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GM Doubles Down on French Alliance Opel’s Future Uncertain

                    Courtesy PSA Peugeot Citroën

GM and PSA Peugeot Citroën unveiled more details regarding their alliance earlier this week.  With European car sales down for six years in a row and excess manufacturing capacity driving up costs, the two manufacturers hope to weather the storm through cost sharing. The two main components of the partnership are joint product development for small vehicles and joint purchasing.  

The product development initiative is focused on B and C segment vehicles; in particular, platform sharing. According the press release, the companies will use one platform for both small cars and cross overs. It appears that the two companies decided not to use any GM platforms for these models.  This part of the alliance seems heavily weighted towards PSA Peugeot Citroën.  In fact, one has to wonder what GM is contributing to this aspect. 

The other aspect of the alliance encompasses joint purchasing operations.  This will be set up as a separate organization, led by executives from both companies on a revolving basis.  By combining platforms and sharing parts, purchasing economies are expected to save $2 billion over five years.

When thinking of GM’s operations in Europe, it is important to understand that there are multiple, competing brands/business units at play.  Volume leaders in Europe for GM are Opel and Vauxhall.  In fact, GM’s European division is based in Rüsselsheim, Germany, which is Opel’s home. In addition, GM also sells Chevrolet, Cadillac and Corvette in Europe. 

Opel is a historically important brand in Germany. Although under GM ownership since 1929, throughout much of the 20^th century, Opel was thought of as a German brand in that country.  Many vehicles in the GM lineup have Opel underpinnings, including several current Buick and Vauxhall models.  Unfortunately, Opel sales have been sagging and the company has been losing money for GM for some time.  Highly publicized strikes by its unionized workforce and Germany’s interest in retaining as many jobs as possible fueled GM’s efforts to sell Opel prior to entering bankruptcy.

The Germans have viewed the partnership with PSA Peugeot Citroën somewhat skeptically. A possible reason is that the French government has a large stake in PSA Peugeot Citroën. However, looking beyond regional rivalries, it does appear as if GM is hedging its bets.  Perhaps GM views its alliance with PSA Peugeot Citroën as allowing it to stay relevant in the European market without Opel. Although both PSA Peugeot Citroën and GM have publicly expressed confidence that the alliance will not cause any job losses, GM announced that it will shutter an Opel plant two years earlier than expected. 

A once proud brand is running the risk of losing its engineering prowess by relying on rebadged Peugeots and Citroën as its volume leaders.  It’s not a stretch to imagine a time when those vehicles will be branded as Chevrolet or Cadillac and Opel will be sold.

Possible Layoffs at Mazda North America

Mazda NA is in an interesting spot. Its US sales have been trending upwards. The automaker ended 2011 with sales up 9.1% over the previous year. 2012 started off strong as well, with significant sales increases.  

Despite positive sales trends, Mazda is offering buyouts to some of its salaried employees and may need to resort to layoffs if not enough employees take advantage of the offers. The Detroit News speculates that moving production from the US to Japan of the Mazda 6 is to blame. It is reasonable that Mazda N.A. hopes to decrease its operating expenses in light of moving production of the Mazda 6 abroad.  After all, why would any company incur the same expense load when cutting output?

Of course, the employees that are usually affected by any production cuts are those assembling the vehicles. Unlike some of its Japanese competitors, Mazda does not have any US production facilities in the south that are not unionized. Since production line workers tend to be unionized, they have greater job security than non-union employees. It is not yet clear what those union workers will do when production of the Mazda 6 ceases. Unfortunately, salaried employees whose workload may not be affected by the move will have to bear the brunt of the cost cutting.

Mazda is in a vulnerable position. A small, independent auto maker that does not offer a full line of vehicles could easily see itself squeezed out of the market. The company has high hopes for its new SUV, the 2013 CX-5, which will likely benefit from the positive reviews it has received.

 

Mercedes Shakes Up Compact Segment

Mercedes is a full-line manufacturer whose portfolio spans from large, commercial trucks to sub-compact city cars. In the US, Mercedes sells only a fraction of its global portfolio; mainly those models that fit the carefully crafted image of upscale luxury.  Products that don’t fit that image include commercial utility vehicles, trucks, minivans and subcompacts. 

One of those subcompacts, the A-Class, has been radically redesigned and was displayed at the Geneva Motor Show.  Unlike the prior version, which looked somewhat similar to the Mazda 5 (think small minivan), the new model morphed into a luxurious hot hatch. 

As Mercedes moves into this space, it will compete directly with Audi’s A3, BMW’s Mini and 1-Series. These models tend to be hatchbacks, including the BMW 1-series which is far more popular in hatchback variant than sedan, even though the sedan is the only available model in the US market. 

In the past, Mercedes has kept the A-Class from US shores, fearing that an odd-looking, tiny semi-minivan would hurt the brand. This was probably a good call.  The new A-Class, however, has been slated for the US market, which is good news for anyone who wants a stylish and sporty (looking) entry-level luxury car.

Personally, I think this is one of the best looking new models from Stuttgart in quite some time.  

 

 Courtesy of Daimler

 Courtesy of Daimler

P.S. Notice the lack of a physical gearshift on the center console. The rotary knob could either operate the COMMAND system, or the transmission or both.

January Auto Sales Off To Strong Start

via wardsauto.com

January 2012 sales data has just been published and for the most part, the industry is pleased.  If January sales gains are a reliable predictor of 2012 annual sales overall, we can expect 14.1 million units this year. That compares favorably to 2011's 12.8 million, but still a far cry from 2007 sales of 16.1 million.

The indsutry is slowly climbing out of the recession. While the total sales volume is increasing, auto manufacturers are competing for their slice of the pie. Mainly due to the natural disasters in Japan and Thailand, Japanese auto makers suffered the most in 2011.  Both Honda and Toyota suffered sales declines exceeding 7%.  Chrysler took up the slack and increased its sales by over 26%.

What can a single month's sales data tell us about the remainder of the year? Assuming the greater economic climate does not worse, we can expect a strong sales year. What we can't predict is how the fight for market share will affect the auto makers' bottom lines. Hopfully, incentive will be kept in check. Then again, if you're in the market, consider a GM product, their sales were down 6% in January.

If Unions Are So Destructive, Why Do They Work Elsewhere?

Unions are a menace to society and stand in the way of free enterprise. That’s the predominant message preached in US business schools. Like most good students, I took what my professor’s told me as a fact, rather than what it really is – a political statement of expediency. True, unions constrain the free flow of capital just as all regulations do, whether they are workplace regulations or environmental regulations. After all, the term “free market” is a misnomer. As any economist will gladly tell you, there is no truly free market. 

Regulations by definition “regulate”, meaning they create a framework within which businesses compete.  It is up to the companies to compete successfully while adhering to the rules of the game.  Why is it than that some companies excel in unionized environments while others do not?

The website Remapping Debate.org posted an excellent article that delves into this issue. Specifically, it examines how unionized automakers in Germany are highly successful while US automakers that are unionized often blame their unions for making them uncompetitive.  The average salary of a unionized US auto employee is about half of his or her German counterpart. Yet these German companies manage to overcome their higher cost structures and earn billions in profits.

How is this possible?  There are two driving factors: costs and revenues. On the cost side, as the article explains, the legal structures in Germany are very different from those in the US. For one, unionized and non-unionized employers face much stricter labor rules. Whereas in the US, most employees can be laid off for almost any reason, a legal principle known as termination without cause, this is not the case in Germany. There, employers must have a thoroughly documented history of negative performance reviews to justify letting an employee go.

Worker protections are stronger in Germany. All German companies have councils made up of employees whose purpose is to represent employees at the organizational level. The councils, known as Betriebsräte, advocate for employees, particularly for minorities, women and the handicapped. In addition, it’s the councils' job to ensure that work rules established in national labor agreements are applied correctly at the local level. This system ensures that ordinary workers are exposed to and interact with management, which has a tendency to build trust and allows each party to better understand the other.

Unlike their German competitors, US firms operate largely immune from outside influences. As such, US unions are the only meaningful counterweight to management’s control of a company. This naturally leads to adversarial relationships.  Further complicating the matter is that in Germany, companies are unable to escape unions whereas in the US union influence can be severely curtailed by moving operations to non-union states. This “opt-out” strategy provides significant leverage to employers. It is also something German manufacturers take advantage of when building assembly plants in the US; which are all in non-union states.

What the article does not address is the revenue side of our economic comparison. In order to be profitable with higher costs, revenue must be higher as well. This is why you rarely see any German companies compete on price. They can’t. Instead, German companies sell at the high-end of their respective markets.  Does that mean a higher cost structure due to unionized employees is only viable for companies with high profit margins? Perhaps so. A better conclusion would be that companies with high labor costs (and presumably high overall costs) have difficulty competing on price. No wonder GM was happy to sell trucks in the 90’s while neglecting other, less profitable segments of the market

BMW: The Ultimate Misery

via www.bmwultimatemisery.com

The above image, coupled with the slogan "The Ultimate Misery" almost seems to suggest that autonomous, BMW zombie cars are out to crush the average American.  Suffice it to say, that's not accurate.

The facts are as follows. After 30 years, BMW N.A. decided to close a California parts distribution center. The workers at the center are BMW employees and members of the Teamsters Local 495 union. BMW plans to "shut down" that distribution center August 31, 2011 only to re-open it the next day with "outsourced" employees. This particular facility has received prizes from BMW for its efficiency, employs 71 workers and has operated for 30 years without a work stoppage.

BMW will hand over the operational control of this distribution center to an unaffiliated third party.  One the face of it, this does seem quite capricious. According to the Teamsters PR efforts, BMW made this decision to cut costs on the backs of American workers. What we don't know is what led up to this move. Presumably, the contract negotiations between the two parties broke down and BMW decided to let the contract expire. We don't know that because BMW has been very tight lipped when it comes to this issue. We do know that the Ontario site is not the only one undergoing this change.  Officially, BMW wants to focus on "core competencies".

The union has been effective in shedding light on this issue. It has managed to garner the support of Senator Barbara Boxer and the Los Angeles Times. "Eroding the Middle Class" is the familiar refrain. Just as predictably, the comments to the LA Times piece are dominated by anti-union sentiment, mixed in with anti-government rants, and sprinkled with sensible economic discussions.

There are two aspects of this that are problematic for BMW. First, eliminating middle-class US jobs that include benefits is tough to reconcile for a company that has been playing up its investment in America. Second, BMW is not a financially struggling company that is saddled with union contracts that threaten to break its back.  A press release dated July 7 stated the following:

"Based on the considerably improved outlook, the BMW Group now expects to achieve an even greater improvement in pre-tax earnings than originally predicted."

If a high-margin manufacturer like BMW decides that paying reasonable wages and benefits (reportedly $25/hour plus benefits) is too expensive, where does that leave the rest of the industry? The old "focusing on core competencies" argument is disingenuous. If that were the case, BMW would focus on product design and marketing and it would outsource all of its manufacturing and assembly work to third parties.

Companies cut costs where they can and that is to be expected. This country's anti-union bias is enabling the steady erosion of decently paying, manufacturing jobs. The US job market is becoming more stratified, possibly leading to a time when earning $50,000 or above is reserved for office workers with college degrees.

BMW Promoting US Production

This commercial caught my attention recently.

Here's why. The commercial plays up BMW's production facility in South Carolina. It proudly showcases the capabilities of the plant to produce all BMW X3s in the world.  There's a bit of patriotism involved here. After all, why wouldn't a company want to promote the fact that it has a major production facility in the US market to US customers?

The punch line of the commercial is "DESIGNED IN AMERICA" & "BUILT IN AMERICA". That is true; it is also misleading.

Automobiles are complex pieces of machinery with thousands of parts and subassemblies.  Most auto production plants don't build cars as much as they assemble them from parts that are shipped to them.  That's why your new vehicle sticker, a.k.a. Monroney Sticker, lists the percentage of foreign parts in addition to the assembly final assembly point. The April 2011 issue of Car and Driver has an interesting article that breaks down the percentage of US/Canadian parts used in domestic auto plants. 

Surprisingly the BMW X3's domestic part content is only 5%.  That's the second-lowest percentage listed in the article.  It makes me wonder just how comfortable BMW is with producing vehicles in the US.  Instead of "DESIGNED IN AMERICA" & "BUILT IN AMERICA" on could say "ASSEMBLED IN AMERICA WITH GERMAN PARTS".

In BMW's defense, the US part content percentages vary widely across vehicles.  For example, the Toyota Camry US/Canadian parts content of 80% is rather high. Conversely, Subaru's Tribecca uses only 40% US/Canadian parts. Still, 5% is nothing to write home about.