Editors' Notes

Measuring pain

2009-02-27T20:54:00Z

Every hospital room, doctor’s office, and ER bay has a faded copy of the Universal Pain Assessment Scale taped to the wall: it’s an annoyingly reductive approach to “measuring” a patient’s level of misery — which is obviously an important diagnostic and clinical task, but as a patient or loved one I’d rather not have the comparison to happy, glum, sad, and horrified faces.

This is the image that popped into my head when I read the Fabricators & Manufacturers Assn.’s announcement that their economic analyst believes the current recession is “less ‘painful’” than those in the past.

In fact, Dr. Chris Kuehl predicts that recessionary conditions will ease later this year. “Unless the current doom and gloom becomes something of a self-fulfilling prophecy, the recession is on a par with past downturns and real improvement will start to manifest itself in 2010,” Kuehl writes in the FMA’s economic-update newsletter.

His analysis is based on the National Bureau of Economic Research’s data analysis technique — the standard used in business reporting — which is that overall economic growth must decline for two consecutive quarters in order to define a recession. Once the decline reverses for two quarters, the recession is over.

“The NBER has a reputation as being pretty conservative and reacts to factors beyond GDP to declare a recession,” Kuehl says. “It uses six criteria to determine when a recession has started and when it ends. These are GDP, real income, employment, industrial production, wholesale sales and retail sales.”

Kuehl’s analysis of government data on GDP, income, unemployment, and production since 1970 leads him to conclude: “It is pretty apparent the recession of 2008-09 is not worse than those in the past four decades. In fact, the recessions of the 1970s and 1980s were arguably more painful on almost every level.

“For example, real GDP dipped lower in 1975 and 1980, and unemployment rates were higher in 1981-82,” he adds. “The statistics also show that although this is no shallow and unimportant recession, it isn't the worst we have been through – not by a long shot.”

I hope he’s right. But, just like the diagnostic chart there’s a lot of room for misinterpretation here. The NBER was widely criticized in early 2008 for relying so strictly on data that it didn’t recognize accelerating recessionary conditions. Nor does the NBER account for regional declines in its statistics, which may make the recovery from recession more difficult in some industries than others.

Most important, the NBER scale does not seem to incorporate anticipated developments — e.g., proposals for taxing carbon emissions — in the decisions businesses make that might prolong or suppress a recession. In short, there’s no way to measure anxiety.

“To those who are frantically trying to hold their business together, the recession is as bad as it gets,” Kuehl says. “But, for those who are trying to decide how radical they need to get to protect their business, a realistic assessment is needed. At this stage, the recession is on a par with what has been endured previously, which means it can and will be survived.”

Let me repeat: I hope he’s right.

“The strategy now should be to hunker down and wait out the downturn – without taking steps that gut a company's ability to react to the turnaround,” Kuehl says. “This means hanging on to valued employees who soon will be needed again. It means making those investments in capital goods that keep a company competitive, and it means staying true to strategic goals in marketing.”

In all fairness

2009-02-23T13:16:00Z

Last year’s strike by the United Autoworkers union versus American Axle & Manufacturing was a revealing development for the U.S. manufacturing sector: it aired all the problems involved in maintaining high-value production programs in the global economy, in the face of rising costs and declining demand. Needless to say, it also revealed the tensions that persist between manufacturers and Big Labor.

Those tensions have become much more apparent as manufacturers worldwide have been crippled by the credit-market collapse and demand is virtually stalled.

The UAW’s side of the argument in 2008 contained much of the populism that is now so prevalent. Calls for “justice” and “fairness” against “greedy” business owners and executives are common.

The fact that populists rarely if ever credit responsible or self-denying owners and executives is, to me, proof that their complaints are merely rhetorical. But, if this story is true, last year’s critics of AAM’s management salaries, and populist of all sorts, have now the chance to prove otherwise.

Everybody get in line

2009-02-13T04:42:00Z

Forgers will get a little bit closer attention for their role in the financial meltdown soon, as one of the most recognizable domestic forging companies joins the crowd of petitioners seeking federal assistance. FormTech Industries, barely three years old, is among the companies being led by the Original Equipment Suppliers Assn. and the Motor Equipment Manufacturers Assn., seeking to have government aid to the auto industry extended to automotive supplier companies.

When everyone else is getting something, it probably is a mistake (in a competitive sense) not to take the same advantage. But, these days, competition is a highly theoretical concept. What are those other supplicants really gaining?

More specifically, what's gained comes at a steep cost in terms of public perception. Already the most overworked quip in the U.S. involves casual friends or total strangers asking out loud, in exasperation, "Where's my bailout?"

Until now, all the bailout money has gone to "Wall St. billionaires," and other irresponsible characters, who have never cared much about their reputations for "quality" or "performance" anyway. And, in exchange for the financial support they've been obliged to show up in Washington to be bullied and berated by Congressmen (of all people!)

At least the bankers got their hands on the money first; the automaking execs were humiliated that way before they got anything. They're due for another round of "hearings" in March, and you can expect more staged outrage.

Which ought to be a signal to the auto parts manufacturers, but apparently they can't help themselves. Apart from recognizing that this money is not free, they ought to consider what they're giving up for it.

With a few obvious exceptions, these are companies that generally don't need to clear up "toxic" debts, don't need to restructure or to reposition themselves, and don't need to cut out excess capacity: they just need for consumer demand to revive so that their customers can get back to placing orders. They've spent the past 20 years right-sizing and optimizing. Some fresh cash will help keep the lights on, but it's not going to fix their biggest problem.

Once they do take the money, they'll have a whole new set of problems but they still won't have anyone buying their products.

A temporary fix

2009-02-01T16:23:00Z

There are many, many issues to be addressed about our financial mess, but no one would can argue that most of the difficult problems would resolve themselves if the economy were growing. Exposing deceptions or punishing frauds is fine, but it’s a distraction. A temporary fix, in the current vernacular.

Growth is the only way out of our decline. This is the core of my objection to a fiscal stimulus program built around the idea of infrastructure investments.

But, even while that initiative has just barely started, it’s being weighed down by a very predictable demand from U.S. manufacturers that federal spending guidelines contain “Buy American” provisions.

There is merit to the idea that investments in domestically manufactured goods will extend the impact of the government’s investments. But, stipulating such choices undermines the speed and quality of the stimulus the feds aim to create, because it will limit the available options. And, that limitation squanders the taxpayers’ very real stake in all this spending. (Such stipulations also contradict free-market principles, but at this point, no one's listening to those arguments.)

Worse, such mandates implicitly invite lawmakers to pick favorites among companies and organizations to be helped by their “investments” — and thereby to reward the highest contributors, or the favored voting blocs, or the local interests of specific legislators. At that point, we’re just a wink away from “earmarks” and “pay for play,” and all the other governmental vices we’ve been assured will no longer take place now that we’ve had a change in Washington.

Toyota, too?

2009-01-05T16:09:00Z

This column today offers a useful perspective to the standard anxiety about the auto industry — which is that for all the serious problems plaguing Chrysler, Ford, and General Motors, there is also a worldwide economic crisis underway, which has snuffed out consumer demand. No automaker is doing well, not even the estimable Toyota.

I would add that this dimension of the problem ought to shape our understanding of the domestic industry's dilemma. In the end, this may not matter: after all, the capacity excess, the labor cost disparity, the customer loyalty, and all the other details that have separated Chrysler/Ford/GM from Toyota (and Honda, Mercedes, and BMW) over the past decade or so, remain. But, as the columnist writes:

The auto industry is in a classic shakeout. Even if whole companies don't disappear because of government bailouts, the weakest companies will be forced to make major cutbacks, a process that's already under way in Detroit and elsewhere. Estimates of excess global production capacity in the car business run as high as 20 million vehicles annually, which would equal the capacity of 80 assembly plants. Not that many will close, of course, but a good number will.

The domestic automakers need to be reorganized to be competitive in the future, not simply to address past mistakes. If you want to continue this line of argument, to say that government involvement in the reorganization process (environmental regulations, domestic content rules, work rules) will not help make the domestic companies more competitive … well, I won't argue otherwise.

Who's getting saved?

2008-12-22T21:37:00Z

News reports characterize the President’s decision late last week as a rescue plan, a “lifeline” to the auto industry, but it’s actually a bailout for the United Autoworkers union. The $17 billion is meant to keep GM and Chrysler viable until the incoming Administration takes charge, but it charges them to wring financial concessions from the union, suppliers, and dealers in order to gain further government support.

Don’t worry. GM and Chrysler will get whatever they need, or rather, whatever the next Administration and Congress tells them they need. Democrats' predilection with “green” vehicles suggests a lot of government money will be delivered for designing and building electric-power vehicles and similar projects, but they will be in business, for a while.

Suppliers are likely to get shafted and the dealers will be made to take whatever settlement they can get.

The union, however, has been spared, and left to deal with the new President, to whom they contributed a reported $400 million. Because the Bush Administration decided not to oblige the UAW in any way for this lifeline, everyone else (including taxpayers) will pay the price.

That’s politics, and we had an election that made this dynamic pretty obvious, so there’s no reason to cry foul. Besides, President Bush is playing politics, too. Allegedly, he wants to avoid being held responsible for the collapse of the domestic auto industry.

He ought to have learned that this sort of politics only works if you hold the last card. In 2002 the domestic steel industry had collapsed, essentially, with several of the leading producers in bankruptcy or liquidation. The President instituted a series of restrictions on steel imports, to stabilize the domestic industry. He was scolded and mocked by consumers and free-trade devotees, but his calculation at the time was that the move would recruit to his side voters in states that depend on steelmaking.

Not a chance. Even though the U.S. steel industry survived the catastrophe, and thrived, labor voters blamed the President because they had to give up some of their advantages. In the 2004 election, the President lost in Pennsylvania and barely won in Ohio.

The steel industry thrived not because of the import restrictions, but because that created the conditions that allowed them to reorganize and consolidate. They were able to break free from their impossible obligations to thousands of workers, retirees, and dependents — obligations in some cases to seven times as many former workers as to current employees. Just as important, the steel companies rewrote the work rules for their continuing operations.

In 2002, Bush held onto a card: he could remove the steel-import restrictions, and as a result the union negotiated. Now, he's passed the negotiating advantage to the next President. The automakers will make every concession, because they must do so in order to survive. The UAW has already been spared.

However, labor might finally consider sparing some gratitude to the current President: he isn’t requiring them to do anything, and as a result neither will anyone else.

Fright makes right

2008-12-15T18:04:00Z

I haven't yet discovered anyone who's made a sensible comparison of the United Autoworkers union strike against American Axle & Manufacturing earlier this year, though something makes me think the incorrigible, poor-poor-me tone that the union's leadership is striking is pretty consistent with their position in that impasse. Now, though, the union apparently has a lot more powerful people interested in their side of the argument than they did in the spring. And, politicians have different interests to fight for than the owners or managers trying to save or strengthen a business.

If that's correct, it may be a more successful tactic for the UAW this time than it was in their face-off with AAM. Whether or not they're right will remain a matter of opinion.

Buy now, pay later

2008-12-10T16:44:00Z

The hardest question about bailing out the domestic auto industry — ie., yes or no — has already been answered. But, the biggest problem about this undertaking is only now beginning to get some credible attention. And, this column in the Wall Street Journal is the most comprehensive analysis I've yet seen of the federal effort being mounted to "save" GM and Chrysler.

… To become "viable," as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.

Things may change as time passes, but the effort now underway to "rescue" these companies is a living example of the way that smart (but not always honest) individuals use crisis and fear to get what they want.

Where's the money?

2008-11-24T13:10:00Z

The matter of "fixing" the auto industry has been boiled down to three general "solutions:

No federal bailout: This is the most unlikely outcome, because it seems so cruel, but those of us who support it believe it is the most expedient approach, and ultimately the fairest, because it will not expand the problem to anyone (federal taxpayers) who currently have no stake in it.

Bailout: Supporters of a federal bailout emphasize the long-term value of maintaining a “domestic” auto industry. And, they offer numerous examples of the ways that the failure of Chrysler, Ford, and GM would rupture the domestic economy, and they stress that this disruption would be too great to endure.

Bankruptcy: A structured bankruptcy, sort like Chapter 11, with the federal government supplying the working capital during the reorganization, would try to preserve some of the value of Chrysler, Ford, and GM, while addressing the problems that make them uncompetitive.

Only the no-bailout approach addresses the urgent questions about the cost of fixing Detroit's problems, and what becomes of the organizations in the aftermath. For example, if the federal government rescues them, what will that cost the taxpayers? Will the feds then own Chrysler, Ford, and GM? And, for how long? And what will happen if they cannot unload them after the bankruptcy is resolved?

The no-bailout approach gets a lot of attention, but it’s not realistic because the Detroit problem has become a Washington problem. This list of U.S. senators with assembly and/or parts plants in their states will demonstrate why there will be no no-bailout.

(As an aside, you can also interpret from that list why Michigan and Ohio are two states with such poor economies, and why those states prove to so many of us why further government involvement would be disastrous.)

Likewise, a straight-ahead federal takeover is unlikely to happen, though many in Congress believe that, one way or another, they can serve their constituents without concern for the most pressing issues in this debate — the cost to taxpayers, or consumers, and the competitiveness of the domestic industry.

So, with the structured bankruptcy approach there is a compromise, and a preview to the next problem. Specifically, after the federal money is exhausted in this effort, where will the new capital come from to charter the restructured entities? No need to wait for the answer: foreign governments and their holdings.

The core of every global economic problem today is the absence of investment capital, and the scarcity of credit created by that absence. Unless the federal government is preparing to adopt a direct-ownership policy for the domestic automotive industry, sovereign wealth funds will be the only bailout available.

Time to bail?

2008-11-12T04:49:00Z

Very few people outside Detroit or Washington are actually arguing that an auto industry bailout is a good idea. Here's one who sensibly explains why the apparent alternative — bankruptcy — is also really bad news.

The dilemma here is that neither a bailout nor bankruptcy is an appealing prospect, and it hardly seems necessary to add that neither idea offers a lot of hope.

Whether one supports one side or the other seems to hinge on whether one sees GM, Chrysler, and Ford as long-term ventures worthy of national resources; or whether one believes there's little hope of "saving" them, and a moral hazard in trying to do so.

It’s nice to be noticed

2008-04-22T20:22:00Z

I won’t use our own numbers to gauge the forging industry’s affinity for Web-based information sharing and gathering, but I will interpret the following as very good news:

The American Iron and Steel Institute has launched the Bar Steel Fatigue blog, extending the service of its Bar Steel Fatigue database into an online tool for automotive engineers seeking innovations and information on fatigue.

"Now in its 10th year, the Bar Steel Fatigue Database is accessed regularly by automotive engineers, as the information and technologies are constantly evolving, providing additional time and cost efficiencies," states David Anderson, director of AISI's Long Products Market Development Group. "The blog will take this powerful tool to the next level, as it creates new opportunities for interactive collaboration with fatigue and industry experts."

The blog administrator is Dr. Thomas Oakwood, one of the developers of the Bar Steel Fatigue Database. He is a metallurgical engineer with over 40 years of industrial experience in steel and related industries.

Engineers involved in steelmaking and ground-vehicle design are welcome participate in the blog, as are supplier design engineers, powertrain/chassis engineers, materials engineers, application engineers and FEA techicians, as well as users of the Bar Steel Fatigue Database and visitors to the AISI Automotive Web site.

Some of the topics open for discussion will be comparisons of fatigue properties of high-carbon steels for various processing cycles, and the fatigue properties of medium-carbon steels in the normalized, quenched and tempered conditions.

Valuing exports

2008-03-28T16:04:00Z

Free-trade skeptic Alan Tonelson is a sharp guy, and you always know where he stands on matters related to U.S. foreign trade policy. He's presented an interesting list (LINKED HERE) of "products" that represent the highest value U.S. exports. He's making a point about something that has intrigued me for several months — i.e., whether or not our devalued U.S. currency commutes into a net gain for manufacturing because it makes imported goods more expensive, and it makes U.S. exports more affordable to foreign buyers.

When the dollar tanked last September, a lot of manufacturers saw it as a new opportunity to improve their export potential. Well, Tonelson isn't addressing whether or not U.S. manufacturers are gaining because imports are more expensive; but his list of U.S. exports is useful. His point is that these exports don't enhance our manufactuirng businesses too much.

One item on the list, "waste/scrap," is part of a much broader and more complicated subject — the fact that the low-cost manufacturing nations like China and India have no domestic scrap processing and trading infrastructures, or at least none that are sufficient to serve their metal producing activity. So, China and India import a lot of scrap metal. And, a lot of that scrap metal comes from the U.S. (This is part of the explanation for Nucor Corp. and Steel Dynamics Inc. paying billions of dollars in recent months to buy their scrap-processing sources.)

I suspect that all of the items on the list have similarly complex backstories. "Nonferrous ores," for example, undoubtedly are increasing in value because of the global raw materials demand. And, "turbines and turbine generator sets" represent an important segment of the basic manufacturing economy, and I wouldn't gainsay the benefits of exporting more of its products.

In any case, my curiosity about the rising competitiveness of U.S. manufacturers thanks to the devalued dollar is still not resolved. I think the U.S. Treasury Dept. should be doing much more to stabilize and support the dollar, for lots of reasons, but I'm not convinced that this list refutes the "pro-competitiveness" argument.

Thoughts on the American Axle strike

2008-03-13T04:14:00Z

When the United Autoworkers union initiated a strike at five American Axle & Manufacturing plants February 26, there was little indication of the impact 3,650 workers might have on the automotive industry — and General Motors in particular. One early analysis depicted a glass-half-full scenario, as GM had stepped up truck production in January, allegedly because truck sales were rising, not because it expected a strike.

The latest count has as many as 30 GM plants idled or slowed. Some Chrysler operations may yet be affected, and various automotive supply chain members may be swept along, too. The union and American Axle aren't even talking now, which only prolongs what has been a noticeably tense "dialog" — and a problem that is set to take off into new territory. (UPDATE: On March 13, an American Axle spokeswoman announced the negotiations had resumed.)

From the earliest hours of the strike, American Axle has been arguing aggressively about labor costs in U.S. automaking – a subject that has been discussed before, of course, and been the cause of many strikes. The Big Three automakers faced it last year, but they made it through 2007 with new labor contracts in place, and effectively offloaded the big issue by parking their pension and benefits obligations into “voluntary employees beneficiary associations, or VEBAs.

Now comes the matter of resolving these same problems for the rest of the automotive supply chain. American Axle contends its “all-in” labor cost is $73.48/hour per union worker — and that this figure is approximately three times what its domestic competitors (Dana Corp., and Ford and Chrysler’s captive axle-producing divisions) are paying union workers.

Note that Dana recently exited bankruptcy, with a new labor contract, of course, and Ford and Chrysler workers are covered by those companies’ recent UAW deals.

American Axle is comprised mostly of former GM operations that were spun off in the early 1990s, but kept their union workforces. Its chairman and co-founder Richard E. Dauch has cut a high profile, restructuring the organization as a focused, Tier 1 supplier, and expanding it globally. He came out swinging when the strike began:

"The market competitiveness of AAM's labor cost structure in the United States of America is the key issue we are discussing with the UAW. AAM cannot accept terms and conditions that put the company at a significant competitive disadvantage in the U.S. automotive supply industry," Dauch stated, alluding to issues that reach far beyond American Axle and this negotiating impasse.

The specific point of the American Axle position — $73.48/hour — seems like it would be easy to refute if it were not true. But the workers, judging by some Web postings, deeply resent the implication that they’re overpaid, and proudly proclaim their devotion to U.S. manufacturing competitiveness, blue collar values, hard work, and so forth — even as they are fully convinced of the decline of the U.S. middle class. (Dauch’s 2007 salary and bonus and the company’s successful growth overseas, has made this point even more vividly.)

In a political season that has re-legitimized arguments about “corporate greed” and the “betrayal” by companies’ manufacturing overseas, the union side has returned to the no-budging position that was mostly out of sight in last year’s negotiations with the Big Three.

Portraying its labor costs in such a way is a bold first move, but what does American Axle expect to happen? The union cannot forego members’ health care and pension coverage, and chipping away at hourly wages is hardly going to bring American Axle back to a competitive position with its rivals. VEBAs will work for the Big Three, who can afford the initial funding, but that’s not a credible option for smaller companies in the supply chain.

This argument is a stalemate, waiting for new facts to reach a resolution.

Don’t conclude from all their acrimony or obduracy that the American Axle strike is not benefiting various parties. For example, the automakers and their other suppliers now idling production have gained a new detail to explain ongoing losses.

A clear winner is American Axle, which is getting to make a bold, clear argument about labor costs in manufacturing — nearly a textbook case for all those manufacturers who are slowly but surely finding their voices to support a government-run health-care program.

The strike benefits the UAW and its political allies, too: they have regained their bravado, and if it can help build an argument for government-sponsored health-care coverage that would also be a victory because separating this issue would lessen the pressure on union members to concede salary and benefits gains.

Finally, such a resolution would be a boon to all those who argue for greater federal action to “protect” domestic manufacturing against foreign competition. It will be a win-win-win … or so they imagine. They may not appear to be enjoying this strike, but in their misery they've moved considerably closer to where they've wanted to be for a long time.

Paying for it, but not buying it

2008-02-26T18:01:00Z

It costs a lot of green to be “green,” as anyone involved in manufacturing can confirm. It isn’t just the cost of new controls and technologies to make plants and operations compliant with evolving regulations, nor the cost of investments to achieve “sustainability.” For companies like Alcoa, and many others, there are significant expenses for lobbying federal and various state legislators on issues relating to manufacturing’s energy costs and climate-change issues. They also lobby on a range of other matters, too, of course.

They pay for it, but that doesn’t mean they’re buying it. General Motors Corp. chairman Bob Lutz stirred up some trouble for himself when he observed to a crowd of reporters that last month that global warming is a “crock” — an opinion he offered along the way to discussing the cost of developing new fuel-cell technologies and other automotive products. This week, Lutz used his blog to discuss the furor that followed: “My beliefs are mine and I have a right to them, just as you have a right to yours,” Lutz wrote with a bit of frustration, as though this shouldn’t need to be reasserted. “But among my strongest beliefs is that my job is to do what makes the most business sense for GM,” he continued. There’s more, and it’s worth reading.

What happened to China?

2007-12-12T21:00:00Z

What happened to all the anxiety about Chinese currency manipulation?

No one doubts that China unfairly suppresses the value of its currency, chiefly by buying and holding foreign currencies — specifically the dollar and the euro. Several years ago the China Currency Coalition was formed by a range of industrial, service, agricultural, and labor organizations, to press the U.S. government to seek an immediate end to this Chinese policy. They estimate the undervaluation of the yuan versus the dollar to be at 40% below a fair exchange rate.

Or, in any case that's the last figure available on the matter from CCC. I don't know if I believe that number, but I agree with the CCC's overall concern and I endorse their effort. (China's social and industrial policies worry me much more than its fiscal philosophy, however.)

But, something else has been going on lately. The ongoing meltdown in U.S. financial stocks was prompted by the exposure of those institutions to defaulted home loans. Among the effects of their crisis has been an increase in inflationary pressure on the U.S. economy, and the most obvious indication of this has been a gradual but steady decline in the value of U.S. currency.

The trigger to the currency decline, however, is the shifting preference of foreign currency traders, including central banks, like China's. They're not buying as many dollars as they had been buying prior to the housing and financial stocks' reversals.

Oddly, about the time this situation began to unfold — June 29, to be specific — was the last time I heard anything new from the China Currency Coalition. That day the CCC offered their endorsement of Currency Reform for Fair Trade Act of 2007, a bill introduced to the House of Representatives at that time. There's not been much discussion of that effort in recent weeks, either.

Where have all the concerned voices been since June? It isn't as though there have not been opportunities for a statement. Late last month, China acknowledged its practice of widespread industrial subsidization, and agreed to end subsidies for its steel, wood products, and IT industries by January 1.

This week, the U.S. and China have had new discussions, part of the intermittent China-U.S. Strategic Economic Dialogue, aiming to broaden the economic interdependence of the two nations. If ever there were an opportunity to raise the ongoing issue of currency evaluation and its effect on U.S. industries, this ought to be it. But the CCC, among others, has not drawn the connection.

I don't believe the Chinese have quietly come into line on the matter of their currency legerdemain. I suspect, however, that the decline in U.S. currency — and the consequent improvement in U.S. manufacturers export opportunities — has taken the steam out of groups like the CCC.