% fortune -ae paul murphy

GM, Chrysler, and one specific IT Job

(Nov 8/2008)

On October 30th, a Bloomberg News story by Mike Ramsey under the headline GM-Chrysler Merger May Cost 74,000 Jobs, Report Says started with this:

A merger of General Motors Corp., the largest U.S. automaker, and Chrysler LLC may cost 74,000 jobs and close half of the smaller company's plants, according to a report from an accounting firm.

The combination may eliminate all but seven of Chrysler's car and truck models, Grant Thornton LLP said. Chrysler, the No. 3 U.S. automaker, would keep the Dodge Ram pickup, minivans and some Jeep models, the report said. GM and Chrysler owner Cerberus Capital Management LP are studying a merger, people familiar with the plans have said.

What that story does not say is that the partners have apparently asked for about $10 billion in federal aid - on the grounds that letting Chrysler go bankrupt would directly and indirectly affect about 2.5 million jobs and totally disrupt the national economy.

Here's part of how Michigan Alive told that story:

The Reuters wire service is reporting that the U.S. Treasury Department is mulling a request from GM and Chrysler owner Cerberus Capital Management LP for direct aid to facilitate a merger and that a decision could come as early as this week. The report cited two sources with direct knowledge of the talks whom it did not name.

The U.S. Department of Energy was reportedly working to make available $5 billion of an already approved $25 billion federal loan package to facilitate the GM-Chrysler deal. Also, the White House said Monday that the financing arms of the Detroit automakers might be eligible for the $700 billion financial rescue package approved earlier this month.

The new deal would reportedly include $3 billion for preferred stock in the merged automaker, about the equivalent of the current, depressed value of GM, and another $3 billion to transfer pension obligations to the government.

That 74,000 jobs estimate is only an estimate - and only covers the two major partners and their direct suppliers. That $10 billion is only an estimate too - and I suspect most people would agree both are much more likely to get bigger than smaller.

Most of this is being blamed on the slowdown related to the credit crunch, but that's just political and media nonsense: the truth is that the financial planning horizons for these companies is rather longer than a couple of weeks and what's really driving the American auto industry out of business is the new CAFE (Corporate Average Fuel Economy) standards passed by Congress late last year.

The problem the companies face is a simple one: consumers want big, heavy, fast vehicles that feel safe on American highways while Congressionally mandated CAFE standards are designed to force the American car industry to make small, light, and relatively low powered vehicles.

This is a rocks and hard places situation for the auto companies because lighter and smaller cars have about the same assembly requirements bigger, heavier, ones do -and what that means is that the smaller and lighter the vehicle, the more important the off shore assembler's labor cost advantage becomes as a determinant of the selling price.

In effect, therefore, forcing American car makers to sell high mileage vehicles the customer really doesn't want and doesn't think of as American, is a recipe for killing the industry - and the current crunch at the big three reflects this far more than it does this summer's hike in fuel prices and the subsequent crash in SUV sales.

Unfortunately there is no in-the-box solution to this -as all three CEOs testified at the time, increasing the relative importance of labor costs in automobile manufacturing shifts the competitive advantage to those with the lowest labor costs.

There might, however, be an out-of-the-box solution: recognize that the CAFE standards are for fleet averages and produce, for each heavy vehicle Americans want to buy, a matching high mileage vehicle for resale in second and third world economies.

The idea would be to nominally sell the two together, but actually deliver only the vehicle the customer wants while forwarding the customer owned high mileage vehicle to an export broker assembling these for sale overseas. Thus sale of a 12MPG H2 Hummer together with an 80MPG resale vehicle would produce a fleet average contribution of 46MPG - meeting both customer needs and the standard while keeping the jobs in the United States.

The key issue, of course, is what such an alternative vehicle has to look like to sell.

Consider, in that context, the Willy's jeep original world war II era jeep.

The GPv weighed 2,160 pounds, had a 60 HP engine, a heavy duty transmission, and four wheel drive. It went just about everywhere, hauled just about anything (including an optional Willy's trailer), hit top speeds of 60 MPH, came with a removable canvas top, and perfectly matches both roads and loads in most of the under developed world today.

A modern version would weigh less and be much more reliable, but could easily achieve 80PMG if the drive system is made up of a piston-less diesel powered generator driving electric motors integrated into the wheels.

The key reason for suggesting a high tech drive system isn't fuel economy or reliability; although the consequent reductions in weight and moving parts improves both. No, the key reason is long term manufacturing advantage because manufacturing quality dominates labor cost in making these kinds of products - meaning that third world governments can neither effectively copy the product nor match American costs once production reaches sustainable volumes.

There are big potential gains here: a multi-billion dollar foreign market; freeing the American car maker to make what American consumers want; and the long term positive consequences of putting a cheap, powerful, economic development tool with an American flag on it into the hands of the entrepreneurial classes in second and third world countries.

All that - and global emissions averaging makes it a global environmental solution: meaning that the liberal fascists trying to use environmentalism to shut down the American automobile industry won't have a complaint to scream from.

Oh, and the IT bottom line? Our friend and frequent contributor Roger Ramjet recently landed a new job - and if something like this can be made to happen, his new employer will be hiring others instead of looking at the most recent arrivals as the first layoff targets.

Note: In July of 2017 it was pointed out to me ( Comment by Dougral) that this is based on an error in interpreting the standard. The CAFE standard requires an average calculated as (total vehicles sold)/(sum of type of averages) - e.g. for 100 pairs: av = 200/((100/80) + 100/10)) = 17.7. However.. the hummer weighs more than 8,500 pounds (gross) and so is excluded, the jeep is a hybrid and so is counted 1.5 times (!) in a multiple vehicle calculation.

Paul Murphy wrote and published The Unix Guide to Defenestration. Murphy is a 25-year veteran of the I.T. consulting industry, specializing in Unix and Unix-related management issues.