By Kevin Meyer

Half a year ago Bill made an interesting prediction on the future of Volkswagen that made several of us wonder what he might have been smoking.  But once again, he may have been prescient.

I have been known to make a fairly radical prognostication from time to
time and I will make one now – within few years Volkswagen will be
increasing their lead over the rest, gobbling up Toyota and Ford market
share, and they will emerge as the dominant auto maker of the next
decade by a wide margin.

His rationale was simple: a commitment to long term excellence and strategic objectives even at the expense of short term returns – a concept rarely found in large especially public companies.

"Starting next year, VW will introduce a so-called "long term
bonus" plan, in which managers will be rewarded according to customer
and employee satisfaction, as well as their achievements in sales and
the company's rate of return. In addition, VW will no longer offer stock
options."  This according to Deutsche-Welle
a few days ago.  The article goes on to state that bonuses will be
based on results in those areas over four years, rather than yearly or
even quarterly stock values.  Said VW Director of Human Resources Horst
Neumann, "We want there to be a close relationship between bonuses and strategic objectives."

Fancy that – tying executive compensation to long term accomplishment
of strategic objectives, including customer and employee satisfaction
instead of having it driven solely on the basis of how much money can
flow into an investor's pocket in the next couple of months.

In one fell swoop, Volkswagen will be changing the scope of their
management thinking, and taking it to a level most cannot fathom.

So today we hear about some of Volkswagen's strategy in an article discussing the challenges still facing GM.

Like awarding one little league team five outs per inning and six
strikes per batter, then doing a victory dance because they have a good
inning, President Obama applauded the "success" of his GM bailout in a
visit to Detroit last week. As much as GM benefited from being able
to shed debts and other expensive obligations in a government-financed
bankruptcy, the real test will be whether GM can go forward and adapt
successfully to a relentlessly competitive market.

GM still has to contend with the United Auto Workers (UAW), a
government-orchestrated labor monopoly that its foreign competitors
carefully avoid.  It still has to contend with fuel-economy rules purposely tweaked by
Congress to prevent GM from sourcing small car production offshore in
non-UAW factories. It also still has to contend with the ambitions
of powerful competitors seeking to survive and expand in the U.S
market—the latest being Volkswagen.

So what is VW up to?

Chief Martin Winterkorn has trumpeted a goal of becoming the world's
largest car maker by volume—an aim suddenly plausible for two reasons.
VW gets most of its sales in Germany, China and Brazil, where generous
scrappage and stimulus subsidies helped Volkswagen continue to grow even
through the subprime abyss.

That's an interesting one – a focus on "being the biggest" was a major factor behind the downfall of GM, and later the stumbles by Toyota.  Biggest in terms of sales – which is not necessarily volume – is meaningless.  It's value, translated into bottom line, that means something.  Is VW pushing to be the "largest" just for the sake of being the largest, or are they predicting they'll be the largest by capitalizing on a solid fundamental strategy?

Secondly,
VW is a famous has-been in the U.S, still the world's most important
market, with high brand-recognition, meager sales, and nowhere to go but
up. Thus, while GM and Toyota have been closing and
consolidating U.S. plants, Volkswagen is pressing ahead with a $1
billion new factory to open in Chattanooga next year.

Volkswagen learned at least one thing during its plummet from the
heights as the dominant U.S. import brand in the 1960s. It was the first
to build a large, wholly-owned U.S. assembly plant. That now-defunct
plant, in Pennsylvania, was UAW-staffed and had been open only six
months when it faced its first strike in 1979. Taking a leaf from its
successors, which includes everybody from Mercedes to [BMW, Honda, Toyota, Hyundai] Kia, VW's new
plant in Tennessee will be nonunion.

While
competitors strive for a "world car" approach, VW is focusing on more
market-specific designs aimed especially at mainstream U.S. tastes. An
early down payment is the new Jetta, significantly bigger and boatier
than its predecessor, and priced about $1,700 less.

Again, an interesting distinction.  Common-design "world cars" can create some efficiencies in terms of design, testing, and manufacturing flexibility – but once again the game is really about delivering value to the customer.  Design and functionality value does seem to be converging among different global demographics – smaller vehicles with higher efficiency – but differences remain.  Where is the value point?

VW's big bet is on the table. For all of Mr. Obama's happy talk in
Detroit, the car wars aren't over. The relentless pressure of
overcapacity is not cured.

That final statement is critical – is VW working toward a long-term value growth strategy, or are they being sucked into the siren call of being the "largest"… whether it's profitable or not?  Time will tell.

By Kevin Meyer

25 years ago Toyota and GM entered into a joint venture to produce small cars together.  For GM it was an opportunity to learn about Toyota's production methods that created vehicles of far lower cost yet higher quality than GM.  At the same time Toyota wanted to learn if those production methods could be applied to a North American workforce and culture.  Toyota did learn from the experience and proceeded to open up many successful factories throughout the continent, although their executives did eventually lose their way in a focus on growth over customer value.  GM never really got it.  The joint venture, and factory, was closed earlier this year.

Along comes Tesla Motors, a company that has designed and is planning on manufacturing one of the most innovative lines of electric vehicles.  The cars have created tremendous buzz thanks to their technological and design innovation.  It's not every day that a car company has the luxury of an order backlog even before launch.

Over the last several months they have been shopping around for a factory, with the leading contender being a facility in Downey, California.  Not anymore.

Enter Toyota and the old NUMMI facility.

Governor Arnold Scharzenegger leaked earlier today that Tesla Motors will be partnering with Toyota to build a new electric vehicle. Now, chief executive Elon Musk confirms that this is true — but that Tesla will also be acquiring the recently-closed NUMMI automotive manufacturing plant in Fremont, Calif., potentially bringing back thousands of jobs lost when that facility closed last month.

Acquiring NUMMI would appear to be a natural as you have an existing high efficiency facility with a large trained workforce only recently laid off.  But a partnership with Toyota?  Tesla vehicles are basically made by hand, and that would be an interesting application of Toyota-esque lean manufacturing.  Not impossible, just interesting.  But that's where someone had a bit of vision.

Tesla clearly realized that the Roadster and Model S weren’t going
to cut it — not in a market where the Chevy Volt and Nissan Leaf are
going to dominate at a lower price. Tesla would need its own
sub-$30,000 car (which would sell for considerably less after likely
rebates), in order to survive. But it couldn’t get its costs down on its
own, so partnering with a major automaker seemed to be the best course
of action. Toyota, which has had a decade’s headstart as the green car
leader since the release of its hybrid Prius, was probably also
shopping around for a bold, new play in the space to retain its throne.

The design of the car, which probably won’t be released today, will
draw largely from an existing Toyota design, Musk says.

Tesla now has the ability to hit the true mass market to drive long-term growth, leveraging Toyota lean principles to create efficiency and value – assuming Toyota remembers how to focus on value over growth.  And Toyota has a potential interesting addition to its portfolio.

Last week Toyota beat estimates and announced surging profits, something of a surprise considering the mess they've had over the past year.  Now they are investing again.

Keep an eye on whether they focus on unnecessary growth or creating value for the customer in terms of desired new technologies, improving quality, and taking care of customers who have problems with their products.  That will show whether the company is really back.

By Kevin Meyer

I guess we should have suspected it: GM didn't receive just a few billion in bailout funds from the government.  It also received some knowledge of funny accounting – accounting only the government is allowed to legally do.

Like many people I saw the ads over the past week touting how GM had paid back, with interest and several years early, the bailout loan from the people of the U.S. and Canada.  It sounded a bit fishy to me and apparently others, leading to this piece in The Wall Street Journal.

Is General Motors no longer Government Motors? That's the impression left by the company's announcement this week that is has fully repaid the $6.7 billion in loans it got last year from the U.S. and Canadian governments.  The company is "paying back—in full, with interest, years ahead of schedule—loans made to help fund the new GM," declared chairman and CEO Ed Whitacre. That certainly is the truth, but not the whole truth.

So what's the problem?  The government… uh… people… didn't just loan the company money, they took it over.  Big difference.

But its early loan repayment represents a little more than 10% of the money it got from both governments. Understanding why means peering under the hood of last year's government-sponsored bailout and bankruptcy.

So the U.S. and Canadian governments decided, more or less arbitrarily, to classify some $6.7 billion of its aid as debt and a ballpark estimate of $52 billion in equity. That $52 billion represents nearly 90% of the government money given to General Motors. None of that has been repaid.

Getting the remaining $52 billion back from GM will require an initial public offering, which means convincing the investing public to buy the 73% of the company's stock owned by the U.S. and Canadian governments. (The other 27% is owned by the United Auto Workers union and by bondholders in the old company.)

It won't be easy for an IPO to raise $52 billion for the government shares. That's more than Ford Motor's current market capitalization, some $48 billion. And Ford, the only U.S. car company to avoid bankruptcy, already is profitable, which GM isn't. For GM to show sustained profits means doing business in a new way and breathing new life into long-moribund brands.

So that's where the story was last night – a simple "I forgot about the other $52 billion."  This morning it got even more interesting.

General Motors is running ads on all the major networks this week claiming it has repaid its bailout from the taxpayers "in full." But the claim isn't standing up to scrutiny from lawmakers and government watchdogs who have found that the automaker was able to repay the bailout money only by dipping into a separate pot of bailout funds.

Yes, you read that right.

Iowa Sen. Chuck Grassley's charge was backed up by the inspector general for the bailout — also known as the Trouble Asset Relief Program, or TARP. Watchdog Neil Barofsky told Fox News, as well as the Senate Finance Committee, that General Motors used bailout money to pay back the federal government.

"It appears to be nothing more than an elaborate TARP money shuffle," Grassley, the ranking Republican on the Senate Finance Committee, said in a letter Thursday to Treasury Secretary Timothy Geithner.

Barofsky said that while it's "somewhat good news," there's a big catch. "I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. … It's actually from another pool of TARP money that they've already received," he said Wednesday. "I don't think we should exaggerate it too much. Remember that the source of this money is just other TARP money."

And who know's about shuffling funds from one account to another to avoid real accounting better than the government?  Social Security anyone?  Where's Al Gore and his lockbox when you need him?

By Kevin Meyer

Nearly a year ago Bill told you how GM's plan to reduce its dealer network was just a fraction of what needed to be done.  At the time GM had 6,300 dealers selling an average of 468 vehicles each, compared to Toyota which had 1,800 dealers selling an average of 1,250 vehicles each.  GM proposed closing 2,600 dealers which take the average to a still underperforming 797 vehicles each, obviously assuming constant sales.

Well that 2,600 reduction was soon whittled down to 2,000 and now it has been reduced even further.

General Motors Co. is reinstating at least 660 of the more than 2,000 showrooms it had planned to drop, a partial reversal of a consolidation plan that caused pain and fear in cities and towns across the country when first disclosed last year.

Toyota now has 1,452 dealerships in the U.S., each of which last year
sold an average of 1,219 vehicles. GM has about 5,500 dealerships and
sold 2.1 million vehicles last year, an average of about 376 a store.

Of course we can understand why this happened since GM is now effectively controlled by the government.

Lawmakers had pressured GM on behalf of local businesses, forcing it to
first offer arbitration to dismissed dealers. The company last year was
bailed out by the U.S. government, which now owns 60%.

Policy trumping good business.  No surprise.  So why is the number of vehicles sold a big deal? The Wall Street Journal describes part of the problem:

In many markets, GM, Chrysler and Ford dealers compete as much or more
against other dealers of those companies, and undercut each other on
price. After years of losing money, many have been left with old and
outmoded facilities, while dealers for companies like Toyota Motor
Corp. and Honda Motor Co. have been able to update and expand their
showrooms and amenities.

And Bill describes how those dealers then react in order to bring in more money to survive.

I was surprised to learn that the average dealer
loses money on a new car sale, but makes a great deal of money selling
parts and service.  Maybe you already knew that.  I am sure that this
is true for GM dealers much more than for Honda and Toyota dealers
simply because the smaller dealer base in the Japanese supply chains
sells so many more cars per dealer – so much less fixed cost per car
sold.
By deploying such an obese dealer network, GM has
put the dealers in the service business – with the unintended
consequence of making defects the dealer's best friend.

Reducing inventory and reducing cost is good business, which increases the value to the customer.  GM, or GM's nanny, has decided to go in the opposite direction – at a time when customer demand is down no less. 

What's really scary is that the old discontinuity between "sales" and "demand" continues to exist, and wasn't even confronted by the author of the WSJ article.

Reinstating dealers and taking orders to restock their lots could help
GM improve its market share as Mr. Whitacre desires, and help the
company regain the lead in U.S. vehicle sales.

Restocking lots is simply increasing inventory, not a sale – unless you have screwy accounting like GM which records a sale when a vehicle moves out of the factory, not when a final consumer decides they want to buy it.  It has no impact on market share.  Customer demand is customer demand, regardless of how many vehicles sit waiting for an owner.

Increasing inventory in the face of decreasing demand obviously makes no sense, but remember this is being driven by GM's puppeteers, the same group of jokers that came up with "cash for clunkers"… and we know how financially irresponsible that was:

More importantly, 5 million barrels of oil at $70 per barrel costs
about $350 million dollars. So, the government paid $3 billion of our
tax dollars to save $350 million.

We spent $8.57 for every dollar we saved.

I'm pretty sure they will do a great job with our health care, though.

Yeah, right.