Tuesday, May 26, 2009

Sonia Sotomayer

Sonia Sotomayer has been nominated to fill the position on the US Supreme Court left by the pending retirement of David Souter.

A graduate of Princeton and Yale Law School, Judge Sotomayer has been on the Federal Bench since 1992.

This one looks like a slam dunk. Her presence on the Court does not significantly alter the liberal-conservative dynamic, as Justice Souter usually voted with the liberal bloc. To vote against Sotomayer would be to vote against a woman and a Hispanic. Besides, even if all of the Republicans in the Senate voted against her, they don’t have the votes to stop her nomination. The Repubs know it, the Dems know it, so there will be plenty o’ grandstanding, which will change the end result not one iota.

Since this was a done deal, I wasn’t going to exert a lot of energy on it. Then I read that Judge Sotomayer said this: “I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion [as a judge] than a white male who hasn’t lived that life.”

Now, when I first read that, I thought “No way. That has got to be an Internet hoax in the making.”

Well, it turns out that she really did say that, as part of a speech she gave in 2001. Apparently the snippet is taken out of context. The full text of the speech can be found here.

Even if you accept her point that being a woman Hispanic makes her a better judge in areas of sexual and racial discrimination, and I’m not sure I do (after all, there’s a reason why the statue of justice is wearing a blindfold), it raises a question for me.

If being a woman and a Hispanic makes you a better judge in some types of cases, where does it make you a worse judge?

Now that’s a question I like to see asked.

Thursday, May 21, 2009

Car Wars, Part III

In my previous posts regarding the Obama administration’s new automotive fuel economy standards, I have intimated why I do not think mandating a huge increase in mileage is a workable idea. In this post I want to counter one of the arguments that has been raised in favor of the idea.

I’m talking about the “national standard” argument. Basically, this argument goes that it is better that we now have a new federal standard, as opposed to a “patchwork” of different fuel efficiency standards in various areas of the country. With a single standard, manufacturers can focus all of their engineering efforts on meeting the Federal goals, rather than trying to develop different cars for different states.

This argument is crap. It’s hogwash. No, it’s hogwash on steroids.

A little history is in order. A few years back, California announced that in the interest of controlling pollution from automobiles, the state was going to come out with a mileage standard for cars sold in California. This mileage standard was considerably in excess of Federal standards at the time.

The car companies sued to halt this action, arguing that mileage standards were the business of the Federal government. The Bush administration agreed with them. What the car companies really objected to was that the new California mileage rules would force them to develop cars that few people wanted to buy, and abandon vehicles that people did want to buy. Since the California market is so large, you can’t afford not participate in it. A classic Catch 22: they don’t want to meet the California standard, but they can’t afford to give up the California market.

But the car companies could have chosen to embrace the California standards. And the mix of cars developed for the strictest mileage standards in the country would meet the requirements of every other region as well.

Fast forward to the present day. The Obama administration has preempted the California attempt to impose higher fuel economy. How did they do it? By adopting the California standard!

Now, call me crazy, but I don’t think there is much preemption in capitulation.

The Obama administration has basically turned over control of the fortunes of a large, strategically important industry to the pollution control bureaucrats of a single state.

It may be a new Federal standard, but these actions are a betrayal of the Federal system.

Car Wars, Part II

I have a clarification on my previous post regarding the new Federal automotive fuel efficiency standards. The 35 mpg requirement is for passenger cars and light trucks combined. The requirement for passenger cars is that the corporate average hits 42 miles per gallon.

I was curious as to how many cars currently on the market meet that standard. So I visited the official EPA fuel efficiency website (www.fueleconomy.gov). They have a searchable database where you can look for cars that meet differing levels of fuel efficiency. Do a search at meet or exceed 40 mpg, and you come up with two, count ‘em two, models. If you want a car that meets the 2016 standard today, you can get a Toyota Prius or a Honda Civic Hybrid.

It kind of reminds me of Henry Ford’s old dictate regarding the Model T. “You can have it in any color you want, as long as it’s black.”

Typically, cars are developed in what’s called a platform. The platform includes the chassis, the suspension, the powertrain; basically, all of the guts and structure between the seats and the body panels. Usually, more than one model of car is built off of the platform. For example, the Honda CR-V is built off the Civic platform. The Ford Fusion and the Mercury Milan also share a platform.

Developing a new platform takes between three and five years. Not only does the platform have to be engineered, but a lot of the subassemblies will also be new designs. Then the tools to build the new parts have to be designed and built. Once the new parts are made, then the assembly processes to make the subassemblies have to be designed and built. I have seen times where getting just one part for a new automotive subassembly took over 18 months between the first quotation to delivery of production parts.

Because of the enormous cost of developing a new platform, particularly once you get to the stage of building production tools, car companies usually bring only one platform to market in any one year.

To arrive at the mandated targets will require new platform development for almost every platform over the next 8 years. If you listen carefully, you can hear faint screams of agony coming from all directions. Those are the screams of product planners and design engineers from all over the world being told about the new North American standards they will have to meet, and the timetable for meeting them.

Tuesday, May 19, 2009

Car Wars

I have been hearing on the news today about the new deal to raise automotive fuel efficiency standards. The average passenger car mileage will increase from the current 27.5 miles per gallon to 35.5 miles per gallon in 2016. From the news coverage I’ve seen so far, it is not clear if that 35.5 mpg figure also applies to light trucks. Last year Congress passed a law requiring light trucks to hit fuel efficiency standards of 27.5 mpg by 2020, but that is now superceded by this new EPA rule.

For car makers, fuel efficiency is governed by a concept known by the acronym CAFÉ: Corporate Average Fuel Efficiency. The concept is pretty simple. The average fuel efficiency of all of the cars a manufacturer sells has to hit the government’s target. If you sell one Ford Fusion (26.5 mpg) and one Ford Fusion Hybrid (38.5 mpg), your CAFÉ rating is 32.5 mpg.

If you are Ford Motor, and you want to sell a muscle car like a Mustang (22 mpg) you have to sell another car that gets 49 miles to the gallon to hit the new standard. The latest version of the Toyota Prius only gets 44 mpg, so even that would have to increase by 11% to average out with a Mustang.

The new fuel efficiency standards represent a 30% increase over a seven year time period. To hit these targets, what all of the car companies are going to have to do is predictable. Cars are going to get (much) smaller, lighter, and less powerful. They are also going to become much more expensive.

A lot more cars are going to be hybrids. Since every hybrid has dual drive systems, one gas and one electric, there are a lot more components per car than a standard powertrain. More components, more cost.

For cars with more powerful engines, the prices will also go up. Why? Well, how else can the car companies convince you to buy a car that would lose a collision with a dog, when what you really want is a big honkin’ pickup truck? After all, the evidence of the marketplace is clear. Given a choice, Americans like to drive SUV’s and pickup trucks. In 2007, the top three best selling vehicles in North America were all full size trucks.

In the news coverage so far, everyone has been all smiley and happy, singing kumbaya over how great this is. So far, nobody has bothered to ask any automotive design engineers what they think about this. Those poor bastards are probably sitting in bars, trying to drink themselves into a catatonic stupor.

Tomorrow morning, they are going to have to wake up with a hangover, go in to work, and start trying to figure out how to retool 80% of the industry capacity to build small cars on lines configured to make big trucks and SUV’s. They have to do this during a major recession, with forecasted sales volume at 60% or less of what is was just a couple of years ago. And, oh yeah, the head of California’s pollution control board announced plans today to start work on the next major ratcheting up of fuel efficiency standards.

Work in the auto industry? I’d rather take on a career juggling chain saws. Flaming chain saws.

Sunday, May 17, 2009

Third

How does Nancy Pelosi stay on as Speaker of the House? She's a pit bull partisan politico, schooled in old school urban machine politics. That extraordinary dedication to partisanship was obviously useful as House Minority Leader, making plans for her party to recapture control of the House of Representatives. But the Speaker of the House, isn't she at least nominally supposed to be for American interests, and not just the interests of the Democrats Party?

Last year, in passing the $700 billion bank bailout legislation, she had a chance to reach across the aisle and get bipartisan support. Whether you thought the bank bailout was a good idea or not, members of both parties thought it was a necessary action for the time. It was considered important to get bipartisan support for the commitment of so much money, so suddenly. So Speaker Nancy showed up to make a speech on the House floor in support of the legislation.

Now, I'm no speech writer, but if I was I would have put together a message somewhere along these lines:
"Ladies and gentlemen of the House. I have come before you today to speak in support of the legislation on the floor today. $700 billion dollars is a lot of money, but we are in the middle of an unprecedented economic crisis. Our banking system has seized up, and is in danger of collapsing. The experts we have consulted have agreed that if we do not do something to turn the situation around, our economy will undergo a calamity which will hurt all Americans.

"That is why I am asking all of you, both Republican and Democrat, to support this bill. As members of opposing political parties, we can have very real differences, both practical and philosophical, on a range of issues. But as Americans, we can put those differences aside, and work together when the chips are down to find solutions for the critical issues that this country faces. In this time of crisis, let us show a united face to the world."

She could have made a speech like that. Instead, we got this:


Now, after inveighing against the evil Republican Party for allowing war criminals to torture innocent civilians, it turns out that Speaker Pelosi had been repeatedly briefed by the CIA on what interrogation tchniques were planned for use, as well as what was actually being done to terrorists that had been captured. At the time, she never raised a note of protest.

When this information came to light, first she denied ever having this information. Then she agreed, yes, she did have the information, but only because a staffer had attended the briefing and had told her. Then, she said the CIA had lied about briefing her. Then she said the CIA misleads Congress all the time. She's got more twists and turns then a snake. Here's a news story on her press conference:


After watching this story, you have to believe that Nancy Pelosi has no commitment to the truth at all, only what she can spin to her political advantage. You know what the scary part of that is? She is third in line for the Presidency, right after Joe "Don't fly on airplanes, they're deathtraps!" Biden.

I really hope President Obama's stop smoking program is working.

Thursday, May 14, 2009

Reserve Currency: I'll Reserve Judgement On That

Nouriel Roubini came out with an Op-Ed piece in the New York Times this week. In it, he raises a warning flag. The Chinese, who fund the US government deficit by being the biggest buyers of Treaury bonds, and who have a gigantic stockpile of dollars, are starting to make noises that they don’t want the dollar to be the world’s reserve currency anymore.

In the post-World War II economic system, the dollar became the world’s reserve currency. That means that for globally traded commodities, the deals are priced in terms of dollars. World oil prices are in dollars per barrel.

It also means that for a number of currencies, if you want to change over to another currency, you have to use dollars to complete the two halves of the transaction. For example, to convert Danish kronar into Thai baht, you first trade your kronar for dollars, then trade the dollars for baht.

If you want to be part of the world trading system, you have to keep a stockpile of dollars on hand to fund your buying and selling.

Because everybody has to have dollars, that keeps demand for greenbacks high. This allows the government to keep interest rates low in financing the deficit. It also allows American consumers to run up massive trade deficits, since exporting countries have to accept US currency. Our status as the world’s reserve currency keps the dollar strong, leading to low interest rates and inexpensive imports.

Mr. Roubini’s warning is that unless we get our fiscal house in order, the Chinese currency, the renminbi, will supplant the dollar over the next ten years. Historically, reserve currencies have always come from creditor nations, not borrower nations. If the renmenbi surplants the dollar, our currency will fall preciitously in value. This will cause a spike in interest rates as the government will have to entice investors into continuing to fund our deficits. Also, commodity prices will inevitably rise in dollar terms.

I hate to argue against anyone who is advocating more fiscal restraint, but I don’t find Mr. Roubini’s nightmare scenario to be particularly frightening.

First, to function as a reserve currency, the renminbi would have to be widely traded on currency markets, and before that could happen the Chinese would have to allow it to float, or move up and down in value, vis a vis other currencies. But the Chinese keep the value of their money pegged against the dollar. It is only in the last couple of years that even limited trading of the currency has been allowed.

It is precisely because the renminbi is pegged against the dollar that the US continues to run such a massive trade deficit with China. Otherwise the dollar would already have dropped in value against the renminbi, making Chinese imports more expensive. And the Chinese get something out of the deal. US demand for cheap Chinese imports is driving the extremely rapid industrialization of the Chinese economy.

In addition to the practical difficulties (many of which Mr. Roubini himself lists out), as a manufacturing manager I think the benefits of a falling dollar would vastly outwiegh the costs. Yes, commodity prices would increase. But for the last ten years the Chinese have used an artificially low currency to take market share from companies like mine. Instead of continuing to fight one long rear guard action against off-shore competitors, we could use our advantages of lower freight costs, higher productivity, and shorter lead time to take back business that has been lost. Maybe we could even expand into new markets and products.

If being the reserve currency has allowed Americans, both collectively and individually, to be irresponsible, than losing that status would be a change for the better. It is the difference between empowerment and enablement.

Monday, May 11, 2009

Pay Me Now or Pay Me Later

I hate slow pay. I hate it with a passion.

The world of business runs on a concept called trade credit. Trade credit basically means that you ship product to your customers before they actually pay for what they have bought. Similarly, if your suppliers extend trade credit, they let you have what you have ordered before money actually changes hands.

This is different then buying things with a credit card. When you use a credit card, the bank that issues the card transfers the money directly to the merchant, treating the balance due as an unsecured loan. The merchant gets paid right away, just as if you use cash, and therefore never takes on the risk of nonpayment. With trade credit, your vendors are supplying you with product solely based on your promise to pay up.

When I started in business, the standard terms for trade credit were Net 30 Days. That meant that one month after receiving product, you agreed to pay the net balance shown on the invoice. To manage your cash flow, you would hound your customers who went over the 30 day limit, knowing that you needed the money both to meet payroll and to keep your promises to your suppliers.

About ten years ago I started to see a change in these terms. Big companies started to demand extended terms. First sixty days, then 75 days, then even more then that. General Electric now has 120 day terms written into all of their contracts. Four months.

I think the move to extended terms was originally pushed by Wal Mart and the other big retailers, Lowe’s, Home Depot, Target and the like. Remember, the consumer pays for product before they take it out of the store. So if you turned your stock over fast enough, all of the cash required for your inventory was actually provided by the suppliers. For the big boys, it is a great idea. If you can get your vendors to pony up most of the working capital you need, that makes your return on equity look just a little bit better.

On the other hand, for a smaller company like the one I work for, this kind of trade credit policy puts you in a real bind. Our suppliers won’t extend 120 credit to us, either because they are so much bigger then us that we don’t have the leverage to force it, or because they are so much smaller that they couldn’t survive for that long.

For that matter, we don’t have enough cash to tie up four months worth of operating expenses in Accounts Receivable. So we are forced by our customers to borrow money for working capital.

I bring this up because our salesmen have heard rumors that next year GE is going to go to 150 days on their terms. They are a big enough customer that they will probably make it stick. After all, might makes right in situations like this.

But might does not necessarily make smart. By compelling their suppliers to focus on locating financing, and spending time keeping the bank placated, attention is necessarily shifted away from improving quality and delivery, and working on process improvements and product innovation. Not to mention, of course, that the interest charges you have to pay the bank reduce your profit margins.

But the real reason excessive slow pay is a bad idea is that it puts your supply chain in the hands of the bank. When you force your vendors to borrow money to meet payroll, the bank can shut your vendor down just by shutting off the line of credit.

Your vendor wants to keep you, the customer, happy. But your vendor’s bank does not care about you, the customer, at all. The bank cares about limiting its risk.

The more vendors you force to borrow money, and the more money you force them to borrow, the greater the odds that one of them will run into problems and be shut down. When your vendors shut down, you shut down.

Increasing leverage makes returns on equity look better, but it also increases systemic risk.

Isn’t that how the financial industry dug themselves into the hole?

Monday, May 4, 2009

Mystery of the Week

The big business story this last week was Chrysler Corporation filing for Chapter 11 bankruptcy. The goal is to have a quick, “surgical” bankruptcy, and emerge from court in a matter of weeks, not months.

When they come out of Chapter 11, the rough outline of the ownership structure will be the UAW holding about 50%, the bondholders holding about 10%, Italy’s Gruppo Fiat having up to a 35% stake, and the US government holding the remainder.

Here’s my question: What is Fiat doing for their share of the equity? Two things Fiat isn’t doing is ponying up any cash up front, or guaranteeing any of Chrysler’s existing debt.

I haven’t researched the deal very deeply. But on the surface it looks like Fiat will pick up a big share of the reconstituted Chrysler in exchange for—nothing!

Nice work if you can get it.