I think you will notice that most of the companies that have filed bankruptcy over the past 9 months are producing commodities as opposed to high tech products. In fact, many high tech companies, including RIM and Apple are actually doing quite well. In contrast to lots of the other negative news out there, I think this is actually a good sign. Moreover, if the government takes note, it will encourage it to take the right steps with regard to the ongoing automobile bankruptcies.
A commodity, as defined by Webster's dictionary is:
A physical substance....... which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.
High tech proprietary products, however, are not subject to the same economic principals as commodities. For instance, Apple has essentially been able to set the price of Iphones for the last few years. As such, it is generally better for a company to be selling high tech proprietary products, as opposed to commodities.
Alas, all products become commodities. Even Iphones are having significant pricing pressures as competitors such as the Palm Pre enter the market.
The genius of the U.S. capitalist system is that it has always provided the greatest incentive for the creation of high tech proprietary products. That is why we lead the way in early industrialization, the computer revolution, and the information technology boom. Unlike our European counterparts, we were not hamstrung by entrenched businesses and the business interference of royalty that were able to mold the laws and markets to encourage the continued purchase of their outdated and fungible products.
In contrast to the U.S., look at countries that really heavily or solely on a commodity based economy. Take for instance, Saudi Arabia. When the price of oil drops, so does Saudi Arabia's economy.
Unfortunately, while we have benefits by a diverse and fluid economy in which new technology is always replacing tired commodities, some businesses have worked against this dynamic system to stack the deck in their favor. Many of our industries have promoted laws and regulation that encourage the artificially inflated prices for their commodities. There is no better example of this than the pharmaceutical companies. The same companies that created lifesaving drugs during the first half of the 20th century, but morphed into sales, marketing and lobbying companies during the second half. Name one drug that has cured anything over the past 25 years. Can't, can you? However, you can probably name 5 diseases that didn't exist 25 years ago, and the corresponding drug that can "cure" it. Yes, I know, we are all grateful that "restless leg syndrome" has been eliminated from our life. All of this culminated with the Medicare Prescription Drug Modernization and Improvement Act, signed into law in 2003, which made it a crime to negotiate with the drug companies for lower prices.
Applied to the automotive industry and the recent bankruptcies, a substantial part of the vehicle has become a commodity. Don't cry to much, as the industry has had almost a century of operating as a high tech businesses with the same technology. That is why Hyundai has one of the top luxury cars in the world, the Genesis, at such a cheap price. The reason for this, is twofold. First, that the existing infrastructure is set up to make the internal combustion engine. I have blogged about this in detail, as well as the need for the government to facilitate a move to new technology. The second, is government incentives that encourage consumption of petroleum. This lead to GM tabling the eclectic car, though it had an over 12 year head start. This needs to be eliminated immediately. If higher gas taxes aren't palatable, substantial investment in new propulsion technology is crucial. After all, the Pruis, which is the only production car with a high tech engine is selling like crazy. Why? Well there is a certain amount of brand status, but also because it is a silent engine. This was emphasized on the show Weeds, where UTURN, the local drug dealer outfitted all of his couriers with Prius, so "no one knew when they were coming." If the current automotive bankrupties are done right, we can revolutionize the automobile with high tech proprietary technology, no one will know that America is coming, and we will rule the next generation of car manufacturing.
Showing posts with label automobile. Show all posts
Showing posts with label automobile. Show all posts
Monday, June 15, 2009
Wednesday, May 27, 2009
Latest Automaker Bond Dance merely a Charade.
It is final, it has happened, and no one is going to stop them now. GM will be filing bankruptcy; by June 1, or sooner. Than again, maybe later, but who really knows. The imminent filing which has been reported on almost a daily basis for the past month. They ran out of adjectives about 10 days ago when imminent didn't seem appropriate anymore. Journalists may no longer be intersted in the truth, but they are at least good with grammar, and "now" wasn't appropriate in the past tense. The reality is the last month of negotiations have been nothing more than a foolish game, one where the only possible solution was some form of bankruptcy filing.
See, even if the government was able to negotiate a deal with the bondholders, which was almost an impossibility given that many of their positions are insured--thus making a negotiated solution less preferable than a total loss-they would still have to deal with the legal liability of all dealers they intend to close. To many of the owners, their dealership is their sole source of living. When it gets unceremoniously yanked, it is not like they won't sue. Bankruptcy was and is the only solution to these contingent liabilities.
As I have said before, bankruptcy is not a bad option for these companies. It is important to restructure the bloated distribution infrastructure. However, bankruptcy won't do anything to modernize the propulsion technology. Remember, and I can't say this enough, cars have the same propulsion system today they had 100 years ago. Why? Is it because we don't have new propulsion system's that would work in cars? No, the electric engine has been available for over 25 years! Because, the new propulsion system's are as efficient? No, we all know hybrids are way more efficient! The main reason, and there are others, is because the massive infrastructure in place is built to make the internal combustion engine. Remember the Brady Bunch episode when Peter Brady was recruited to be Johnny Bravo because the suit fit, that is our auto industry. We continue to build internal combustion engines because that is what we are set up to build--the suit fits. 3 million American jobs rely on the status quo, and in the midst of this current recession, we can't afford to send them on there merry way to find new employment.
While I don't take the needs of the 3 million workers lightly, retaining the current infrastructure, and by design creating ongoing disincentives to develop new propulsion technology, comes at a cost. Imagine what would happen if that infrastructure collapsed, and incentives to develop new technology existed. I am just guessing, but the hybrid engine would look prehistoric in 2 years. Let's remember folks, this is America. We developed the car, we can take it to the next generation. That being said, we won't get there with financial, economic and government incentives against it.
I have a theory. There have been rumors that GM will sell off some of its assets to the government after the Chapter 11 filing. Why would they do this? Well maybe they intend to temporarily nationalize the company through the modernization of new propulsion technology. After a period of nationalizaion, the modernized automobile infrastructure which it could then privatize. This would maintain some form of status quo, avoid a total collapse of the car industry(and the 3 million jobs reliant on them), and put America on the forefront of next generation of vehicles.
I like this idea. It is bold, and need I say audacious. However, I don't think it will happen for a few reasons.
1. President Obama is a capitalist. I don't care with Limbaugh and Beck say, while a liberal, the President is a dyed in the wool capitalist. This move is a bold energetic move of socialism.
2. Similarly, the government doesn't have the economic resources to run a car company. Republicans will say that once that infrastructure is developed, it will be hard to dismantle (by the way, not a bad argument). That being said, there will be a lot of out of work car executives. Moreover, our country has such a capitalist value, I don't see a brief experiment in surgical socialism will be something impossible to undo.
3. In addition, the move is way to bold and dramatic for this President. I like Obama, supported Obama, and trust his judgment, but bold moves are not in his playbook. Obama is quite possibly the most temperamentally conservative president our country has ever seen. Nationalizing the car industry to promote ingenuity and innovation may be to wild of an idea for him.
4. Finally, it is expensive. It may be cheaper to simply prop up the existing infrastructure and hope that technology evolves slowly over time.
Only time will tell whether the current strategy for working out the issues in the car industry will be successful. History really does not give us much to work off of. We have never had an industry which was so important to our economy(or any economy for that matter) in such dire financial condition. For us to prosper from the solution, however, we need bold action, and for our private and public sectors to engage meeningfully in the solution.
See, even if the government was able to negotiate a deal with the bondholders, which was almost an impossibility given that many of their positions are insured--thus making a negotiated solution less preferable than a total loss-they would still have to deal with the legal liability of all dealers they intend to close. To many of the owners, their dealership is their sole source of living. When it gets unceremoniously yanked, it is not like they won't sue. Bankruptcy was and is the only solution to these contingent liabilities.
As I have said before, bankruptcy is not a bad option for these companies. It is important to restructure the bloated distribution infrastructure. However, bankruptcy won't do anything to modernize the propulsion technology. Remember, and I can't say this enough, cars have the same propulsion system today they had 100 years ago. Why? Is it because we don't have new propulsion system's that would work in cars? No, the electric engine has been available for over 25 years! Because, the new propulsion system's are as efficient? No, we all know hybrids are way more efficient! The main reason, and there are others, is because the massive infrastructure in place is built to make the internal combustion engine. Remember the Brady Bunch episode when Peter Brady was recruited to be Johnny Bravo because the suit fit, that is our auto industry. We continue to build internal combustion engines because that is what we are set up to build--the suit fits. 3 million American jobs rely on the status quo, and in the midst of this current recession, we can't afford to send them on there merry way to find new employment.
While I don't take the needs of the 3 million workers lightly, retaining the current infrastructure, and by design creating ongoing disincentives to develop new propulsion technology, comes at a cost. Imagine what would happen if that infrastructure collapsed, and incentives to develop new technology existed. I am just guessing, but the hybrid engine would look prehistoric in 2 years. Let's remember folks, this is America. We developed the car, we can take it to the next generation. That being said, we won't get there with financial, economic and government incentives against it.
I have a theory. There have been rumors that GM will sell off some of its assets to the government after the Chapter 11 filing. Why would they do this? Well maybe they intend to temporarily nationalize the company through the modernization of new propulsion technology. After a period of nationalizaion, the modernized automobile infrastructure which it could then privatize. This would maintain some form of status quo, avoid a total collapse of the car industry(and the 3 million jobs reliant on them), and put America on the forefront of next generation of vehicles.
I like this idea. It is bold, and need I say audacious. However, I don't think it will happen for a few reasons.
1. President Obama is a capitalist. I don't care with Limbaugh and Beck say, while a liberal, the President is a dyed in the wool capitalist. This move is a bold energetic move of socialism.
2. Similarly, the government doesn't have the economic resources to run a car company. Republicans will say that once that infrastructure is developed, it will be hard to dismantle (by the way, not a bad argument). That being said, there will be a lot of out of work car executives. Moreover, our country has such a capitalist value, I don't see a brief experiment in surgical socialism will be something impossible to undo.
3. In addition, the move is way to bold and dramatic for this President. I like Obama, supported Obama, and trust his judgment, but bold moves are not in his playbook. Obama is quite possibly the most temperamentally conservative president our country has ever seen. Nationalizing the car industry to promote ingenuity and innovation may be to wild of an idea for him.
4. Finally, it is expensive. It may be cheaper to simply prop up the existing infrastructure and hope that technology evolves slowly over time.
Only time will tell whether the current strategy for working out the issues in the car industry will be successful. History really does not give us much to work off of. We have never had an industry which was so important to our economy(or any economy for that matter) in such dire financial condition. For us to prosper from the solution, however, we need bold action, and for our private and public sectors to engage meeningfully in the solution.
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