Thursday, April 2, 2009

Cars and Banks - Apples and Oranges

New York Times | Reuters | Business Week


Media received news of GM's CEO dismissal with shock and disbelieve, and questions of unfair treatment when compared to CEOs on Wall Street. Apparently, they missed the obvious difference between the two sectors of the economy. Automotive is no longer an American monopoly dominated by GM. Although General Motors is still competing with Toyota for the top spot as the biggest automotive manufacturer in the world, it is losing, badly. And the future does not bode well for GM because there are other players, many other players on the field with new technology and resources. Europe just went through a major re-orientation after Porche skillfully managed a coup to buy out Volkswagen, and made a $2 billion profit from hedge funds in the process. That changes the pecking order for decades into the future.

In addition, China is poised to overtake not only GM, but Toyota to become the world's next automotive giant, by leap frogging the gasoline engine to invest directly in hybrid and electric vehicles. General Motors, and American, complacency allowed it to fall behind Toyota and Japan. President Obama with a clear vision of the perils ahead, demanded more rigorous discipline and action from the CEO. After months and billions, the plan to re-structure in order to meet the challenges ahead has been proven to be insufficient. It is better to swallow the bitter medicine now than a decade from now.

Is there a difference between the automotive industry and the banks? As of now, American finance is still a monopoly of sorts. No other country comes close to the skills and knowledge on Wall Street. The American system of banks and financial institutions dominate the world, especially after the financial crisis, as never before. The CEOs of these institutions still hold the lifeblood of the world in their vaults. We need their cooperation to recover from the worst crisis of the century. Cooperation can only come from a willingness to cooperate. However, when the time comes to enforce new regulations and discipline, I am confident President Obama will treat the financial CEOs with fairness, and firmness. That's the hallmark of a good parent, and a good president.


(New York Times) Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today.

“China is well positioned to lead in this,” said David Tulauskas, director of China government policy at General Motors.

To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.

Japan is the market leader in hybrids today, which run on both electricity and gasoline, with cars like the Toyota Prius and Honda Insight. The United States has been a laggard in alternative vehicles. G.M.’s plug-in hybrid Chevrolet Volt is scheduled to go on sale next year, and will be assembled in Michigan using rechargeable batteries imported from LG in South Korea.

China’s intention, in addition to creating a world-leading industry that will produce jobs and exports, is to reduce urban pollution and decrease its dependence on oil, which comes from the Mideast and travels over sea routes controlled by the United States Navy.

But electric vehicles may do little to clear the country’s smog-darkened sky or curb its rapidly rising emissions of global warming gases. China gets three-fourths of its electricity from coal, which produces more soot and more greenhouse gases than other fuels.

A report by McKinsey & Company last autumn estimated that replacing a gasoline-powered car with a similar-size electric car in China would reduce greenhouse emissions by only 19 percent. It would reduce urban pollution, however, by shifting the source of smog from car exhaust pipes to power plants, which are often located outside cities.

Beyond manufacturing, subsidies of up to $8,800 are being offered to taxi fleets and local government agencies in 13 Chinese cities for each hybrid or all-electric vehicle they purchase. The state electricity grid has been ordered to set up electric car charging stations in Beijing, Shanghai and Tianjin.

Government research subsidies for electric car designs are increasing rapidly. And an interagency panel is planning tax credits for consumers who buy alternative energy vehicles.

China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.

The United States Department of Energy has its own $25 billion program to develop electric-powered cars and improve battery technology, and will receive another $2 billion for battery development as part of the economic stimulus program enacted by Congress.

Premier Wen Jiabao highlighted the importance of electric cars two years ago with his unlikely choice to become minister of science and technology: Wan Gang, a Shanghai-born former Audi auto engineer in Germany who later became the chief scientist for the Chinese government’s research panel on electric vehicles.

Mr. Wan is the first minister in at least three decades who is not a member of the Communist Party.

And Premier Wen has his own connection to the electric car industry. He was born and grew up here in Tianjin, the longtime capital of China’s battery industry, 70 miles southeast of Beijing.

Tianjin has thrived in the six years since Mr. Wen became premier. It now has China’s first bullet train service (to Beijing), a new Airbus factory and an immaculate new airport. Tianjin has also received a surge of research subsidies for enterprises like the Tianjin-Qingyuan Electric Vehicle Company.

Electric cars have several practical advantages in China. Intercity driving is rare. Commutes are fairly short and frequently at low speeds because of traffic jams. So the limitations of all-electric cars — the latest models in China have a top speed of 60 miles an hour and a range of 120 miles between charges — are less of a problem.

First-time car buyers also make up four-fifths of the Chinese market, and these buyers have not yet grown accustomed to the greater power and range of gasoline-powered cars.

But the electric car industry faces several obstacles here too. Most urban Chinese live in apartments, and cannot install recharging devices in driveways, so more public charging centers need to be set up.

Rechargeable lithium-ion batteries also have a poor reputation in China. Counterfeit lithium-ion batteries in cellphones occasionally explode, causing injuries. And Sony had to recall genuine lithium-ion batteries in laptops in 2006 and 2008 after some overheated and caught fire or exploded.

These safety problems have been associated with lithium-ion cobalt batteries, however, not the more chemically stable lithium-ion phosphate batteries now being adapted to automotive use.

The tougher challenge is that all lithium-ion batteries are expensive, whether made with cobalt or phosphate. That will be a hurdle for thrifty Chinese consumers, especially if gas prices stay relatively low compared to their highs last summer.

China is tackling the challenges with the same tools that helped it speed industrialization and put on the Olympics: immense amounts of energy, money and people.

BYD has 5,000 auto engineers and an equal number of battery engineers, most of them living at its headquarters in Shenzhen in a cluster of 15 yellow apartment buildings, each 18 stories high. Young engineers earn less than $600 a month, including benefits.

When Tianjin-Qingyuan puts its entirely battery-powered Saibao midsize sedan on sale this autumn, the body will come from a sedan that normally sells for $14,600 when equipped with a gasoline engine. But the engine and gas tank will be replaced with a $14,000 battery pack and electric motor, said Wu Zhixin, the company’s general manager.

That means the retail price will nearly double, to almost $30,000. Even if the government awards the maximum subsidy of $8,800 to buyers, that is a hefty premium.

Large-scale production could drive down the cost of the battery pack and electric motor by 30 or 40 percent, still leaving electric cars more expensive than gasoline-powered ones, Mr. Wu said.

But Mr. Wu has plenty of money to pursue improvements. He interrupted an interview at his company’s headquarters on Thursday to take a call on his cellphone, politely declined an offer from the caller, and hung up.

The general manager of a state-controlled bank had called to ask if he needed a loan, he explained.

(Reuters) General Motors Corp (GM.N) has asked for $2.6 billion of low interest government loans to support the development of three new hybrid vehicles, according to a business plan update released on Wednesday.

GM's loan request, which would help develop two spinoffs from its all-electric Chevrolet Volt, raises to $10.3 billion the aid it is seeking under a U.S. Energy Department program designed to support development of fuel-efficient vehicles.

The request for low-interest taxpayer backed loans was made on Monday to the U.S. Treasury Department, GM said. It was the automaker's third request for loans under the program.

It was also the first time GM has confirmed that it intended to move ahead with production of variants of the Volt, a battery-powered car that will carry a small, 1.4-liter engine as a generator designed to kick in after 40 miles. (64 km)

The Volt, which is scheduled to go into production in late 2010, remains one of the most closely watched upcoming GM vehicles and has been central to the automaker's attempt to reinvent itself in the eyes of consumers.

In January, GM showed off a concept version of a Cadillac called the Converj, which was based on the electric-drive system the automaker has developed for the Volt.

GM executives have said the top U.S. automaker plans to use the Volt system in other other models to raise volume and bring down the cost of the lithium-ion batteries the vehicles require.

The White House-appointed autos task force has given GM 60 days to come up with a restructuring plan that cuts costs and debt levels more deeply than the automaker had planned.

It was not immediately clear how that review process might affect GM's bid to secure the Department of Energy loans.

President Barack Obama has warned that GM may have to be restructured in bankruptcy if it fails to win sweeping concessions from the United Auto Workers union and bondholders.

Contingency plans for a GM bankruptcy developed by advisers would split the automaker into its more promising assets -- such as electric car technology -- while keeping lower-margin and loss-making operations under court-protection, a person with knowledge of the matter has said.

(Business Week) In firing the CEO of General Motors (GM) this week and suggesting bankruptcy may be the best course for that company and Chrysler, President Barack Obama demonstrated forcefully that the Administration will go only so far to rescue even the country's most important icons. But the move, which experts are comparing with a variety of similarly dramatic decisions by his predecessors, is fraught with political risk—and risk for his economic program generally.

Some commentators and bloggers are comparing Obama's actions on the car companies with President Ronald Reagan's 1981 dismissal of the country's air traffic controllers, and British Prime Minister Margaret Thatcher's 1984-85 showdown with her country's coal miners. In both cases, the moves proved pivotal in demonstrating their resolve, and boosted their political support. Others have cited showdowns by Presidents Harry Truman and John F. Kennedy with the U.S. steel industry. Truman shut down the industry in a case involving the Korean War (his decision was overturned by the Supreme Court), and JFK faced down U.S. Steel over a price increase.

It's too early to say how important Obama's ultimatum to the U.S. auto industry will prove. "This could be an important moment," says Lou Cannon, a preeminent Reagan scholar and the author of five books on the former President. But even if it is, the decision could turn out to have starkly different meanings. Obama could be "seen two years from now as the President who saved the American automobile industry, or…as the President who destroyed it," Cannon said by phone from his California home. "Think of the two characterizations."

Because of that uncertainty, Cannon thinks there may be a more apt analogy. It is then-Secretary of State Colin Powell's remonstration to President George W. Bush before his final decision to go to war in Iraq: "If you break it, you own it." "The President of the U.S. owns GM. He put himself in a position in which the success or failure of GM will be blamed on him," Cannon said.

There's another key difference between Obama last week and Reagan and Thatcher in the '80s: The conservative icons acted in the face of blatant opposition, and in the process changed the political equation by showing that government was not going to side with labor, says Richard Reeves, the author of biographies of both JFK and Reagan.

Obama, by contrast, is in a much more fluid situation. The true message of his move remains to be seen. Reeves compares Obama's strategy with that of President Franklin D. Roosevelt's. The economic downturns in the 1930s and now were bafflingly complex. FDR "had not mastered the declining economics of the country," he said. As for Obama, Reeves said, "I can't believe that, with the amount of time that's passed and the people involved, that they have dug so deep into these problems. There's no way that they know what they're doing. You couldn't know so many things in such a confusing time."

In both cases, the Presidents were "throwing everything against the wall and seeing what sticks," Reeves said. "I think Obama is saying, 'Someone has to be in charge,' and I think he's right. If he was just sitting back, he'd be toast. This country wants a sense that someone is in charge."

But they also want results, and that's where Obama's chutzpah on GM and Chrysler may come back to hurt him, well beyond his auto-industry policy. If the automakers dodge Obama's deadlines, perhaps by finding political cover with Congress, it could undermine his ability to take similarly bold stands on other issues.

"On the most obvious level, if you issue threats or you intimidate business, and in the end business just does what it wants, you lose some of your political capital," says Julian E. Zelizer, a professor of history and public affairs at Princeton University's Woodrow Wilson School of Public & International Affairs. "It will suggest the business community is not so frightened of Obama at a time he needs to be able to lean on them."

That happened to FDR, too. One of his signature early initiatives, the National Recovery Act, sought to impose voluntary production levels to bring the country out of the Depression. It flopped, even before the Supreme Court declared it unconstitutional, Zelizer says. "Sometimes a President can't use the power of persuasion to get business to act even in a time of major economic crisis," he said.

Not that the NRA's failure hurt FDR's legacy in the long run, of course. But the verdict is far from clear at this point for Obama's GM-Chrysler moment.

LeVine is a correspondent in BusinessWeek's Washington bureau. Francis is a writer in BusinessWeek's Washington bureau.

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