US Auto Industry:Adapt or Die!

May 3, 2007 2:20 am

CNBC Million Dollar Portfolio Challenge Update

The last week or so has proved to be rather difficult to pick a winner even in a thick field of news related announcements. Possibly due to the fact that there is no shortage of earnings announcements or just the simple fact that we are a bit off on the last few picks, the portfolio has been stagnant for the past 8 trading days!

No particularly bad trades have hurts us, but even as we have a return average approaching 9% per week, the fact is that there have been a few amazing runs that we plainly missed. Amazon and Baidu come to mind of major winners over the past two weeks. Both of these beat earnings and rocketed higher. It is a hellish reminder of how stocks were reacting back in 1998-2000.

Is it any consolation that these are two within the sectors that saw a reversal of fortune from 2002 through 2007? Not quite. In fact it is rather disconcerting that the same sectors that saw such an amazing move during the height of the last market top are seeing a similar boost from investors who are hungry for earnings acceleration.

The Worst of it…

Even so, there is just as much bad news out there to stop any sober investor in their tracks. Look no further than the automobile industry and you will find a fiasco of epic proportions. Just last night a friend was asking why the domestic automakers have had such a hard time over the past few years. I responded with these points (if you have a weak constitution, do not read any further… you have been warned!):

1) US Manufactures, for the most part, have produced an inferior product of years. Hidden behind lower pricing and attractive interest rates, once the rest of the world was able to compete with price, the game was over

2) Unions have been a drag on earnings for years. Who needs an additional layer of cost and aggravation from workers looking to rip every penny from their employer. Somewhere along the way, union workers forgot that if they want to continue receiving rich benefits, they would need the company to survive and be profitable.

3) Globalization has allowed for imports to become easily accessible. Years ago, most wanted to support US companies as they were patriotically moved to ensure that we continue to be the dominant economy worldwide. With the loss of American pride due to a raging deficit and politicians who are blatantly ignoring their constituents, the “BUY AMERICAN” slogan has essentially vanished as has American Pride.

Now, the final battle will be fought when the incentive for international buyers are gone and purchasing American cars becomes more expensive. (this assumes that they have not done so already – but, if you have ever traveled abroad you will be hard pressed to see anything in wheels produced in the good old USA). As the dollar is sunk in a hole of undervalued muck, foreign companies and consumers should be buying cars buy the boatload (really the boatload, literary). US cars are cheap, as the currency conversion has created a discount like none other seen before.

The problem is that the dollar will not be here for long. The FED is inclined to move towards a firming and that will immediately short circuit exports. Cars included!

The Fix

The only way for many of these companies to survive will be to do the following:
1) Change the rules: Unions can no longer be the dictator of benefits, wages and ultimately profitability. GM, Ford and others need to take back their company. Actually, shareholders need to take it back from those that are holding it hostage for their own financial gain.

2) Allow for the possibility of benefit reduction. Of course #1 above has to occur first, but it is time for a diet. The fact is that the actuaries mis-planned pension benefits and these companies are paying equally or more to retired employees (at my last count, retired employees do not bring in revenue to the company). Now do not get hysterical and think that we are unfeeling, cruel and unjust. Surely there loyal employees are entities to their just share of pension and health benefits, but if there was an egregious error on the part of the pension planners, someone needs to pay for it and up until now it has been the company and its shareholders. Is working a right or a privilege? One answer brings these companies closer to bankruptcy, one towards eventual profitability.

3) MERGE, share or die! It is time for these companies to stop competing domestically and think more globally. Congratulations are due to some of the great thinkers in the marketing department who finally decided to shed some of the ridiculous brand conflicts they once had. Did anyone ever understand why GM produced the Oldsmobile, Buick, Pontiac and Chevrolet Brand? Mind you, the eight-brand overlap that GM had was dramatically disassembled in 2005, but you have to wonder why it took so long… Was there a difference between the Plymouth Voyager and the Dodge Grand Caravan anyway?

4) Get efficient. Forget about efficiency off of the old assembly line. Let’s assume that this is a no-brainer! Fuel efficiency is the key to sales. Hydrogen, electric hybrid, ethanol, solar powered or even nuclear. I don’t care! As long as it is cleaner burning and provides for greater fuel economy; it should be at the top of the list for US manufacturers. IS IT ANY WONDER THAT THE MOST EFFICIENT CAR IS A TOYOTA? EPA mileage: 60/51 for the Toyota Prius hybrid. Aren’t they the #1 car manufacture in the world now… What a coincidence!

5) If this all fails, run an American Car Exec-Idol show. This will bring in the best and the brightest (ensure that the age maximum for entrants is 25) to solve the issues facing these companies. Over a 10-week period, contestants will be made to take tests and solve puzzles in order to move on. There will be three judges; Warren Buffet, John Bogle and Meg Whitman. In the end, the best 10 of the group will make up the new executive board of which a few will be chosen to lead the company. How much worse can they do anyway? (and the profits from the show will go to pay down the pension debt)

This will eventually be a mute point when we are all traveling in personal hydrofoils anyway. So with that I will also watch as GM and Ford work out their problems to right the ship into the future. Two pipe dreams in one sentence…nice!

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