Fix It Again, Tony (FIAT)

In my previous post, I noted that Chrysler fared dismally in Consumer Reports‘ brand reliability study. They have no data on Fiat models, of course, but the strangely named journal Which? Car (WC) in the U.K. does. As quoted on Autoblog.com:

WC’s annual survey of ownership experiences in the UK rates vehicle models up to eight-years-old, and keeps track of all the standard quality metrics (breakdowns, unscheduled repairs, etc.). … Of the 38 brands listed last year, Fiat ranked 35th on the list, with Renault, Land Rover and Chrysler/Dodge filling the bottom and garnering a “Very Poor” rating. Jeep came in 29th, just missing the lowest designation, but still walking away with an overall rating of “Poor.”

This obviously bodes well for Chrysler’s future in a Chrysler/Fiat mash-up. Not.

Chrysler: Doomed to Fail

Some friends have asked me what I think about Chrysler, so I’ve prepared this FAQ.

Why is Chrysler in the trouble it’s in?
The immediate issue is that Chrysler is essentially out of money. That’s the problem the government has been trying to resolve by loaning it a seemingly unending stream of cash. Your cash.

But obviously, if you peel back the onion one layer, the reason Chrysler has run out of money is that for years it’s been building notoriously unreliable, quirky, uncompetitive cars that fewer and fewer people want.

So will bankruptcy help Chrysler?
No. The government argues—and they’re about the only ones who claim this to be true—that Chrysler’s key problem is cost structure. In other words, if Chrysler could only cut its expenses dramatically, then it would be profitable, and thus would be a viable business.

Yes, Chrysler’s cost structure should be reworked: it has too many employees, too many plants, too many dealers, and it pays its UAW workers an uncompetitively high wage. That’s the expense side of the equation, and it’s a fixable problem. But the government apparently missed Accounting 101, where one learns the equation:

Profitability = Revenue – Expenses

Chrysler needs to increase revenue, otherwise it won’t be profitable and simply cannot continue operations.

So how would Chrysler increase revenue?
They need to make (a) better cars that (b) people want. These are distinct issues. (A) is doable. There’s a lot that goes into (A): good engineering, good styling and good reliability, to name a few. But Chrysler has a mixed bag of product goodness.

Its most mainstream car, the 300C, is actually a fairly well-engineered vehicle with some solid (albeit dated) Mercedes-Benz underpinnings. But its sales have been hindered by, among other things, the car’s love-it-or-hate-it styling, and the fact that it’s too big for the most popular mid-sized car segment. Moreover, it has nothing significant to offer over the Camry or Accord, the two mainstream cars everyone in the auto industry benchmarks.

The smaller car in Chrysler’s lineup, the Sebring, is a product engineering disaster, with absolutely no stand-out qualities versus the competition. It’s really no better than the cars it replaced, the Cirrus/Stratus twins, that were launched in 1995.

On the truck side, Chrysler has a stupidly large portfolio of quirky vehicles. Like the Nitro, which is a tiny, goofy-looking and underpowered mini-SUV that somehow replaced the acceptably decent Neon, which was a compact sedan. Huh?

Chrysler once led in the minivan class, but today Chrysler’s minivan offerings typically rank dead last against the now wide field of competition. And minivan sales are dropping, anyway.

Thank God Chrysler Never Produced This

There’s one surprising bright spot in Chrysler’s portfolio, which is its new Ram pickup. In a comparo of full-size pickups by Car and Driver Magazine, the Ram took top honors. Its biggest and perhaps only downside: deplorable fuel economy. Woops.

Oh, and speaking of bad product: in Consumer Reports’ latest survey of vehicle reliability, Chrysler ranked 32nd out of 34 overall among all brands sold in the United States, beating only Saturn and Land Rover. And referring to overall product quality, in April 2009 Consumer Reports wrote:

“Chrysler is at the bottom of the class, with a drop in its overall score and average reliability rating. Most models from the manufacturer have noisy, inefficient, unrefined powertrains; subpar interiors; and poor visibility. Chrysler is the only automaker with no models on our Recommended list.”

As if Chrysler’s poor product lineup wasn’t problem enough, (B) is the much, much harder piece to execute. Do you know anyone who owns a Chrysler product and would buy another? I don’t, either. And now that Chrysler has been tarred and feathered in the media, coupled with bankruptcy concerns, do you think anybody wants to give Chrysler money? And does Chrysler make a single vehicle you would seriously consider over a competitor’s product?

(B) boils down to a marketing problem, and frankly, as a marketer myself, I don’t know if this one can be solved. Ford and GM have been struggling with this for decades, too, and all I’ve seen is that strong marketing in this industry can blip sales up for a short time, but in the longer-run market share has continued to erode. Don’t be surprised to see some kind of “This is the New Chrysler” campaign. It won’t work.

Okay, so how does Fiat fit into all this?
If you didn’t notice, Fiat has no U.S. operations. They haven’t sold cars here in decades. But like any automaker, sales success in the U.S. is critical to growth because Americans (except for the last year) buy a lot of cars. So Fiat wants in. To do that, they need North American manufacturing and parts suppliers, and a dealer network. This is called a supply chain, and it’s really hard to develop one from scratch. So, Fiat is thinking they could piggy-back on Chrysler’s supply chain.

So would that help Chrysler?
Nope. Fiat’s product line-up has a problem similar to Chrysler’s: a bunch of quirky, uncompetitive niche vehicles. Chrysler has told the government that Fiat makes incredibly fuel-efficient cars, which meets the Obama Adminstration’s desire that the Big Three make more environmentally-friendly vehicles. Well, yes, Fiat makes some respectably fuel-efficient vehicles. They’re fuel-efficient because they’re tiny and have underpowered engines—a recipe Americans don’t want. They also look quirky or boring, depending on your point of view, and have few, if any, product advantages over smaller cars from brands that have gained traction here. Nobody will buy them. I mean, really, do any of these Fiat gems available in the U.K. appeal to you?

As a particular example, Chrysler has talked about selling the Fiat 500 here—a tiny car that looks, well, ugly to me. Yes, it gets great mileage. But that’s its only selling point. Interestingly, Ford sells the Fiat 500 in Europe as a rebadged Ford Ka. Ford studied whether the Ka would sell in the U.S. and decided it wouldn’t. If Ford—which hasn’t collapsed like Chrysler—couldn’t figure out how to make money on this Fiat model here, why would anyone think that Chrysler/Fiat could?

And let’s not ignore that the majority of corporate mergers—particularly in the auto industry—fail miserably, for a variety of reasons. I don’t see why Fiat/Chrysler would be any different.

But does that mean Chrysler is doomed?
Yes! The problem is timeline. Consider:

• Car sales are not going to pick up dramatically for at least another year.  During this time, Chrysler can cut expenses until the cows come home, but the revenue variable in the profitability equation will continue to drop.
• Chrysler—whether or not they’re tired up with Fiat—could theoretically start developing competitive cars right now. But they don’t have the money to do so. It costs billions. Moreover, it takes 3-4 years to get a car from the drawing board into production. By then, Chrysler will have long been deceased. And, to date, Chrysler has not significantly invested in the development of a small, fuel-efficient gasoline, or a viable hybrid model, or an electric vehicle. They’re already way, way behind the competition.
• Fiat can give Chrysler a cash infusion and some additional product to sell. Cash could fund new product development, but it would take years to see the fruit of that. And again, nobody on this side of the pond will want to buy anything in Fiat’s product portfolio.

So what should Chrysler do?
Liquidate! Chrysler does have some salable assets, albeit few. Like the new Ram pickup. Pickups will always be in demand, and several foreign brands need one. Maybe Nissan? Their Titan pickup is uncompetitive. So they could literally takeover production of the Ram and call it their own.

Or the Jeep brand. From an engineering perspective, they’re terrible vehicles, but the brand has a cult following that may never die. Maybe that’s what Fiat should take over, and only that. It’s a very strong brand in Europe, too.

Really?
Yes. I’m sorry, folks, but Chrysler is dead, and has been for some time. Cause of death: suicide. It’s time to move beyond the denial stage and just accept it.

Why You Need an Online Savings Account

In case you somehow missed it, interest rates have fallen to almost zero. That’s bad news if you’re parking money in interest-bearing savings or money market accounts. At Wells Fargo, for example, the best rate you can get right now—if you open a savings account with at least $10,000 and maintain a balance of at least $25,000—is a paltry 0.65%. If you have less than $25,000 and don’t link your savings account to a checking account, you’ll earn a truly pathetic 0.05%. As turbulent as the stock market is these days, you could do better than 0.05% by randomly picking stocks. In fact, if you play the stock market with just a little bit of forethought, in most cases you could beat the 0.05% you’d make in a year at Wells Fargo within one hour.

CDs (Certificates of Deposit) pay only a tad more than bank savings accounts. But most require large minimum investments, and CDs tie up your money for anywhere from six months to several years. The best you can do at Wells Fargo right now: 3.0% if you invest at least $5,000 and keep it there for 39 months. In this economy, who wants to tie up their money for over three years?

If you don’t want to lock up your money, don’t want to take risks in the stock market, and still want a good return, you can have your cake and eat it, too, with an online savings account (OSA). My account with Shore Bank Direct (https://www.shorebankdirect.com) currently pays 3.15%, with a $1 (yes, just one dollar) minimum investment, and no bizarre maintenance fees.

The OSA concept is about a decade old now. These accounts pay much higher interest rates because small banks can leverage the reach of the Internet to attract capital from all over the country, giving them more money to loan out at higher rates, and because banks have little costs associated with supporting these accounts. These accounts are established and managed entirely online and through email—there are no brick-and-mortar branches, no teller salaries to pay for, no paperwork, and no mailings.

These accounts are backed by “real” banks, and your money is FDIC-insured up to $250,000. ShoreBank, for instance, is a regional bank based in Chicago that was founded in 1973. (ShoreBank has retail branches for a certain type of customer, but not for OSA customers.) It’s not taking TARP money and is not in financial trouble. In fact, the big banks like Wells Fargo and Bank of America don’t even offer an OSA, and why would they? It would cannibalize their traditional savings accounts business, on which they make billions (and then lose it all on bad loans, hence the need for TARP money. But I digress.).

There are about a hundred OSAs out there, and they all essentially work the same way. You apply online, which takes 10 minutes, and you get approved immediately. You link the online account to your traditional checking account, which you use to make deposits and withdraw cash. Then, you go to the OSA website to withdraw funds from your checking account or transfer money back into it. Transfers take 1-4 days, depending on the OSA provider. Most OSAs limit the number of withdrawals you can make per month to something reasonable, like six, though none will place limits on the number of deposits. You can check your balance and make transfers 24 hours a day, and elect to have all notices and such sent to you by email. It’s all very simple.

Many people use an OSA as a secondary, backup savings account, or as a “goal” account (i.e., they put money into it every month until they have, say, the $2,500 they need to buy a new plasma TV). I say, forget that—use an OSA as your only savings account to maximize interest income.

Since all OSAs work the same way, you should shop primarily for the one that pays the highest interest rate (this is about making money, after all). However, you also need to judge the quality of the OSA’s website for ease of use (ShoreBank’s isn’t great, but it works), and be sure to read the fine print about fees, if there are any.

Keep in mind that interest rates paid by OSAs can vary at ANY time, without notice. ShoreBank is paying 3.15% today, but tomorrow it could be 2.50% or less. In fact, ShoreBank is the fourth OSA I’ve signed up for. The first three were all the highest yielders at the time I registered, but for various reasons their rates have fallen, and when they fell too much relative to their peers, I pulled my money out and put it in a new OSA that paid more. There are no fees for applying or transferring funds, so this money-shifting game costs nothing to play. My advice is to check competing rates every few months to make sure you’re earning the most you can.

A good place to start for comparing rates is the continuously-updated MoneyRates website (http://www.money-rates.com/savings.htm). Again, be sure to read the fine print of the sites you consider.

I hate to sound like a cheesy ad, but go start making more money today!

Saving the Auto Industry: A Radical Solution

I plan to write a series of posts on the issue of bailing out the Big Three. Let me cut to the chase on a couple of points.

First, yes, I do think we need to save the car companies. The primary reason: if they fail, the U.S. would be looking at a near-term loss of up to 3 million jobs, mainly in Midwestern states that are already beaten down economically. Given the fragile state of the economy, the consequences of this would be nothing short of catastrophic.

Second, I don’t think a bailout of the form the government is currently considering would be much help. Yes, it would buy the car companies some time. However, given that the Big Three are collectively burning through about $6 billion per month, “bridge financing” bailouts in the $25 billion range would buy them only four months. Nothing in the economy is going to change in the next four, or even six to ten months that will suddenly propel car sales and again secure the finances of the car companies. And I don’t think our country can realistically afford yet another bailout in the $100+ billion range.

So, what can be done? I have two radical suggestions. The two are not mutually exclusive.

Option 1 is for the government to buy a controlling stake in the three companies. The combined market caps of three car companies is now only about $10 billion (Chrysler is privately held; I’m guessing its value is $3.7 billion, which may be high). If the government were to buy a controlling 51% stake in these companies for all of $5.1 billion (or less), it would be able to select Board members and directly influence corporate policy and finances in whatever direction it sees fit. In fact, it might be able to do the same with much less than a 51% investment. When the economy recovers, the government would simply sell its shares on the open market and make a nice profit, which it could return to taxpayers in the form of a tax refund.

There already is precedent for this. Unless you missed it, the government now owns (or soon will) pieces of several financial institutions. And one could argue that the government also effectively owns “corporations” like Amtrak and the Post Office through tight regulations and by controlling their funding sources.

Option 2 is to offer Americans a $10,000 refund on their purchase of a new car. Instead of taxpayers footing a $25 billion tab to help the automakers—which has no direct benefit for the average Joe—I’d rather the government take $25 billion and give it back in the form of a discount to car buyers. 2.5 million people could get a dirt cheap car this year. Why would this help? Because, by keeping U.S. car factories running at full capacity for months, no one would be losing their job.

I would add a few stipulations. First, the car or truck must be assembled in a U.S. factory—but it can be a foreign nameplate. This specifically keeps U.S. manufacturing jobs intact, but keeps the playing field level. Honda will still be rewarded for making Accords in Ohio, Toyota for making the Camry in Kentucky, and so on. Remember, this is about American jobs, not GM, Ford or Chrysler jobs.

Second, optionally, we can add fuel economy sticks and carrots to the size of the refund amount. More fuel-efficient vehicles or those with key technologies (hybrids and electrics, namely) could get a bigger refund, and certain gas guzzlers could be exempted from a refund altogether.

Third, to avoid price gouging, I would add a requirement that manufacturers cannot suddenly raise their cars’ prices above list.

The beauty of this approach is that everyone benefits. Consumers get a new car at a bargain price, and still have the freedom to purchase a foreign nameplate. The car companies get their much-needed cash infusion. Manufacturing jobs are preserved. The government can provide a viable incentive for consumers to choose more fuel-efficient vehicles, thus helping to advance a sensible environmental agenda. States will get a boom in sales tax revenue. And I would expect that the stock prices of the car companies, their parts suppliers, and all the companies that support the auto industry will rise, as well, thus helping drive the broader U.S. (and world) economy.

Obviously, Option 2 is a one-shot deal, good for 2009 only. Which is why I like Option 1 in conjunction with this plan. My biggest objection to bailing out the car companies is my fear that even if they cross the chasm until the economy recovers, they still won’t be any better managed and will be doomed to repeat the mistakes they’ve made over the last three decades. Can the government do a better job by controlling their Boards? I’m not sure, but I think it’s time to try something new.

Please share your thoughts by adding a comment.

The End of General Motors?

The stock price of General Motors dropped almost 23% today, to a 60-year low of $3.36. The list of reasons for the company’s horrendous recent stock performance is expansive, but today’s sell-off was primarily triggered by two analyst’s new price targets for the stock price. Barclays believes it will hit $1.00, while Deutsche Bank has set a target of $0. Zero. Nothing. Nada.

It’s hard for me to conceive of this, but once-mighty General Motors may actually soon be worth nothing at all. In fact, if current trends continue, I feel this is unavoidable. A government bail-out could buy some time, but in my most optimistic thought exercise scenarios I don’t see a way out of this.

What does it mean for a stock to be worth zero? Well, there are a couple ways to look at it. Generally, a stock price reflects an expectation of future earnings. So, a stock price of $0 means that the expectation is that the company will never again make a profit. Ever. If you believed that the company would eventually be profitable, the stock should still have some value—a low value, to be sure, but not zero.

There’s another way to look at is this. Earnings (profitability) is a function of both revenue and expenses. Right now, GM can’t increase revenue, because nobody wants to buy cars (anyone’s cars), and even if they did, securing financing is difficult right now. So, all GM can do is control the expense side of the equation, by doing things such as reducing its workforce, idling factories, and selling under-performing assets like the Hummer brand.

But a stock price of zero reveals a deeper problem. It means that even if you sold off all of the company’s asset and then subtracted all of its liabilities (money it still owes), you’d have nothing left (or even still owe money). Put differently, if you sold off all of GM’s currently unsold vehicles and parts inventory, all of its facilities and the land they’re on, all of its manufacturing machinery, all of its computer systems, office furniture, staplers—literally everything—all the money you’d collect wouldn’t be enough to pay its current bills or other existing financial commitments. Complicating this severely is that it’s hard if not impossible to find buyers for any of GM’s assets, let alone at good prices. So even in a “fire sale” situation, investors would be left with nothing. Hence the $0 price target.

So GM is in the perfect storm. Sales are a standstill. Liabilities are climbing. It has assets, but can’t sell them. And the company will be out of cash in a few months. Unless you believe that a multi-billionaire (an oil sheik, perhaps) will sweep in, buy GM, and somehow turn it all around, I think Deutsche Bank’s estimate is fair.

I’ll talk more about the fate of the auto industry in future posts. But man, it’s depressing to think about.

Oil Oil Everywhere

Let’s take a test.

1. What country produced more oil than any other nation in the world in 1996?
2. What country produced more oil in 2006 than Iran, Mexico, Canada, Venezuela, the UAE, Kuwait, Nigeria, Iraq, and in fact more than ANY other nation except Saudi Arabia and Russia? In other words, what’s the third-largest oil producing nation on earth?
3. What country’s annual oil consumption exceeds that of the next five largest oil consumers (China, Japan, Russia, Germany, and India) combined?

When you dig into oil industry statistics, it gets downright fascinating. My friend Grover Jackson found an amazing little webpage of statistics put together by Gibson Consulting (http://www.gravmag.com/oil.html), many of which are abstracted from a site run by the U.S. Government (http://www.eia.doe.gov).

I’m not trying to make a specific point by directing you to these sites, but amidst all the political bickering over energy policy these days, it’s good to be armed with some facts. I leave it to you, dear reader, to answer for yourself such questions as, “Do we really get most of our oil from countries that don’t like us very much?” and “Can’t we just drill our way to energy indepedence?”

By the way, if you answered “the United States” to all three questions above, give yourself a pat on the back. I told you it was fascinating.

A Hero in Healthcare?

Health insurance carriers get demonized a lot, and for good reason: they’re often demonic. But I’m here to tell you, I’m impressed by a change Humana has made in how they decide whether to grant an individual a health insurance policy. First, some background.

We’ve all heard Democrats, Republicans, and just about everyone else complain about the lack of affordable health insurance. Without a doubt, that is indeed an enormous problem. But for years I’ve thought the deeper problem wasn’t so much that health insurance isn’t affordable, but rather that it wasn’t available, at any price.

In 2003, I tried to get health insurance as a self-employed individual. Most insurance carriers wouldn’t even consider covering me. Why? I had asthma, which meant I had to see a doctor once in a while and needed expensive inhalers. I thought this was silly, since my asthma was very well controlled and the costs of treatment really weren’t that high. Moreover, why wouldn’t an insurance company just put an exclusionary rider on my policy so they wouldn’t have to pay for my asthma treatment? Or – even better – why not cover my asthma but jack up my premiums to compensate for the increased costs of my coverage? Nope, those options would make too much sense. Instead, they just wouldn’t cover me. At any price.

Think about that. Is there anything else nobody will insure? If you have the worst driving record in the world, you can get auto coverage. Expensive, yes, but you can get coverage. You can get insurance on experimental aircraft that have a greater than 51% chance of exploding. You can insure a house in Los Angeles built squarely on the San Andreas Fault. I’ll bet someone will even insure a house in New Orleans’ Ninth Ward against flood damage. But insurance to cover a common, easily and effectively treatable medical condition? Nope. Even for $10,000 per month? Nope. $1 million a year? Nope. It seemed like something went terribly wrong with the free market system.

In 2003, the only insurance provider that would cover me was Humana. The coverage they offered me was not particularly expensive (around $135/month) and was quite good. It was a PPO that covered 80% of most in-network expenses, subject to a relatively low annual deductible, and had low co-pays for office visits and prescription drugs. The catch? A full rider for asthma, allergies, and spinal implants (which I had installed a year prior). Of course, asthma and allergies were, by far, the most common thing I ever saw a doctor for, but under Humana’s offer those treatment costs were on me. My spine probably wouldn’t need any more care, but if it did, the costs could be overwhelming. As fate had it, I did end up needing an MRI of my spine, and that set me back $600 out of pocket. I appreciated that Humana covered me at all, but in the year I had that coverage, I never needed it. My only medical expenses were asthma, allergy and spine related, and I paid for those dearly.

Flash forward to 2008. The COBRA coverage I had from my previous employer was soon to expire and,  self-employed again, I went back to Humana to see if they’d cover me. I fully expected them to play the rider game once more, but they didn’t. Instead, they surprised me and offered me full coverage with no riders, but with a 42% hike in my premium. Hallelujah! My new premium of $250 per month may sound high, but I consider myself lucky. You do get what you pay for, and to be fair this is excellent coverage, with no exclusions.

Before you conclude that Humana is the bomb, I should point out that Humana has a long list of conditions that will automatically deny you of coverage. If you’ve ever had a condition on that list, regardless of your health status today, you won’t get coverage. Period. No exceptions. In addition to this being inhumane, this is just bad business policy. If there is a price at which it makes sense to cover asthma treatment, there should also be a price — even if astronomical — at which it makes sense to cover cancer, AIDS, or any other condition on their list. If an individual doesn’t want to or can’t pay that, fine, put a rider on their policy for that condition but still offer to cover them for everything else. Why isn’t it that simple?

I’ll write more about my suggested fixes to the healthcare system in future posts. There’s a lot to fix. And we must fix it. But for now, the fact that Humana will insure people like me gives me a glimmer of hope for our healthcare system and some supporting evidence that, in the end, free market principles prevail.