Appendix B - Example of Transportation Productivity Improvements the Auto Industry

The auto industry is beginning to undergo major transformations. In time, all three major US auto companies, Chrysler, General Motors, and eventually even Ford, will go bankrupt and then major reforms will be put in place. This will occur in stages:

Government Subsidization

The first stage has already begun. The government is attempting to subsidize a highly dysfunctional auto industry. Our expectation is that government subsidies could eventually reach anywhere from 50-100 billion dollars for the industry as a whole. All of this will be lost and none of it will be repaid even by the auto industry or more interestingly by the federal government, who is borrowing the money to provide these subsidies. The losses will be borne by those people who loaned money either directly or via the federal government to the auto companies, as well as borne by the people who worked for the industry and its suppliers.  The basic reason subsidies are ineffective is two-fold. First, we are going into a severe bubble collapse, which is devastating to the industry's sales. On top of this, they have a fundamental managerial problem, primarily with the efficiency of their operation and the design and marketing of their vehicles.  A management change would of course have some affect, but you would need strong managers such as the very recent Lee Iacocca, or earlier managers such as Ford, Durant, Kettering, Sloan, or Chrysler.  All of these men had a very fundamental understanding of both operating efficiently and of good design and marketing.  This is not true of the automobile industry today.  However in spite of this, the automobile industry will eventually emerge with efficiency levels and design and marketing capabilities that are far beyond what they could accomplish or even imagine.  We would see for right now until approximately 2012 increasing evidence of subsidizes and increasing fights between labor, suppliers, management, the government, dealers and the public as well as both stock and bond investors over a rapidly collapsing industry.  This fight will initially be in the halls of Congress and then will increasingly move into the bankruptcy courts with Chrysler being the first one to go into bankruptcy, then General Motors and then finally Ford Motor Company.  Initially all of these will be Chapter 11 reorganization bankruptcies that will simply be a continuation of the current fight among the various stakeholders for a rapidly decreasing pie.

Liquidation

At some point the federal subsidizes will be cut off, most likely by the bankruptcy or the federal government itself. At that point, the auto industry will have to basically go cold turkey and all of the companies will be facing a very devastating liquidation bankruptcy. Under a liquidation bankruptcy, all union contracts and dealer contracts will be destroyed and that includes all obligations of union members. Everyone, white collar, blue collar will effectively be fired and the companies, as we know them, no longer exist. All of the trademarks will be sold off along with the other assets at probably less than 1 or 2 cents on the dollar at most and probably less. All equity and all debt whether owned by private individual banks or the government will be wiped out. The companies themselves could be sold for as little as $200 million to a billion in US dollars each, with Europeans buying them with Euros as a proxy can that value in terms of Euros so they would be paid 20-100 million Euros for auto companies which is of course absurdly small amount for such vast assets, but at that point that is the actual market value. One reason is that any investor that buys these assets will have to invest billions of additional dollars to see any return at all on their money.  They will be bringing in new cost-cutting measures, primarily focused on cutting labor costs.  We would expect labor costs to be cut to approximate $15.00 an hour plus $5.00 of benefits an hour.  Ether networks will be streamlined and be designed so that a transition can be made to larger, more efficient ether networks that ultimately can handle international sales.  There will be no unions or no obligations in these new auto companies.

New car models will have to be designed because the market has changed drastically.  The very high cost of fuel means that small highly fuel-efficient hybrids will comprise most of the market.  Also because of the lack of financing and the lack of money, almost all models will have to be very stripped down economy models.  Much of the money to be made will come from charging exorbitant prices for parts.  Actual production, which today is approximately 15 million, will descend rapidly to 10 million and 5 million and then eventually by the time the companies are liquidated, we’ll probably be less than 1 million cars a year.  At most, for a couple of decades this will probably be increased to only 2-3 million cars a year, almost all of them as we’ve mentioned earlier will be cheap, stripped down hybrids vehicles.  Because of the unreliability of the car companies, all warranties will be government guaranteed, although at that point, people will not see government interference much.
At this point, the auto companies are stabilized, meaning they are functioning again, producing automobiles and the nation is able to replenish its rapidly decreasing stock of autos.  The average miles per gallon for those vehicles will probably be about 50 miles per gallon so they will be fuel efficient, but many of the techniques that will be used later to increase fuel efficiency while retaining a large luxury style car will not yet be available or used at this time.

FUNDAMENTAL CHANGE

Let's focus for a minute on what the auto industry looks like after a long period of fundamental reform in which is initiated by the collapse of every company in the American auto industry during the Mega Depression. Of great interest is what happens to labor and auto dealers. Both are going to be hit very hard in the first stages of the Mega Depression as previously described. Most of the autoworkers will lose their jobs permanently with less then one out of three able to retain any long-term employment prospects. Those that are left will be paid approximately $15.00 an hour base wages with about $5.00 an hour in benefits. None of them will be unionized. This situation will be forbade industry a few decades into the Mega Depression but will eventually start changing. The basic reason is the productivity and the US will start improving and ultimately will lead within a reasonable short time to incomes for workers there two to three times higher than the average today.  At that point, all workers including auto industry workers will be members of mandatory unions and will receive a full set of health and retirement benefits, although the structure will be different and the benefits will be handled much more efficiently, but will be more bountiful in many ways than today’s benefits.  More importantly, these workers even though they are receiving far more income will have approximately 35-hour work week and approximately 6 weeks of vacation.  A big change in fact a shocking change will be the dominance in the auto industry as well as many other industries is the blue-collar elite.  White-collar employment will be far smaller than today and much of the white-collar work will actually be outsourced.  A lot of blue-collar work will be outsourced, but there will still be a large internal blue-collar work force maintaining the production facility, although very, few of the members of the elite will actually be on the assembly line.  Within industry (inaud), the typical auto industry family could expect to make $200-$300,000 a year in today’s terms and as well as having very attractive working conditions. This is in contrast to the situation (inaud) decades after the Mega Depression where the management will be experts at forcing workers to work much harder for a much longer for less pay and will basically use management by extreme fear.  Privatization of functions and outsourcing, particularly foreign outsourcing will be important portions of the efficiency.

Dealers will be devastated and will for the most part never really recover. The number of dealers is likely to contract immensely and those dealers that are left will be operating under new contracts that are far more favorable to the auto companies and (inaud) to dealers with short-term cancellation provisions without penalty.  This is actually an important part of the smooth efficiency since the auto industry will be in the long run be moving to much larger dealers, more similar to a dealer like CarMax today which specialized primarily in used cars and have a very important role in moving used cars overseas.  They will also be handling the very inexpensively much more efficient maintenance and much rare maintenance procedures that are required.  Most new cars at that point will be sold and ordered over the Internet and the dealers will handle delivery only for a small fee.

Vehicle Designs – Vehicle designs will be radically different from today’s designs and with fantastically improved productivity and far lower operating costs.  At that point, there will probably only be six (6) car companies worldwide; two US; two German; two Japanese, primarily because a very strong economy scale.  The designs themselves will almost always be outsourced with the outsource marketing agency assisting the marketing department in monitoring the performance of the interior and exterior designers which will be profit participant in those designs that are successful.  Before we go further into the design, we need to mention that the productivity of the auto industry has improved immensely so that (inaud) car would cost 1/3 of what it does today.  Much of that productivity, in fact, 2/3 is due to extending the life of the vehicle, which are current 10 years and would after all the technological improvements last upwards of 50 years in a developed country, but since most of them will be exported to undeveloped countries, after about 25 years of operation will last upwards of 100 years.  Although that sounds like we have a productivity growth of approximately 10-1, there are additional costs that will offset some of the (inaud).  The other 1/3 improvement parts will be primarily due to foreign outsourcing.  An equally important part of the that remaining productivity improvement will be the radically improved efficiencies in a radically improved fuel efficiency, safety, maintainability which translates into far more operating costs.  Finally the one area that Detroit would really like productivity to soar in will seem relatively low productivity increase partially because (inaud) of these cars is a very small component of total cost already.  However, you will see robotization make in-roads in car (inaud) will be primarily managing the inventory of parts for assembly so that robots will handle parts from their arrival at the factory until they are needed on the assembly line with virtually no human intervention.  There will be a small amount of robotization in the final assembly operations with most of it being in the assembly of the basic car frame, which will be completely automated.  The power train will be using high efficiency turbo-charged two-cycle diesel engines. They will be far different than any thing we understand today and will also rely heavily on battery power with recharging some (inaud) and will also use direct drive (inaud) motors in all four (4) wheels.  There will be heavy use of plastics both on the exterior and the interior.  The cars will be extremely safe.  They will have massive amounts of electronics that overall will be very cheap to both in solve and maintain.

The reason we mention some of these details on the design is to make it clear that these designs are going to be evolutionary, not revolutionary, but very dramatic improvements in productivity and efficiency are going to result from these singularly modest changes.  We cannot go into it in the sidebar discussion, but (inaud) it to say anyone who understand the auto industry will understand the extremely (inaud) to any and all of these changes, both within and outside the auto industry and we have just started with our list of changes.  This brings us to the larger point of why the Mega Depression is (inaud) necessary.  We can see that the auto industry faced with the nasty overwhelming changes that need to be made is going to be (inaud) resistant and that’s why in a sense they have to be destroyed and rebuilt under very brutal circumstances because that’s the only viable operation for improving the efficiency of and consumer sensitivity of this industry.  In an ideal world we could change more easily with the executives and the politicians being willing to accept a gravel change without destroying the companies or the livelihoods of so many people, but for them just as for the monarchs (inaud) over one or in fact any group that benefits from the status quo and tries to extend it to the better end, that simply is not an option. They would rather simply be destroyed then change and that’s what is going to happen.