Wednesday, May 11, 2011

Return to Janesville?

On Wednesday, the Milwaukee Journal Sentinel reported that the United Auto Workers has not given up on convincing General Motors to reopen its Janesville assembly plant.

GM plans to "add or keep 4,000 jobs in the U.S. by hiring new employees or calling back furloughed workers" over the next 18 months. GM plans to spend $2 billion at 17 plants in eight states. Besides Janesville, GM has as options the late Saturn plant in Spring Hill, Tenn. (remember "A new kind of company, a new kind of car?" That turned out to be less than half right), and a Shreveport, La., plant GM had planned to close.

The Janesville closing -- production ended in 2008, and the plant closed in 2010 -- hit a lot of Wisconsinites personally. The father of a high school classmate of mine drove 40 miles one way every day from up the street in Madison to Janesville to work at GM. We owned a Janesville-built Chevrolet Caprice, which lasted more than 130,000 miles at a time when hitting 100,000 miles was a big accomplishment. Manufacturing is obviously a big part of Wisconsin's economy, and car manufacturing in particular has a certain status that manufacturing of other things doesn't have. So the closing of the Janesville GM facility and the Kenosha Chrysler engine plant, both in 2010, felt bad, whether or not it made business sense.

That last sentence is the first of several questions that come to mind. Back in 2008, Catherine Madden of Global Insight, said GM "simply has too many facilities in the system, if you look at where its [declining] market share is today."

It's been apparent for many years that GM's main problem was not the quality of its cars, but the quality, or lack thereof, of its P&Ls. Through their combination of sales incentives, loss leaders (as in small cars) and the few vehicles on which they made money -- in GM's case, pickup trucks and SUVs and, interestingly, the Corvette -- the Big Three sought to make money on volume, a formula that only worked as long as the automakers had a lot of sales volume. That formula fell apart in 2008, leading to GM's bankruptcy and Chrysler's sale to Fiat.

If any automaker is to make money in the future, it will have to do by building fewer vehicles more profitably. Big Three cars used to have a reputation for poor quality. (Unfortunately, I can attest to that in at least two cases.) Poor build quality has been substantially reduced, in part through design and in part through improvements in manufacturing quality. That means cars last longer, so people replace them less often. The profit-through-volume model runs out of gas when that happens.

Lakeshore Laments doubts GM's profitability:

Would I like to see Janesville re-open?  Absolutely, but I seriously wonder if GM has the capability, not to mention the revenue and cash flow from its post-bankruptcy operations to make re-opening Janesville a possibility instead of a pipe dream. Simply put, a lot of GM's numbers are not adding up.

A review of quarterly GM 10Q SEC filings reveals that, over the past six months, GM's cash and cash equivalents has gone down from $27.5 billion at the end of 3rd quarter 2010 to $21 billion at the end of 1st quarter 2011. GM continuing its old habits of burning money may be part of the reason its share price is stuck below the IPO price of $33 and well below the $53 per share needed for taxpayers to be paid back on the portion of money put in during the Obama term.
GM seems to be focusing on politically driven public relations campaigns (as also demonstrated by the Chevy Volt hype) rather than on maximizing profits. Investors should be wary if the trend continues.

If the above numbers are true, they indicate that General Motors is still bleeding cash.  Such finances don't seem to warrant re-opening the Janesville plant for the long-term.

GM's profitability is a bigger issue than any concessions the UAW says it's willing to make to reopen Janesville. This may look like a drive down the same path of Mercury Marine and Harley–Davidson, both of whose unions agreed to givebacks to keep their Wisconsin facilities open.

But what would be built in Janesville? To respect history, GM should bring back the aforementioned Caprice (which is still being built in Australia and the Middle East), which it plans to sell to law enforcement agencies, but for the entire marketplace. GM made a huge error in killing full-size rear-drive cars in 1996, a mistake Ford is about to repeat by finally ending production of its ancient (as in first built in 1979) Ford Crown Victoria. Irrespective of $4-a-gallon gas, there is still a market among police departments and taxi companies for body-on-frame rear-drive cars. (The Dodge Charger, now appearing in a rear-view mirror near you, is not as large as the Crown Victoria.)

It’s unfortunate, but a fact of life, that workers bear the brunt of bad decisions made by management. I think GM erred by not offering diesel engines in their SUVs, which would have resulted in better fuel economy, even at, in 2008, 70 cents per gallon more than unleaded. GM was the only one of the Big Three to manufacture its own diesel engine, instead of getting outsourced diesels — Ford's previous truck diesel was made by Navistar, and Dodge's is made by Cummins — until Ford started producing its own diesel engine for its Super Duty pickups. (It's taken more than a decade for GM to undo the damage created by its first move into diesels, a product so bad that it is credited for having damaged the entire market for diesel cars in North America. Not until GM got its Detroit Diesel division to build a V-8 for pickups and the Suburban did that stigma start to go away.)

GM’s gas V-8 engines have Active Fuel Management, which turns off half the cylinders when not needed, when attached to automatic transmissions, but I suspect buyers remember GM’s first crack at that, the V-8-6-4 on 1980s Cadillacs. (And not fondly; called the system “the Titanic of engine options. The cars jerked, bucked, stalled, made rude noises and generally misbehaved until wild-eyed owners took the cars to have the systems disconnected.”) The Chevy Tahoe and GMC Yukon have a hybrid system option based on shutting off and restarting the engine when needed (i.e. in traffic), which seems to me antithetical to long engine life. GM dragged its corporate feet on equipping its cars and trucks with six-speed automatic transmissions (the more gears you have, the better a vehicle will perform, in both acceleration and in fuel economy), and pretty much eliminated manual transmissions, which still get better fuel economy (in the hands of the right driver), on vehicles bigger than subcompacts.

GM pushed trucks and SUVs because GM made much more money on trucks and SUVs than they did in cars, and particularly small cars. The aforementioned Spring Hill plant was the exclusive home for GM's Saturn to build small cars. Unfortunately, there was nothing Saturn built that was particularly better than its Japanese competition. (I can speak with authority on that, having test-driven and rejected their SC2 and SW2 due in large part to the noise of their twin-cam engines.

People bought Suburbans and Yukons because they felt a need for them — either to pull boats or campers, or just because they preferred their roominess and their higher driving position to smaller cars. Those smaller cars, incidentally, are the result of increasingly stringent fuel economy standards, which helped kill off large rear-drive cars, and particularly station wagons, in this country; an SUV is nothing more than a station wagon body on top of a truck chassis. SUVs weren't subject to those fuel economy regulations, so those who wanted a vehicle more like the old big cars (for instance, tall people) voted with their feet and purchased SUVs. If they wanted small cars, they purchased small cars from companies that had more experience in designing, building and selling them -- Toyota, for instance.

There are lessons from the Janesville closing for both workers and for government. The days of having the same employer for your entire career (40½ years in my father’s case) are over. The days where someone can make $54,000 (the average GM Janesville assembly line worker's salary by 2008, according to the Milwaukee Journal Sentinel) after walking into the plant with your only marketable skill being your work ethic are over too. 

The GM closing obscured a couple of interesting facts about Janesville. The Wisconsin State Journal in Madison pointed out in 2008 that GM had fewer employees in Janesville than Mercy Health Care. By 2008 86 percent of new jobs in the post-9/11 recovery were created by companies of 100 or fewer employees, and 65 percent of new jobs were created by companies of five or fewer employees. GM and its suppliers total 6.3 percent of the jobs in the Janesville area, half of the total at GM's peak in Janesville, so it's obvious that economic development officials in the Janesville area did in fact get the message years ago. As Doug Pearson, the former executive director of Chamco, the nonprofit Oshkosh development corporation, pointed out, "If you've got 50 small companies, it's a lot less likely you're going to have something that's going to affect all those companies."

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