The Ford Fusion and how the media got it wrong (again!)

2013 Ford Fusion

I had a pretty intense discussion with a guy from Detroit at a dinner party a couple of years ago.  Okay, so some would say it was more of a debate.  Well, it was an argument.

Anyway, the Detroiter, a visitor to South Florida, was decrying the tendency among the locals to buy foreign cars.  “Why not buy cars made by the Big 3 and create jobs in the U.S.?” he argued.  I might have asserted my preference for the design, features and quality of foreign cars; but I didn’t.  Instead I pointed out that it’s not so easy to figure out what’s a foreign car and what’s a domestic car. 

The Big 3 have focused their investments on foreign markets while manufacturers of “foreign cars” have been investing in factories in the U.S.  Capital investment creates jobs.  So, would you rather buy a Ford Fusion made in Mexico or a Honda Accord made in Ohio?

Well, pretty soon, the question may be moot.  Ford has announced that its Fusion sedan will no longer be made only in Mexico.  They will be expanding their capacity to produce their best selling car in Michigan. 

Ford’s decision is only one example of manufacturers investing and creating jobs in this country.   The media reported this story as though Ford was living up to a promise they had made to the unions to add 12,000 domestic jobs by 2015.  As usual, the media got it wrong.

I’m not saying that Ford didn’t make that promise.  I’m saying other forces drove their decision.  U.S. exports have been growing seven times faster than the economy at large since 2005.  Most of that growth has come at the expense of other large manufacturing economies in Europe and Japan.

To understand this, you need to wrap your head around a new set of economic facts.  By and large, Americans (fed by an uneducated media) focus on jobs and wages. It’s something we can all understand.  But the cost of labor in the economy at large is driven by productivity.  And productivity improves because of automation and labor regulation.  Robots populate automobile assembly plants where workers used to stand.  And, American employers have more flexibility than their European and Japanese counterparts to lay off workers when economic conditions dictate.  In Germany, for example, rules governing notice to workers and requiring severance pay drive costs to shut down a factory.  Lay off 1,000 workers and it may cost you more than $40 Million in severance in addition to mandated worker training and asset write-down rules.

If you are running a global manufacturing company, you have to consider these factors before you invest in a new factory.  So, in a way that some may consider perverse, the absence of those rules in the U.S. is creating more jobs.

A new study by the Boston Consulting Group (BCG) identifies the key drivers of this trend as lower cost of labor (when adjusted for productivity), transportation and electricity.  By their estimates, leading industrial nations – the U.K., Germany, France, Italy and Japan – will have costs ranging from 8 to 18% higher than the U.S. by 2015.  China? Their costs will be lower but the gap is closing.  At 95% of U.S. manufacturing costs, the added transportation cost to get products to our shores erases their advantage completely.

BCG cites some interesting examples of foreign manufacturers investing in plants here so they can export to other countries.  Chinese computer giant Lenovo has opened a plant in North Carolina.  Toyota is exporting Camry’s from Kentucky to China and Russia.  Rolls Royce is making aircraft engine parts in Virginia.  France’s Michelin is building a new factory in South Carolina. 

For sure, there are gaps that need to be addressed.  Technical education is one.  The shortage of degreed engineers and technically qualified factory workers will only grow as time goes on.  Importing engineers from other countries requires reform to our immigration policy.  But, there are ways to address these concerns.

Siemens AG, a German manufacturer of telecommunications equipment, has built a factory in Charlotte, NC.  Their decision to locate there was the result of state and local governments investing in infrastructure and working with local junior colleges to develop programs that will give local workers the skills they need to work in Siemens’ factory. 

Despite the valid complaints of many business people about government regulation, the U.S. still has a high degree of economic freedom.  Capital seeking a high return is coming back to the U.S.  But, the needed reforms to both education and immigration policy are tied to emotional debates between the hard right and the hard left.  A deadlock, as we know, that will not be broken soon. 

WHO WILL LEAD?

GM, Ford, Chrysler… Does the end justify the means?

Have you heard?  People everywhere (except Europe) are buying cars again.  Automotive News reports that June’s U.S. auto sales are up for six consecutive years. They project 16 million for the full year.  Further, they report that each of the Detroit Big 3 gained market share in the first six months of 2013. 

That’s a far cry from the reports out of Detroit a few years ago.

More interesting is that foreign manufacturers are locating more factories here in the U.S.  Is that a good thing?  You bet.  When companies from another country invest here it creates jobs no matter what the nameplate on the car.  Indeed, Nissan, Mercedes, Toyota, Honda, BMW and the rest are exporting cars from their U.S. factories to the rest of the world.

Bloomberg recently ranked the U.S. as the third most attractive country to locate a business behind Hong Kong and the Netherlands.  China? They’re number 19. 

How can that be?  Here’s how.  While it’s true that the weaker dollar has caused the effective labor cost to drop, what’s more important is that the U.S. is well integrated into the global economy through its transportation and communications systems, has the wealthiest consumer base and is a rules-based economy. 

Global investors – business owners, corporate executives, shareholders -- are more likely to put their money into a venture governed by a reliable set of regulations, taxes, policies, etc.  “The rule of law” is very important to them.

Rule of law is a confusing term and, used in other than economic contexts, can be construed as “rule according to law” or “rule under the law”.  Dictionary.com provides a concise definition thusly:  “the principle that all people and institutions are subject to and accountable to law that is fairly applied and enforced; the principle of government by law.”

Was the rule of law abandoned a few years ago when the automakers were circling the toilet for the third time?  Fearful that hundreds of thousands of jobs would be flushed along with the shareholders money, the government intervened, first under the Bush administration, to loan TARP money the automakers and, then under the Obama administration, to engineer a restructuring of both GM and Chrysler through bankruptcy proceedings.

Critics howled but fear ruled the day.  So, what would have happened if the government hadn’t stepped in?  Many of my friends and colleagues have speculated that private investors would have acquired the assets through a Section 363 sale in bankruptcy court.  GM could probably have been had for about $10 billion, chump change for the private equity industry. 

But, I am not so sure.  We were all in a panic in the first half of 2009.  No one was quite sure what would happen next.  Investors like a stable environment in which they can place their bets.  2009 was anything but stable.   Mike Jackson, CEO of AutoNation (NYSE:AN) the nation’s largest auto dealer, has often said, “it’s pains me as a conservative Republican to say this…” but the U.S automakers would not have survived if the government hadn’t taken action.  He goes on to support the oft-reported view that the a GM liquidation would have unraveled the supply chain and brought down many other companies in the industry, causing not only job losses but also disruption of the global economy.  And, this was at a time when the U.S. Federal Reserve was still putting the Humpty-Dumpty financial services industry together again.

Principles are important.  Our leaders, both Republicans and Democrats, violated so many sound principles of capitalism during the nine-month span between the Lehman bankruptcy and the GM bankruptcy that it’s hard to keep track.  The most prolific of the Austrian school of economics, Friedrich Hayek, in his most important work The Road to Serfdom, said, “nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law”.

But, there is no line in the sand that can distinguish between actions that satisfy the principles of the rule of law.  Both the President and the Chair of the Federal Reserve are given a great deal of discretion.  Here’s what George W. Bush told CNN in December 2008, a month before he turned the reins of government over to his successor.  "I've abandoned free-market principles to save the free-market system, to make sure the economy doesn't collapse."

We’ll never know what might have happened if the government hadn’t exercised its discretion.  But, no President wants to preside over the collapse of the economy.

WHO WILL LEAD?

Clint vs. Karl: Yeah, But What About the Cars?

Clint Eastwood

I watched the Super Bowl on a Huge Screen TV. It was about 9 feet high and 16 feet wide, planted in the ground across the swimming pool from the projector and its audience. There were 40 or 50 people at the party so I saw few of the plays and heard even less of the audio. When Clint Eastwood’s "It's Halftime in America" Chrysler ad came on, I heard very little of Clint’s speech. What I did hear was the woman behind me, whose husband grew up in Detroit, express her empathy for the plight of Michiganders. That said, she isn’t about to give up her S-Class Mercedes.


By the next morning, of course, Karl Rove was on Fox News politicizing the ad. Has Clint Eastwood --America’s tough guy and the former Republican Mayor of Carmel, CA – gone soft in the head? Or worse, become a Democrat? Never mind that Clint is an actor who probably got paid bazillion dollars for reading a speech for 2 minutes. For the same money, I would have dressed up as Bo-Peep and sang Deutschland, Deutschland Uber Alles. This debate (over nothing) has gone viral since.

Lost in all this discussion is any analysis of the validity of Clint’s (and Chrysler’s) claim. Are the Detroit Big 3 producing cars that can compete on a global stage? More importantly, are they competitive in the world’s most important market, the U.S. of A?

2012 Buick Regal

I wouldn’t qualify as an expert; however, I am a car nut. I read about, drive and buy a lot of cars. And, I am here to tell you that products from GM, Chrysler and Ford are every bit as good as those from Japan, Korea and Europe. Maybe better.

Last year, I blogged about Bob Lutz’ book, Car Guys vs. Bean Counters (They Don't Write Songs About Volvos). It’s a great book even if you’re not a car nut. Lutz spent his life working in the industry and was largely responsible for Chrysler’s comeback in the 90’s. The book is well written and Lutz is a great American character, a former Marine Corps fighter pilot whose treatise offers terrific lessons in leadership.

While Lutz’ book may be self-promotional, he also goes out of his way to say the he doesn’t believe anyone, including him, could have saved GM from its 2009 bankruptcy. However, the changes in cost structure brought on by that event coupled with his decade long focus on design and engineering have resulted in a great product lineup from Chevy, Buick, Cadillac and GMC. Ditto, Ford and Chrysler.

2012 Chrysler 300C

But, public perception lags reality and GM did great damage to itself by producing mediocre automobiles for a generation while Toyota became the world’s largest auto maker by focusing on quality and products that people wanted to buy.

However, if you are in the market for a new car, you owe it to yourself to check out the American competition before you make your final choice. Before you buy that Lexus, stop off at a Buick dealer. That’s right. Buick!

2013 Ford Fusion

Interested in a BMW 3-series or 5-series? Check out the Cadillac ATS or CTS. A high performance coupe like a BMW M3 or Infiniti G37S? You owe it to yourself to test drive a Camaro ZL-1 or a Mustang Boss 302. Porsche? Try the new Corvette. Mercedes E-Class? Drive a Chrysler 300 first. Honda Accord? Ford Fusion.

In each case, you will find the American car offers similar (or even better) performance, utility, ride and handling – at a lower price!

As for the S-Class Mercedes? Well, not yet. But, then it’s only half time.

 
 

A 21st Century Dinosaur

This is Lucille. Ain't she gorgeous?

Lucille is a 1965 Ford Mustang. Like anyone her age, she is not as spry as she once was. And, she has a few bad habits. (Who doesn't?) She drinks too much and occasionally her 289 V8 omits some noxious odors and impolite sounds.

She is nothing like the Mercedes Benz that carries my candy ass to work every day. She is missing a few modern conveniences. She has no shoulder harnesses or air bags. No windshield washers, no right side rear view mirror. No air conditioning or satellite radio. No digital displays of outside temperature, average fuel economy or miles remaining till you run out of gas.

289 V8

When Lucille let's me peak under her hood (she's that kind of girl), I know how everything works. There are no computers to ensure I don't skid if I brake too hard, shift gears at the wrong time or wander outside my lane. There are no exhaust gas recirculators or pollution control valves. Indeed there is no pollution control of any kind. Lucille was manufactured before government regulators started sucking the soul out of the American automobile.

She is kind of like a Manwich or a bucket of Kentucky Fried Chicken. You know it's not good for you but just can't resist.

2012 Ford Mustang

The truth is a new Mustang with a 6 cylinder engine would run circles around Lucille. It would take you from here to there faster, more comfortably and quieter. And, it would get double the gas mileage. But you don't connect with modern cars in the same way. That's why auto manufacturers today have platoons of engineers trying to capture the essence of the high performance car from days of yore. The new Lexus GS350 has a 6 cylinder engine and a resonator under the hood that makes it sound like a V8. Ya gotta be kiddin' me!

I am not alone. You don't have to watch the auctions on the Velocity channel or the Speed network to know how much old guys like me love old cars like Lucille. Just type 1965 Mustang into the search box on eBay and hundreds of them will come up.

But, I think there's more to it than that. People of all ages connect to the objects, communities and even ideas that they grew up with. Just listen to modern political speech. References to traditional values abound.

Gas is no longer 29.9 cents per gallon. Middle aged baby boomers buy cars for their safety and reliability. The environment is threatened by green house gases.

And, Lucille's days are numbered.

Sigh!