get businesses to hire people.  To reduce unemployment.  And pull us out of the Great Depression.  So how do you get businesses to hire more people?  Hmmm, he thought.  Pay people less so businesses have more money to hire more people.  It was brilliant.  So FDR imposed a ceiling on wages.  Why did FDR do this?  Because he was from a rich family who didn’t understand business or basic economics.

Of course there was one major drawback to this.  How do you get the best talent to work for you if you can’t pay top dollar?  Normally the best talent can go to whoever pays the most.  But if everyone pays the same by law you might as well work at the place closest to your house.  Or across from the best bars.  No, if a business wanted the best workers they had to figure out how to get them to drive across town in rush hour traffic and sit in that traffic on the way home.  A real pain in the you-know-what.  So how to get workers to do that if you can’t pay them more?  You give them benefits.

Toyota doesn’t have the Legacy Costs that Bankrupted an Uncompetitive GM

And this was, is, the root of GM’s problems.  Those generous pension and health care benefits.  Things we once took care of ourselves.  Before our employers started providing these.  And the UAW really put the screws to GM.  Getting great pay, benefits and workplace rules.  For both active workers.  And retirees.  Even laid-off workers.  Such as the job bank.  Where GM paid workers who had no work to do.  It’s benefits like this that have bankrupted GM.  Especially the pensions and health care costs for retired workers.  Who outnumbered active workers.  Those people actually assembling the cars they sell.

It’s these legacy costs that have made GM uncompetitive.  Toyota, for example, didn’t suffer the FDR problem.  So their costs for retired workers don’t exceed their costs for active workers.  In fact let’s compare GM and Toyota for the four years just before GM’s government bailout (2005-2008).  We pulled financial numbers from their annual reports (see GM 2005 & 2006, GM 2007 & 2008, Toyota 2005 & 2006 and Toyota 2007 & 2008).  We’ve used some standard ratios and plotted some resulting trends.  Note that this is a crude analysis that provides a general overview of the information in their annual reports.  A proper analysis is far more involved and you should not construe that the following is an appropriate way to analyze financial statements.  We believe these results show general trends.  But we offer no investment advice or endorsements.

GM Toyota Current Ratio

We get the current ration by dividing current assets by current liabilities.  These are the assets/liabilities that will become cash or will have to be paid with cash within 12 months.  If this ratio is 1 it means current assets equals current liabilities.  Meaning that a business will have just enough cash to meet their cash needs in the next 12 months.  If the number is greater than 1 a business will have even a little extra cash.  If the number is less than 1 a business is in trouble.  As they won’t have the cash to meet their cash needs in the next 12 months.  Unless they borrow cash.  Toyota’s current ratio fell slightly during these 4 years but always remained above 1.  Falling as low as 1.01.  Whereas GM’s current ratio was never above 1 during these 4 years.  And only got worse after 2006.  Showing GM’s financial crash in 2008.

The GM Bailout did not address the Cause of their Bankruptcy—UAW Pensions and Health Care Benefits

There are two basic ways to finance a business.  With debt.  And equity.  Equity comes from outside investors (when a business issues new stock).  Or from profitable business operations.  Which typically accounts for the majority of equity.  Profitable business operations are the whole point of running a business.  And it’s what raises stock prices.  To see which is providing the financing of a business (debt or equity) we calculate the debt ratio.  We do this by dividing total liabilities by total assets.  If this number equals 1 then total assets equal total liabilities.  Meaning that 100% of a business’ assets are financed with debt.  And 0% with equity.  Lenders do not like seeing this.  And will be very reluctant to loan money to you if your business operations cannot generate enough profits to build up some equity.  And that was the problem GM had.  Their business operations could not generate any profits.  So GM had to keep borrowing.

GM Toyota Debt Ratio

GM went from bad to worse after 2005.  Their debt ratio went from 1.02 in 2006.  To 1.24 in 2007.  And to 1.94 in 2008.  Indicating massive borrowings to offset massive operating losses.   And how big were those losses?  They lost $17.806 billion in 2005.  $5.823 billion in 2006.  $4.309 billion in 2007.  And in the year of their crash (2008) they lost $21.284 billion.  Meanwhile Toyota kept their debt ratio fluctuating between 0.61 and 0.62.  Very respectable.  And where lenders like to see it.  As they will be more willing to loan money to a company that can generate almost half of their financing needs from profitable business operations.  So why can’t GM?  Because of those legacy costs.  Which increases their cost of sales.

GM Toyota Cost of Sales

GM’s cost of sales was close to 100% of automotive sales revenue these 4 years.  Even exceeding 100% in 2008.  And it’s this cost of sales that sent GM into bankruptcy.  Toyota’s was close to 80% through these 4 years.  Leaving about 20% of sales to pay their other costs.  Like selling, general and administrative (S,G&A).  Whereas GM was already losing money before they started paying these expenses.  Thanks to generous UAW pay and benefit packages.  The job bank.  And the even greater costs of pensions and health care for their retirees.  It’s not CEO compensation that bankrupted GM.  It was the UAW.  As CEO compensation comes out of S,G&A.  Which was less than 10% of sales in 2007 and 2008.  Which was even less than Toyota’s.

GM Toyota S G and A

GM’s costs kept rising.  But they couldn’t pass it on to the consumer.  For if they did the people would just buy a less expensive Toyota.  So GM kept building cars even though they couldn’t sell them competitively.  And sold them at steep discounts.  Just to make room for more new cars.  So the UAW could keep building cars.  Incurring massive losses.  Hoping they could make it up in volume.  But that volume never came.

GM Toyota Automotive Sales as percent of 2005

Toyota continued to increase sales revenue year after year.  But GM’s sales grew at a flatter rate.  Even falling in 2008.  It was just too much.  GM was such a train wreck that it would have required a massive reorganization in a bankruptcy.  Specifically dealing with the uncompetitive UAW labor.  Especially those pensions and health care benefits for retirees.  Which the government bailout did not address.  At all.  The white collar workforce lost their pensions.  But not the UAW.  In fact, the government bailout went to bolster those pension and health care plans.  So the underlying problems are still there.  And another bankruptcy is likely around the corner.

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The Taxpayers to lose Billions on the GM Bailout and likely will have to bail GM out Again

Posted by PITHOCRATES - December 22nd, 2012

Week in Review

GM could have filed bankruptcy.  Like many companies do.  They reorganize.  Fix the problems that caused them to go bankrupt.  Then they emerge leaner and meaner.  And are able to compete in the market that bankrupted them before their reorganization.  That’s the usual path.  GM did not take it.  Why?  Because the thing that bankrupted GM was its high union costs.  Especially their legacy costs.  Paying pension and health care costs for more retirees than they have active workers.

Had they gone through a normal bankruptcy they would have made GM competitive again.  Which meant doing something to those costly union contracts.  But as the UAW is a valuable resource for the Democrat Party President Obama swept in and protected the UAW.  Giving them the money they needed to fund those pension plans.  Without fixing their competiveness problem.  Meaning they will likely need another bailout (see GM to benefit from tax break for years by David Shepardson posted 12/20/2012 on The Detroit News).

The Treasury Department’s decision to begin its exit from General Motors Co., despite low stock prices, means U.S. taxpayers are almost certain to incur large losses on the $49.5 billion bailout of the Detroit automaker.

At current stock prices, the government stands to lose nearly $13 billion.

To break even, it would need to sell its remaining 300 million shares for about $70 each. The Treasury will sell its remaining shares over the next 15 months, likely in a series of small sales, and that could stem some of the losses.

Unlike the 1980 Chrysler bailout, the Obama administration didn’t require GM to repay all of its government funds. Instead, the government swapped about $42 billion for a 61 percent equity stake in the automaker.

Former auto czar Steve Rattner said the government made the decision because it didn’t want the new GM to be carrying crushing debt. Instead, it gave GM billions of dollars after its bankruptcy to operate.

GM also got other financial benefits. For example, it has legally avoided paying federal income taxes since exiting bankruptcy, even though it has earned $16 billion in profits.

And GM likely will pay no income taxes for many years, because Treasury rulings let GM use $18 billion in losses from the “old GM” left behind in bankruptcy to offset profits.

Interesting.  We’re going to raise taxes on small business owners (those S corporations and LLCs who earn more than $250,000 in business profits that pass through to their personal tax returns) because those who can afford to pay a little more should.  But a company earning $16 billion (yes, that’s billion with a ‘B’) in profits doesn’t have to pay any income taxes.  Why?  Small business owners create far more jobs than GM does.  So why does GM get preferential treatment?  Because small businesses aren’t unionized.  And don’t pay union dues that feed back to the Democrat Party.

When the Carter administration bailed out Chrysler they at least got all of our money back.  They made no gifts of taxpayer money.  If that wasn’t bad enough our gift to GM didn’t fix their competitiveness problem.  So that when GM once again pays income taxes they will be right back where they were before.  Starved of cash.  And unable to fund their pension plans.

Had GM gone through a normal bankruptcy they would already be back in business.  Competitive.  And paying income taxes.  Without the taxpayers picking up the tab.  President Obama didn’t save GM.  He saved the UAW.  Who will eventually destroy GM with their legacy costs.

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Nikola Tesla, Sheldon Cooper, Inventors & Entrepreneurs, Compromise & Tradeoff, Theoretical & the Practical, GM and Hostess

Posted by PITHOCRATES - December 4th, 2012

History 101

Geniuses strive for Theoretical Perfection which often doesn’t work in the Market Place

There have been a lot of brilliant inventors that gave the world incredible things.  Nikola Tesla gave us the modern world thanks to his work in electromagnetic fields.  Giving us the AC power we take for granted today.  Electric motors.  The wireless radio.  Etc.  But as brilliant as Tesla was he was not brilliant in making money from his inventions.  He died broke and in debt.  And, some say, insane.  Though he was probably more like Sheldon Cooper on The Big bang Theory.  As one character on the show called him, “The skinny weirdo.”  Tesla had an eidetic memory (often called a photographic memory).  And probably suffered from obsessive-compulsive disorder (OCD).  Which when added to genius can be mistaken for crazy genius.

So Tesla and the fictional Sheldon Cooper have some things in common.  Genius.  And some odd behavioral traits.  As well as something else.  Neither was rich.  Their genius did not make them rich.  Which is a common trait of all brilliant inventors.  Their genius gets in the way of practicality.  They strive for theoretical perfection.  Which often doesn’t work in the market place.  Because perfection is costly.  And this is what separates the theoretical geniuses from practical engineers.  And entrepreneurs.

The internal combustion engine is a technological marvel.  It has changed the world.  Modernized the world.  It gave us inexpensive modes of transportation like cars, trucks, ships, trains and airplanes.  But the engine is not theoretically perfect.  It is a study of compromise and tradeoff.  Providing a final product that isn’t perfect.  But one that is economically viable.  For example, pistons need to compress an air-fuel mixture for combustion.  However, the piston can’t make such a tight seal that it can’t move up and down in the cylinder.  So the piston is smaller than the cylinder opening.  This allows it to move.  But it doesn’t contain the air-fuel mixture for compression and combustion.  So they add a piston ring.  Which contains the air-fuel mixture but restricts the movement of the piston.  So they add another piston ring that takes oil that splashes up from crank case and passes it through the ring to the cylinder wall.  The heat of combustion, though, can leave deposits from the oil on the cylinder wall.  So they add another piston ring to scrape the cylinder wall.

Selling a ‘Low Price’ is a Dangerous Game to Play Especially if you don’t Know your Costs

Every part of the internal combustion engine is a compromise and tradeoff.  Each part by itself is not the best it can be.  But the assembled whole is.  A theoretical genius may look at the assembled whole and want to add improvements to make it better.  Adding great costs to take it from 97% good to 99% good.  While that 2% improvement may result with a better product no one driving the car would notice any difference.  Other than the much higher price the car carried for that additional 2% improvement.

This is the difference between the theoretical and the practical.  Between brilliant inventor and entrepreneur.  Between successful business owner and someone with a great idea but who can’t bring it to market.  The entrepreneur sees both the little picture (the brilliant idea) and the big picture (bringing it to market).  Something that a lot of people can’t see when they go into business.  The number one and number two business that fail are restaurants and construction.  Why?  Because these are often little picture people.  They may be a great chef or a great carpenter but they often haven’t a clue about business.

They don’t understand their costs.  And because they don’t they often don’t charge enough.  A lot of new business owners often think they need to charge less to lure business away from their competition.  And sometimes that’s true.  But selling a ‘low price’ instead of quality or value is a dangerous game to play.  Especially if you don’t know your costs.  Because as you sell you incur costs.  And have bills to pay.  Bills you need to pay with your sales revenue.  Which you won’t be able to do if you’re not charging enough.

If Business Operations can’t Produce Cash a Business Owner will have to Borrow Money to Pay the Bills

The successful small business owners understand both their long-term financing needs.  And their short-term financing needs.  They incur long-term debt to establish their business.  Debt they need to service.  And pay back.  To do that they need a source of money.  This must come from profitable business operations.  Which means that their sales revenue must make their current assets greater than their current liabilities.  The sum total of cash, accounts receivables and other current assets must be greater than their accounts payable, accrued payroll, accrued taxes, current portion of long-term debt, etc.  And there is only one thing that will do that.  Having sales revenue that covers all a business’s costs.

The successful business owner knows how much to charge.  They know how much their revenue can buy.  And what it can’t buy. They make the tough decisions.  These business owners stay in business.  They see the big picture.  How all the pieces of business fit together.  And how it is imperative to keep their current assets greater than their current liabilities.  For the difference between the two gives a business its working capital.  Which must be positive if they have any hope of servicing their debt.  And repaying it.  As well as growing their business.  Whereas if their working capital is negative the future is bleak.  For they won’t be able to pay their bills.  Grow their business.  Or service their debt.  Worse, because they can’t pay their bills they incur more debt.  As they will have to borrow more money to pay their bills.  Because their business isn’t producing the necessary cash.

Those restaurants and construction companies fail because their owners didn’t know any better.  Others fail despite knowing better.  Like GM, Chrysler, Hostess, just about any airline, Bethlehem Steel, most print newspapers, etc.  Who all entered costly union contracts during good economic times.  Costs their revenues couldn’t pay for in bad economic times.  Which was most of the time.  As they struggled to pay union labor and benefits they run out of money before they could pay their other bills.  As their current liabilities exceeded their current assets.  So instead of producing working capital they ran a deficit.  Forcing them to incur more debt to finance this shortfall.  Again and again.  Until their debt grew so great that it required an interest payment they couldn’t pay.  And now they are no longer with us today.  Having had no choice but to file bankruptcy.

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U.S. Tax Dollars being Invested to Create Jobs in China

Posted by PITHOCRATES - December 1st, 2012

Week in Review

The U.S. government bailed out GM.  Instead of letting them go through a normal bankruptcy proceeding that would make GM competitive again so they could sell cars in the U.S. again.  Instead, the government gave GM taxpayer money to fund their pension and retiree health care costs.  Which will do nothing to improve their competitiveness.  Or create new jobs in the U.S.  So what will that massive government investment do for GM?  Allow them to expand and create jobs…in China (see GM Chinese venture to build $1 billion plant in Chongqing by Ben Klayman posted 11/28/2012 on Reuters).

General Motors Co (GM.N) and its Chinese joint-venture partners said on Wednesday they plan to build a $1 billion auto assembly plant in the city of Chongqing as the GM group bids to remain the leader in the world’s largest auto market…

Earlier this month, GM and its Chinese partners opened a plant in the southern city of Liuzhou for its low-cost Baojun brand. That plant will also eventually have an annual production capacity of 400,000 vehicles…

In September, GM opened a large vehicle test track west of Shanghai. GM and its partners invested $252 million to build what officials called the country’s largest proving ground.

In addition to Liuzhou, the joint venture currently operates a plant in Qingdao. GM and SAIC, through a different joint venture, also have a plant in Shanghai, and several more in northeast China.

This is not helping the U.S. economy.  Building plants and creating jobs in China.  All this is doing is allowing GM to make money like Wall Street makes money.  By investing money.  And getting a return on their Chinese investments.  Government Motors, I mean, General Motors is doing the very thing the Democrats hammered Mitt Romney for doing during the 2012 election.  Creating jobs in China.  The only difference, of course, is that Romney didn’t use U.S. tax money to create any of his jobs.

So the government bailout of General Motors didn’t help anyone but the UAW whose high costs were making them uncompetitive (the source of all of GM’s problems).  And the Chinese.  It didn’t create any new jobs in America.  And it didn’t help GM become more competitive.  Forcing them to rely on their Chinese job growth because their cost structure just won’t let them sell more cars or add more jobs in the United States.

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GM doing well in China after the Taxpayer-Funded Obama Administration Bailout

Posted by PITHOCRATES - September 23rd, 2012

Week in Review

President Obama saved General Motors (GM).  He bailed them out.  Instead of letting them go through normal bankruptcy proceedings where the creditors are protected and contracts are rewritten so the company can become competitive again.  The Obama bailout didn’t follow normal bankruptcy proceedings.  Nor contract law.  Secured creditors became unsecured by presidential decree.  They transferred ownership to the UAW.  And billions of taxpayers’ money propped up the UAW pension fund.  None of which improved GM’s competitiveness.  And the Obama administration poured more money into the Chevy Volt that no one wanted and few are buying.

But the president did all of these things to save US jobs.  Even though normal bankruptcy proceedings would have made GM more competitive and actually created more jobs.  In fact, under normal bankruptcy proceedings those new jobs would probably have been in the US (see GM opens China test track in effort to remain market leader by Ben Klayman posted 9/21/2012 on Reuters).

General Motors Co(GM.N) opened a new, large vehicle test track west of Shanghai on Saturday as part of its push to retain its leading market share in the world’s largest auto market.

The No. 1 U.S. automaker and its joint venture partners, including SAIC Motor (600104.SS), invested about $252.5 million to build what GM China President Kevin Wale called the country’s largest proving ground…

GM invests $1.5 billion annually in China.

The government still owns GM stock.  So that investment in China was technically made by a company the US government partially owns.  And some of those dollars invested in China were US taxpayer dollars.  So the Obama bailout of GM has allowed GM to invest in China.  And to create jobs in China.

GM is making the investment despite a slowing in the Chinese auto market because it is focused on the long-term growth prospects, Wale said…

GM, whose joint venture in China began building vehicles in 1999, sells under the Buick, Chevrolet, Cadillac, Opel, Wuling, Baojun and Jiefing brands. Wale said GM had to continue to roll out new products as the market grows, including adding products in the SUV and luxury car segments.

The government has raised fuel economy standards and pushed the Chevy Volt.  So we would stop buying the cars we want to buy.  And start buying the cars they want us to buy.  Like the Chevy Volt.  While the Chinese are expanding the SUV and luxury car segments.  Making it easy for the Chinese to buy the cars they want to buy.  Thanks to that taxpayer-financed government bailout.

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The Amount of Loss per Chevy Volt Sold is in Dispute but what is Not Disputed is that Each Volt Sold Loses Money

Posted by PITHOCRATES - September 16th, 2012

Week in Review

Some number crunching shows the Chevy Volt to be a disaster.  A Reuters’ article (see below) puts the loss per Volt sold as high as $49,000.  Which GM disputes.  Even former GM vice chairman Bob Lutz wrote an article in Forbes disputing this.  Criticizing the authors of the article for dividing the total Chevy Volt investment by the number of Volts sold to date.  And not the projected sales over the 5 year life of the vehicle.  But if you crunch the numbers over this 5 year period they still aren’t good.  And show a loss that may never be recovered (see Insight: GM’s Volt: The ugly math of low sales, high costs by Bernie Woodall and Paul Lienert and Ben Klayman posted 9/10/2012 on Reuters).

Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds, according to estimates provided to Reuters by industry analysts and manufacturing experts. GM on Monday issued a statement disputing the estimates…

GM’s basic problem is that “the Volt is over-engineered and over-priced,” said Dennis Virag, president of the Michigan-based Automotive Consulting Group…

GM’s quandary is how to increase sales volume so that it can spread its estimated $1.2-billion investment in the Volt over more vehicles while reducing manufacturing and component costs – which will be difficult to bring down until sales increase…

The lack of interest in the car has prevented GM from coming close to its early, optimistic sales projections. Discounted leases as low as $199 a month helped propel Volt sales in August to 2,831, pushing year-to-date sales to 13,500, well below the 40,000 cars that GM originally had hoped to sell in 2012.

Out in the trenches, even the cheap leases haven’t always been effective…

It currently costs GM “at least” $75,000 to build the Volt, including development costs, Munro said. That’s nearly twice the base price of the Volt before a $7,500 federal tax credit provided as part of President Barack Obama’s green energy policy…

The car entered production in the fall of 2010 as the first U.S. gasoline-electric hybrid that could be recharged by plugging the car into any electrical outlet. The Obama administration, which engineered a $50-billion taxpayer rescue of GM from bankruptcy in 2009 and has provided more than $5 billion in subsidies for green-car development, praised the Volt as an example of the country’s commitment to building more fuel-efficient cars…

Before GM resorted to discounting Volt leases, sales were averaging just over 1,500 cars a month. A huge part of that reason was consumer push back over the price, according to Virag of Automotive Consulting.

GM forecasted selling 40,000 cars per year over 5 years.  Before the discounting leases they were selling only 1,500 per month.  At that pace that comes to 18,000 cars per year over 5 years.  If you divide the $1.2 billion by 200,000 (40,000 X 5) cars sold that comes to a projected investment recovery of $6,000 per car sold.  If you divide the $1.2 billion by 90,000 (18,000 X 5) cars sold that comes to a projected investment recovery of $13,333 per car sold.  So the projected loss on their investment based on the current pace of sales over 5 years is $7,333 per Volt sold.  Or a profit margin of NEGATIVE 18.3%.  And that’s without adding any production losses.  The longer it takes to meet sales projections the greater the losses climb.  And the less likely they will ever make money on the Volt.  Even with all the subsidies and tax credits.

The big question is what do the taxpayers get for this massive investment into a car that can’t sell?  It’ll help GM advance technology for the next generation of hybrid car?  But isn’t that something car companies are supposed to be doing anyway?  And should a company that is coming out of bankruptcy protection be experimenting in exotic new technology instead of focusing on selling what people are buying to return to profitability?  So they can raise their stock price so the government can sell their shares of GM stock without a loss to repay the American taxpayer?  GM, and the American taxpayer, would be better off if GM focused on selling their more profitable trucks and SUVs until they repay their taxpayer debt.  Then once they were on more steady financial ground they could explore the exotic technologies.

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The Chevy Volt is too Expensive unless you want to Drive in the Carpool Lane Alone

Posted by PITHOCRATES - September 9th, 2012

Week in Review

The government rarely runs anything well.  Because few politicians have any business experience.  Which explains why the more they intervene into the private sector economy the more the economy suffers.  Case in point GM.  GM was losing money because they couldn’t sell cars at a high enough price to pay their bills.  Especially their retiree pension and health care costs.  Instead of allowing GM to go through the bankruptcy process to fix their problems so they could sell cars at prices that would pay their bills the government bailed out the UAW.  And did not fix their underlying problem.  What caused all of their problems in the first place.  High labor and retiree costs.  So it’s no surprise that GM did not emerge leaner and meaner from bankruptcy.  Like the airlines typically do.  Instead they left the problems in place.  And told GM to build the Chevy Volt (see The Chevy Volt: Dead or alive? by Brooke Crothers posted 9/3/2012 on CNET News).

Depending on who you believe, the Volt is either alive and kickin’ or in its death throes.

The most recent news about GM’s plug-in hybrid gives fodder to both sides. On the upside, GM said on Wednesday that it already has sold more than 2,500 Volts this month. That would be a monthly record, bringing the global total this year to about 13,000, according to reports.

But critics quickly jumped on another piece of news: GM’s suspension of Volt production for four weeks.

Dying or not this is not good news for the Volt.  Very few are buying these cars.  And those who do are not buying them because they are great cars.  They’re buying them to make a statement.  Or for some other reason.  And that is the problem for the Volt.  When a vehicle is selling well you hear the rank and file complaining about all of the overtime they have to work.  To keep up with demand.  While demanding their factories add another shift.  But when you’re only selling 13,000 a year (just over 1,000 a month) you can shut down for four weeks.  And no one will even notice.

But the completely electric Nissan Leaf has not fared well either. It has a goal of 20,000 units this year, which the Detroit News says is increasingly unlikely.

Another problem GM faces is competition. It’s no longer the only plug-in hybrid on the block. Ford has its C-Max Energi plug-in hybrid ($32,950) and Toyota is now selling a Prius plug-in hybrid ($32,000)…

GM says one in three Volts are now sold in California. And there are reasons for an uptick in Golden State sales. The Volt earlier this year finally qualified for the California provision that allows environmentally friendly cars to use restricted carpool lanes whether they’re carrying passengers or not.

And the Chevy Volt sells for $40,000.  People just aren’t demanding these cars.  Because they’re expensive, small cars.  And the people that are buying the most Volts are in California.  Just so they can drive in the carpool lanes.  Where commuters will pay almost any price to avoid that awful Californian gridlock.  Especially if you don’t have to drag along another body with you.

The federal government poured a lot of money into the Chevy Volt when they bailed out the UAW pension fund (aka the auto bailout).  This was the car of the future.  Because President Obama said so.  And proclaimed the new GM would sell a million Volts a year.  And GM would use the proceeds from these sales to repay the taxpayers.  Not only have they grossly missed the president’s sales target.  The government interference in the company (by making them build a car that no one demanded) has caused the stock price to fall.  While the government still owns a substantial amount of shares.  Pushing any repayment of the taxpayers’ money further out in the future.  If there is any repayment at all.

It just may not be time for the plug-in hybrid.  Based on these sales numbers.  So it probably wasn’t wise to make it such a big part of GM’s turnaround plan.  Or to pour so much taxpayer money into it.  Worse, GM is not positioned any better to compete in the market place.  Which is why their plug-in hybrid is the most costly one in the market place.  And will be for the foreseeable future.  Until they have a true bankruptcy reorganization.

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Jimmy Carter, Malaise, Ronald Reagan, Austrian Economics, Morning in America, Barack Obama, Keynesian Economics and Great Recession

Posted by PITHOCRATES - September 4th, 2012

History 101

It was Morning in America again because Ronald Reagan reduced the Misery Index by 42.7%

Ronald Reagan was a supply-sider when it came to economics.  Of the Austrian school variety.  In fact, one of his campaign promises was to bring back the gold standard.  A very Austrian thing.  The Austrian school predates the Keynesian school.  When the focus was on the stages of production.  Not on consumer spending.  These policies served the nation well.  They (and the gold standard) exploded American ingenuity and economic activity in the 19th century.  Making the U.S. the number one economy in the world.  Surpassing the nation that held the top spot for a century or more.  Perhaps the last great empire.  Great Britain.

Following the stagflation and misery (misery index = inflation rate + unemployment rate) of the Seventies Reagan promised to cut taxes and governmental regulations.  To make it easier for businesses to create economic activity.  Easier to create jobs.  And he did.  Among other things.  Such as rebuilding the military that the Carter administration severely weakened during the Seventies (it was so bad that the Soviet Union put together a first-strike nuclear option.  Because they thought they could win a nuclear war with Jimmy Carter as president).  During the 1980 campaign Reagan asked the people if they were better off after 4 years of Jimmy Carter.  The answer was no.  Four years later, though, they were.  Here’s why.  (Note:  We used so many sources that we didn’t source them here to save space.  The inflation rate and unemployment rates are for August of the respective years.  The dollar amounts are annual totals with some estimates added to take them to the end of 2012.  The debt and GDP are not adjusted for inflation as they are only 4 years apart.  Gas prices and median income are adjusted for inflation.  There may be some error in these numbers.  But overall we believe the information they provide fairly states the economic results of the presidents’ policies.  (This note applies to both tables.))

Reagan entered office with some horrendous numbers.  The Carter administration was printing so much money that inflation was at 12.9% in 1980.  Added to the unemployment rate that brought the misery index to 20.6%.  A huge number.  To be fair Carter tapped Paul Volcker to be Fed Chairman and he began the policy of reigning in inflation.  But Carter did this far too late.  The only way to cure high inflation is with a nasty recession.  Which Volcker gave Ronald Reagan.  But it worked.  By 1984 inflation fell 8.8 points or 66.7%.  Even with this nasty recession the unemployment rate fell 0.2 points or 2.6%.  Which shaved 8.8 points off of the miserable index.  Or reducing it by 42.7%.  This is why it was morning in America again.  The Left to this day say “yeah, but at what cost?” and point to the record deficits of the Reagan administration.  Saying this is the price of tax cuts.  But they’re wrong.  Yes, the debt went up.  But it wasn’t because of the tax cuts.  Because those tax cuts stimulated economic activity.  GDP rose 12.6% by 1984.  And tax receipts even increased with those lower tax rates.  Because of the higher GDP.  By 1984 Reagan’s policies increased tax revenue by 28.9%.  And on a personal level the median income even increased 0.4%.  And this following a very bad recession a few years earlier.  Finally, gas prices fell 22.2%.  And the way Americans feel about rising gas prices this was truly morning in America again.

To Top off the General Malaise of the Obama Economy Gas Prices Soared while Median Income Fell

Barack Obama is a Keynesian through and through.  A believer in pure demand-side economics.  To that end his administration focused everything on increasing consumer spending.  Tax and spend policies.  Income redistribution.  Deficit spending.  Anything to make America ‘more fair.’  Raising taxes on the rich so the poor can spend more money.  With the Keynesian multiplier they believe this is the path to economic prosperity.  Just doing everything within their power to put more spending money into the hands of poorer people.  Increasing government regulation, fees and fines as well as taxes to bring more money in Washington so they can redistribute it.  Or spend it directly on things like roads and bridges.  Or solar power companies.  Even paying people to dig a hole and fill it back in.  Because these people will take their wages and spend them.  Creating economic activity.

So President Obama put Keynesian economics to work.  Beginning with a $787 billion stimulus bill.  Investments into green energy and the jobs of the future.  Like a Department of Energy loan of $528 million to the now bankrupt Solyndra.  Which was only one of many loans.  The bailout of the UAW pension fund (aka the auto bailout).  The government poured $528 million into GM.  And President Obama touted the Chevy Volt, boasting that GM would sell a million each year bringing his green goals to fruition (GM is struggling to sell 10,000 Volts a year).  A lot of malinvestment as the Austrians would say.  But a Keynesian sees any government expenditure as a good investment.  Because if all the people who receive this government money spends at least 80% of it (while saving only 20%) the Keynesian multiplier will be five.  Meaning that the net gain in GDP will be five times whatever the government spends.  So how has that worked for the president?  Well, here are his numbers:

The government spent so much money that the federal debt increased by $5.4 trillion.  Trillion with a ‘T’.  That’s over a trillion dollar deficit each of the president’s 4 years in office.  And his last year isn’t even a whole year.  Unprecedented until President Obama.  And what did all of that federal spending get us after about 4 years?  An unemployment rate 2.1 points higher.  Or 33.9% higher than when he took office.  Inflation fell but it did nothing to spur GDP growth which grew at an anemic 3.1%.  Which is less than a percentage point a year.  Which is why the Great Recession lingers still.  Meanwhile the Chinese are having a bad year with a GDP growth of 7.8%.  So all of that spending didn’t help at all.  In fact, it made things worse.  The economic activity is so bad that even tax receipts fell 2.2% after four years of President Obama.  Which has many in his party saying that we need to raise tax rates.  Contrary to what Ronald Reagan did.  And to top off the general malaise of the Obama economy gas prices soared 107.6% under his presidency.  While the median income fell 7.3%.  One has to look hard to find any positive news from the Obama economy.  And there is one.  Inflation did fall.  But even that really isn’t good.  As it may be an indicator of a looming deflationary spiral.  Giving America a lost decade.  Like Japan’s Lost Decade.

The Flaw in Keynesian Thinking is that it Ignores the Layers of Economic Activity above the Consumer Level

So there you have an Austrian and a Keynesian.  Both entered office during bad economic times.  Although things were much worse when President Reagan took office than when President Obama took office.  The misery index was 20.6% in 1980.  It was only 11.6% in 2008.  About half as bad for President Obama than it was for President Reagan.  It came down 16.4% under Obama.  But it came down 42.7% under Reagan.  Which is why it isn’t morning in America under President Obama.  Reagan increased tax receipts by 28.9 % by the end of his first term.  They fell 2.2% under Obama.  Adjusted for inflation Reagan averaged annual deficits of $348 billion.  That’s billion with a ‘B’.  Obama averaged $1.324 trillion.  That’s trillion with a ‘T’.  Or 280% higher than Ronald Reagan.  Gas prices fell 22.2% under Reagan.  They rose 107.6% under Obama.  Median income barely rose 0.4% under Reagan.  But it fell 7.3% under Obama.  In short there is nothing in the Obama economic record that is better than the Reagan economic record.

And why is this?  Because Obama’s policies are Keynesian.  While Reagan’s policies were Austrian.  Reagan focused on the stages of production to improve economic activity.  Cutting taxes.  Reducing regulatory compliance costs.  Creating a business-friendly environment.  A system that rewarded success.  Whereas Obama focused on consumer spending.  Tax, borrow and print (i.e., quantitative easing).  So the government could spend.  Putting more money into the pockets of consumers.  Which stimulated only the last stage in the stages of production.  So while some consumers had more money it was still a business-unfriendly environment.  Where tax, regulatory and environmental policies (as well as the uncertainty of Obamacare) hindered business growth everywhere upstream from retail sales.  From raw material extraction to industrial processing to construction to manufactured goods.  Where these Obama’s policies punish success.  For the bigger you get the more you pay in taxes and regulatory compliance costs.

The greatest flaw with Keynesian economics is that it looks at aggregate supply and demand.  With a focus on consumer spending.  And ignores the layers of economic activity that happens before the consumer level.  The Austrian school understands this.  As did the British when she became one of the greatest empires of all times.  As did America during the 19th century.  No nation became an economic superpower using Keynesian economics.  Japan grew to be a great economic power during the Fifties and Sixties.  Then went Keynesian in the Eighties and suffered their Lost Decade in the Nineties.  Some Keynesians like to point to China as an example of the success of Keynesian economics.  But they still have a fairly restrictive police state.  And their economic policies are hauntingly similar to Japan’s.  Some have even posited that it is very possible that China could suffer the same fate as Japan.  And suffer a deflationary spiral.  Resulting in a lost decade for China.  Which is very plausible considering the Chinese practice state-capitalism where the state partners closely with businesses.  Which is what the Japanese did in the Eighties.  And it hasn’t been great for them since.  As it hasn’t been great in America economically since the current administration.

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President Obama’s GM Bailout Bailed Out the UAW not GM

Posted by PITHOCRATES - August 19th, 2012

Week in Review

GM got into trouble because they couldn’t sell cars competitively.  Because they had higher labor costs than the foreign competitors taking their market share.  And they simply couldn’t sell enough cars at their high prices to pay their labor costs.  Which led them to bankruptcy.  But President Obama saved GM.  By bailing them out.  And putting them on the road to prosperity.  Or did he (see Morning Bell: Taxpayers’ Auto Bailout Losses Mounting by Amy Payne posted 8/14/2012 on The Foundry)?

Taxpayers will lose even more on the auto bailout than previously thought, as the Treasury has just revised its estimate upward to $25 billion. This may still underestimate the losses to come—yet President Obama plans to tout the auto bailout as a key accomplishment of his Administration…

Heritage labor expert James Sherk and co-author Todd Zywicki found that all of the taxpayer losses occurred because the Administration manipulated bankruptcy law to shelter the United Auto Workers’ (UAW) compensation. None of the losses were necessary to preserve jobs, and taxpayers spent billions to prop up the compensation of some of the most highly paid workers in America. They write:

We estimate that the Administration redistributed $26.5 billion more to the UAW than it would have received had it been treated as it usually would in bankruptcy proceedings.…Thus, the entire loss to the taxpayers from the auto bailout comes from the funds diverted to the UAW.

The union workers, who were making more than $70 an hour in wages and benefits, received preferential treatment when their companies had to restructure. GM and Chrysler owed billions to a trust fund they had created to provide UAW members with gold-plated retiree health benefits—and taxpayers ended up paying right into that fund. That doesn’t happen in a normal bankruptcy.

Even Stephen Rattner, President Obama’s “car czar,” has admitted that “We should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay.” As a result, even after the reorganization, GM still has higher labor costs ($56 an hour) than any of its foreign-based competitors.

So this wasn’t so much a bailout of GM as it was a bailout for the UAW.  Lovely.  More debt for the rest of us so a privileged few can live better than we can.  And to add insult to injury this didn’t even fix GM’s original problem.  Their high labor costs.  Which prevents them from selling their cars competitively.  So the bailout did nothing to help GM.  Which means they’ll probably need another bailout later.  Or special treatment from the government.  Such as a pass on paying their federal income taxes.  So the American taxpayer is not benefitting at all from the GM bailout.  Unless he or she is a member of the UAW.

So in other words, the GM bailout basically screwed the American taxpayer.  So the president could reward a political ally.  That will repay his kindness in campaign contributions.  And votes.  Which he desperately needs because his stewardship of the economy is worse than Jimmy Carter’s.

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The 2011 Earthquake and Tsunami both Helped GM and Hurt the Economy

Posted by PITHOCRATES - August 5th, 2012

Week in Review

Sadly for President Obama and GM the Japanese have recovered from the 2011 earthquake and tsunami.  And GM has to face some formidable competition once again (see More Bad News for Obama: A Slump at GM by Rick Newman posted 8/2/2012 on U.S News & World Report).

The downshift seems to have scotched any notion of the government selling its stake in the company prior to the November elections, since that would amount to a taxpayer loss of roughly $17 billion, and a major embarrassment for Obama. The government can hold onto its shares as long as it likes, and sell when the price is high enough to get all its money back. But the stock would have to hit about $53 for Uncle Sam to break even—a threshold that seems a long way off…

One reason GM has lost market share this year has been the resurgence of Toyota, Honda and Nissan, after the 2011 earthquake and tsunami disrupted production and temporarily boosted the market share of Japan’s competitors…

Funny.  For the 2011 earthquake and tsunami was responsible for America’s lingering recession.  According to President Obama.  And here it was propping up GM and all the economic activity it generated.  Which was why the government bailed out GM.  To save jobs.  And all of that economic activity GM created.  So if the 2011 earthquake and tsunami was responsible for propping up GM why didn’t it prop up the rest of the economy?  Like Japan’s Lost Decade helped Bill Clinton’s economy during the Nineties?  Simple.  Because President Obama’s economic policies are just that bad.

GM will probably regain some momentum in 2013, when it rolls out its next generation of large SUVs, which are usually highly profitable. Meanwhile, Cadillac is on a roll, thanks to the new ATS compact, the XTS large sedan, and improving quality ratings. Chevrolet has three new models out or on the way—the Malibu and Impala sedans and the Spark subcompact—and a refreshed version of the popular Traverse crossover is coming next year as well…

Nobody would like to see the government sell its stake in GM more than GM. CEO Dan Akerson has complained about the company’s unhappy status as a political football, and the toll that takes on sales and morale. But he’s probably going to have to put up with it for a good while longer.

The car President Obama wanted Government Motors, I mean, General Motors to build is not even mentioned in this article.  The Chevy Volt hybrid.  Which is conspicuous by its absence.  Instead they mention the things his administration opposes.  SUVs.  And large sedans.  Vehicles the American people want to buy.  Perhaps encouraging GM to build something the American people didn’t want to buy also had something to do with GM’s falling stock price.

Perhaps it would be best for the government to sell its shares now.  Even at a loss.  So GM can run the car company.  And not politicians who don’t know the first thing about running a car company.  Ending his war on the stuff that makes these cars run, refined petroleum, would help, too.  A lot.  By bringing the cost of gasoline down.  Helping GM to sell more of the vehicles people want to buy.  Doing these things would help the economy more than 2011 earthquake and tsunami helped it.  Now that would be smart government.  Sadly, something we just don’t see much of these days.

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