June 1st, 2007

#422: Africa, Airbus, and Automobiles

Ilana Mercer writes today about the futility of sending foreign aid to Africa.

I've written before about Africa and its troubles. (The latter is part of my discussion of "PC Christmas Carols".) In the former entry I discussed several reasons why AIDS in Africa is such a problem.

Mercer's column gives teeth to my discussion, particularly the last five paragraphs of her article.

Airbus has more trouble with its widebody A350.

With the double-deck A380 now into double-delays, Airbus is attempting to compete with Boeing's 787; but airlines don't much like the A350.

Boeing has a technological advantage: the 787 is a composite-fuselage aircraft made of carbon fiber, and the company has the tools required to bake the composite fuselage as a unit. Essentially it requires a giant oven; and Airbus does not have such equipment, so the A350--also slated to be composite--will have its body made in sections and riveted together.

First off, the idea of riveting composite panels together kind of obviates the entire purpose of building an all-composite fuselage in the first place. Carbon fiber is strong stuff, and lighter than aluminum--but seams create weak points, amd the last thing you want when you're in a pressurized tube hurtling through the air at 40,000 feet is for one of those seams to give out.

This means that every so often every seam on the aircraft would have to be inspected, thoroughly. Airplanes are periodically required to undergo complete inspections, and the interval depends on a number of factors, but commercial aircraft which are pressurized (as all airliners are) must be inspected the most frequently.

Whenever an airplane is not flying with passengers in it, it is costing the airline money--lots of it. Maintenance detracts from the time an airplane can spend in revenue operation. If each seam must be inspected, inside and out, it adds considerably to the maintenance interval.

So, naturally, airlines aren't willing to pay "carbon fiber" prices for an airplane they must inspect like an aluminum airplane. Fuel savings notwithstanding, it's still more expensive...particularly when Airbus' only competitor, Boeing, is planning to deliver a one-piece composite-fuselage aircraft.

All of this means that Boeing's 787, which is to be available in 2008, will have a good five-year jump on the A350, which is expected in 2013. And the A380 is now two years late and five billion Euros over budget.

Sucks to be Airbus, I guess.

GM plant, said to be most productive, will be closed.

This is the main point I wanted to mention from this article:
Ford lost an average of $5,234 on every North American-produced vehicle, according to the Harbour study, while GM lost $1,436 and Chrysler lost $1,072. Meanwhile, Japanese automaker Nissan earned a pretax profit of $1,575 for each North American vehicle, while Honda earned $1,368 and Toyota, $1,266.
...emphasis mine.

That means when you go and buy a Ford Anything it costs the company $5,234 to make the sale. In other words Ford--in order just to break even--would have to raise its prices on all its vehicles by $5,234.

Of course that would mean that a basic Ford Focus would cost about $17,734 without any real options. Then they wouldn't sell. Losing $5,234 per vehicle is better than not selling anything, but it is still no way to do business if you expect to remain in business.

The disparity is egregious in Ford's case. I knew about GM's woes, but Ford's per-vehicle loss is more than three times GM's. Where the hell is that money going?

Notice something, however: the first sentence includes the qualifier "North American-produced". And that means "union-produced", especially "UAW". The three Japanese automakers mentioned are not union shops, and the UAW has failed many times to unionize those shops. Strangely enough, the non-union Japanese plants make money, and the unionized American plants lose it.

I wonder if there is a connection?

I do know--and knew before reading this article--that union costs (particularly "legacy costs", such as guaranteeing health coverage for retirees) cost GM about $1,400 per car. Oh, wait! Look at that! GM is losing $1,436 per car! Why, what a coincidence!

The UAW doesn't care that GM is losing $1,436 per car. If GM tries to cut its labor costs, the UAW will declare a strike, and GM will be shut down. So really, for GM, it becomes a question of bleeding to death or having a fatal heart attack.

If nothing is done, the UAW will be able to claim that GM was never able to rescind any blue-collar employee benefits...but the victory will be Pyrrhic, because they will have put every member of their union out of a job. And it won't just be UAW employees who get screwed by that deal; the unions themselves will dry up. The companies which sell things to the automakers will wither and die. All the white-collar people--engineers, technicians, managers, and so on--will be out of jobs.

And all the people who hold stock in the companies will find themselves holding worthless paper.

In the end, there is a crisis looming for domestic auto manufacturers: tame the unions or die. It will not be pretty, and there will be a lot of money lost as businesses die and the industry changes.

The crisis point will come first from Chrysler. Daimler-Benz recently divested itself of Chrysler, and now Cerberus Group owns it--and this thread on Pennock's Fiero Forum contains an interesting discussion of what might happen. This quote from the initial post, from an article by Peter DeLorenzo, sums it up:
Maybe so, but consider this - the Cerberus attention span for this deal actually only extends as far as the contract talks with the UAW this summer. If Cerberus gets what it needs and what it wants from the UAW, then their attention span grows exponentially. If the UAW plays its strident "entitlement" card as if it's 1980, then all bets are off and Cerberus will part-out the company - despite all of its touchy-feely public pronouncements.

Is this the end of the UAW as we know it? If the UAW deigns to think that they're going into these negotiations from a position of strength and power, then we're talking Eve of Destruction-type scenarios here. In this global economy, the classic UAW position of entitlement and "getting what we deserve" is so obsolete and out of touch that it's excruciatingly painful to even contemplate. GM and Ford are going to let Cerberus do the heavy lifting here. Cerberus will present the UAW with a one-time, non-negotiable, "take-it-or-leave-it" package that will put the company back on track to profitability. The UAW will have to invest mightily in its own health care program as a key component of the deal - or else it's all over but the shouting.
It's the kind of scenario that many observers have been quietly expecting for some time.

I've been expecting it ever since I first learned what union legacy costs ran GM, per car, several years ago.