North America’s Auto Capital - Yes I’m writing you from the Windsor side of the Detroit/Windsor border, the auto capital’s of the US and Canada. So you know i have a vested interest in this. This doesn’t make me an expert on the auto industry, but it does apparently mean i know a lot more about the topic than Senator Richard Shelby and NY Times commentator Tom Friedman. After listening to the two of them slander the US auto industry generally and the UAW specifically, I wanted to set the facts straight and let you decide.

The UAW is not the problem here. Toyota, Honda, Mercedes, BMW, Hyundai, Renault, VW, etc. all have Unions in their home countries. The problem here is the US Auto Company’s management. Detroit’s managers have had to manage their unions, as have their competitors, if the union is the problem, then management has failed to manage that part of their business. In fact, since 2005 the UAW has agreed to 2 major concessions in their contract. The first concession established a 2 tier wage system that allows the Detroit 3 to pay new workers at levels matching foreign owned plants in the US, while the second removed medical pension liability from the auto companies to the Union. The effect of these will be to reduce GM’s cost differential with Toyota by 80%, by 2010.

Now that the blame is being placed at management’s feet, just how bad are they? The Detroit 3 still holds about 45% of the US market, while competing against world class competitors that include Toyota, Honda, Daimler Benz, BMW plus companies including VW, Fiat and Renault who are world class in the small car markets. The Detroit 3’s 45% share is larger than that of Toyota, Honda and all 3 German automakers combined. How is this a failure? Does either Coca Cola or Pepsi have a 45% market? The Detroit 3 control 45% of the market against at least 15 large international competitors.

Friedman and Shelby chastised the automakers for not building what people want. Forgive my ignorance here, but weren’t pickup trucks and SUV’s the most popular vehicles in the US, before Oil skyrocketed and gasoline rose from $2 to $5.25? If Friedman or Shelby were right, the current financial panic should not have affected the sales of world beater Toyota? Well Toyota’s sales were down 26% while the US 3 were down 33-45%, the difference is based on the US companies being more focused on trucks and SUVs. So Toyota is down 26% and Ford is down 33% so Toyota is great and Ford is sub par? Let’s get real, whatever the problems the US 3 have, the financial panic which has wiped out sales, has had the effect of accelerating the costs of the US 3’s huge restructuring.

Finally, there is the repeated claim that Detroit is behind the times on technology, which is historically untrue. The Detroit 3 first introduced engine computers, overhead cams, fuel injection, etc. For years Detroit has led the way in spread safety technologies such as Airbags and ABS to mass produced cars. Yes Detroit has fallen behind on hybrids, but it’s important to remember that much of the success of hybrids have been their marketing as being greener than traditional cars. The reality, according to Toyota’s own numbers is that each Toyota hybrid reduces an average of 4.5 tons of CO2 over it’s lifetime (Hybrid Hype), about $5 worth of CO2 at current market prices: www.theccx.com. GM has been launching their Hybrids, which have focused on improving the mileage of their most popular and least efficient products: SUVs and trucks. Management in Detroit may have be unable to compete in small cars, pay themselves too much and lack forward thinking vision, but the truth is their products are demonstrating they still have a major impact in marketplace.

A lot of people have been shocked by a variety of aspects of the current credit/banking crisis and the recessionary conditions that it seems to have created or exhasterbated. I have been warning about the collapse of the US housing and mortgage markets and the potential for a banking collapse since i first heard, a few years back, that over 20% of all US mortgages were Interest only VAR loans. I never imagined that a) it would affect the rest of the world as much as it had and b) that financial firms in Europe were part of this AAA rated crapfest, or c) that people in Iceland, Hungary and other countries in Europe were taking out mortgages in foreign currency that could destroy them financially. I never imagined that Europeans would attempt or even be allowed to make such risky financial descisions, maybe more than in the US, but i was wrong.

Strangely enough, many things that have helped build the productivity of the last 25 years have combined to increase the speed at which economic changes occur and how extreme they are. In the 1970s it took weeks or even months for the automakers to notice that sales were dropping and to cut back production. Today the number are integrated so that if sales drop today, you can cancel a shift of production tomorrow. Ideas of maximizing your business by aggressively using your cash flow to expand your business, lead to businesses with no capital reserves. printers, car dealers, small manufacturers came to rely on credit to ensure they can pay their bills from day to day, so they could maximize their pay. That strategy and it’s associated tactics worked great in strong market. Today it appears that all markets are even more rapidly pulling back as the world sees slacking demand.

The combination of technology, management innovation and rapid communications have combined to allow the various players in the economy to react instantly. This rapid reaction has allowed the economy to turn around from boom to bust in a few short months as word of crisis cause business and consumers to start hoarding cash instead of spending it. We should get used to the speed at which the Economic “bi-polarism” occurs.

Well i hope someone will do something about slowing this crisis down. I heard/read yesterday that 30% of Prime rated borrowers are being turned down for car loans, vs 10% last year. The number for Sub Prime rated borrowers was a 90% rejection rate, vs just 30% last year, basically the sub prime market is gone. With all the automakers reporting sales down 35% and show room traffic down 45%, we can see these new financial realities hitting the society in many different ways and few if any are ‘good’.

I say let’s call these toxic securities(and i use the term securities loosely) as worth 35 cents on the dollar, for the purpose of “Mark to Market” accounting rule for a 6 to 12 month periods. This will bring borrowers into compliance with loan covenants thus slowing the crisis. In fact had this been the case last january, most of the crisis might not have happened.