DETROIT () -- While managing an industry that consumes more steel than any other domestic business, along with a major portion of the aluminium, nickel, copper, molybdenum, tungsten, manganese, vanadium and plastic resin used in the United States, the executives of the American owned OEM automotive industry (i.e., GM [NYSE:GM] and Ford [NYSE:F]) are asking us to focus on the "legacy costs" per vehicle that they have incurred from years of "giving in" to the demands of their workers for pension and health benefits.
This has occurred, they say, because of:
- Faulty economic models that predicted that sales and prices of their products would increase, in real terms, forever, and;
- Foolish decisions by their poorly informed predecessors. Poorly informed, that is, with regard to future and, they say, then unpredictable market changes.
I personally recall a GM statement in the 1950s that the domestic car market would be "around 28 million vehicles a year" by the year 2000. GM didn't abandon this idea until after the second oil shock in the 1980s when it began worrying about the dreaded concept of "overcapacity." I also recall a UAW official in the 1960s who was a childhood friend's father telling me that the companies will always give in to union demands for ever increasing wages, pensions and health benefits, because they know that they can pass them on to the customers without much trouble. After all, I remember him saying, are people going to have any choice?
Today's legacy management of the American OEM automotive industry will mention the recent unparalleled increases in the costs of metals and oil based commodities as just another reason that their current costs are out of line. However they rarely elaborate on this factor, because to do so would be to emphasize another mistake that their predecessors made, and to shine a spotlight on the fact that it is one mistake that even the youthful contemporary managers of the carmakers could have avoided if their planning horizons went beyond the time that Wall Street gives them to "improve" results.
The major reason that I believe that a merger of GM with Renault-Nissan-Dacia would be of tremendous benefit to GM is that the merged purchasing departments of Renault [LSE:RNT], Nissan [Nasdaq:NSANY] and Dacia as well as the finance and planning staffs of all of those companies come from cultures that take a long term approach to strategic material sourcing, because both France and Japan have always been dependent on foreign sources for the bulk of the strategic metals, minerals and petroleum based products upon which their domestic economies depend.
Paraphrasing Claude Rains speaking to Humphrey Bogart in Casablanca, the CEOs of the American OEM automotive companies tell us that they have been "shocked, shocked," by the sudden and unforeseeable sharp run ups in the prices of iron ore, steel, aluminium, nickel, copper, tungsten, molybdenum, manganese, chromium, platinum group metals and plastics during the last 10 years. They say that they did not and could not have planned for this eventuality. That is simply untrue. They have all been focused on the stock price of their companies in the near term and have done almost nothing in the way of strategic planning.
Thirty years ago in the public and globally prestigious journal, Science, two nationally prominent metallurgists, Ralph C. Kirby and Andrew S. Prokopovitsh, of the Bureau of Mines of the U.S. department of the Interior, wrote a seminal survey article entitled: "Technical Insurance Against Shortages in Minerals and Metals."
The six-page article contains a very interesting graph that identifies the "major foreign sources" of metals and minerals along with the total percentage of the items that were imported in 1974.
The 1976 article begins with these paragraphs:
"The United states is faced with the challenge of producing more minerals and metals from lower grade resources.
"The United States has an insatiable appetite for minerals. With but 6% of the world's population and only 6% of the world's land area, we consume 23% of the world's nonenergy minerals....Stated in other terms in the last 35 years [1941-1976] we in the United States have consumed more minerals than all of mankind from the beginning of time up to about 1940. The forecast for the future is that in the next 25 years our mineral needs may triple. The supply is deteriorating steadily as demand increases, domestic high-grade ores are being used up, and other nations compete with us for world supplies [my emphasis added]. To meet this challenge requires a strengthening of U.S. metallurgical processing research and development efforts.
"The nation has been a net importer of minerals since World War II. By the year 2000 [my emphasis added] we may be forced to get more than half [my emphasis added] of our nonfuel mineral requirements from foreign sources unless we move to increase their availability from domestic sources.
"The United States is dependent on imported manganese, chromium, aluminum, platinum and may other minerals and metals...."
The following graph appeared at that point:
What stands out from the graph is that 30 years ago Canada was a major source of our imports of metals and petroleum. Canada is as industrialized and modern a country as the U.S. Its citizens enjoy a very high standard of living, but Canada's natural resources are so abundant that she can earn the bulk of her foreign exchange by exporting to us everything that we want to buy and still have enough raw materials left over to support a domestic demand that per capita approaches ours.
Note that, ominously, in 1976 we were importing almost nothing from Asia, Africa (other than the Republic of South Africa) or even (directly) from the Arab states. The graph even demonstrates, I think, that the British Empire and Commonwealth were built in part (or all) on a raw material sourcing basis first of all for the resource-poor mother country and then for internal development.
Note also that critical metals such as molybdenum, palladium and the then about to be critical rhodium were not even considered by the authors. To be fair this is due to the fact that the authors were looking to source domestically what was at that time being imported, and in 1976, for example molybdenum was being produced domestically in sufficient quantity so as to fall outside of the study. Today nearly 100% of our domestic molybdenum ore is smelted and refined in China and then that portion of the metal that the Chinese will sell back to us is re-imported back into the U.S. making us essentially totally dependent on imports for this strategic high temperature metal! What a difference a generation of predominantly environmental politics makes.
In 1976 we imported nothing of metals and minerals from France or Japan. Those two nations in turn then as now imported 100% of their domestic needs both of almost everything on the graph and also of those additional metals mentioned in this article. Yet both nations had and have robust modern industrial economies and their citizens enjoy a high standard of living comparable, in the case of France, to ours.
How did this come about? And how does this relate to the American OEM automotive industry's failure to foresee the commodity "boom" of the last decade?
The industrialists of a country like France or Japan have always needed to be aware of strategies to insure a supply of strategic raw materials. Not only the businessmen but also the politicians of every wealthy nation other than the United States see the necessity of long-term planning.
The American OEM automotive industry is now paying the price for ignoring the information that has been right in front of it and of assuming that our politicians would take care of any raw materials shortcomings by seriously maintaining both a strategic stockpile and an economic risk management model for industrial crises and emergencies as Japan, Korea and the world's newest major supplier and user of strategic materials, The Peoples' Republic of China, do.
Next week I will continue this topic and describe how the Chinese have been working economically to put in place what could be an economic stranglehold on the OEM American automotive industry. The success of the Chinese model is conditional upon the managers of the American carmakers remaining as blind to long term strategic planning to ensure an undisrupted flow of raw materials as they have been for the last 30 years.
Renault-Nissan-Dacia is far ahead of GM with regard to long-term planning to ensure necessary supplies of metals and minerals. I don't know if the dramatic improvement in purchasing efficiency and long-term strategic raw material sourcing planning that would certainly be the legacy of a Renault-Nissan-Dacia alliance with GM would be synergistic, but I doubt that it would make things worse at either company.
The pundits are saying that even if one of the two took the other completely over it would take a decade to merge the companies. That might be true, but I'll bet it would only take a few months to revolutionize the failed model of purchasing by price metric at GM.
