Monthly Archives: December 2017

Car Books – Fourth Gear

Continued from Car Books – Third Gear

After reading what a scandal Volkswagen perpetrated on the unsuspecting public throughout the world, I was ready for a more upbeat car book to read.

I thought this might be a good read as I recalled from previous car books how divisive the relationship had been between car guys and financial people within Ford. Bob Lutz is unique in that he held executive positions in all three of the Detroit car companies, Chrysler, Ford and GM (twice) and this book covered his second stint at GM. But it turned out not to be the book that I thought it was and having been written by Lutz himself, only portrayed the story from his perspective, which to me, based on his opinions of the job he could have done had he been CEO, seemed a bit haughty (although I did appreciate Lutz’s disdain for GM’s PMP process, a Performance Management Program I too despise).

So I next tried this book, Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers – GM, Ford, and Chrysler by Bill Vlasic. Vlasic, being a business reporter, gave a much more balanced accounting among the Big Three as well as the UAW and turned out to be a really good book.

This book covered the fall and rise of the Big Three as a result of the Financial Meltdown of 2008. But the book actually picked up the history starting in 2005, which provided helpful background information about the financial health of each company prior to the sub-prime mortgage collapse that took place in 2008. Prior to the events of 2008, I was not aware of the huge issues the car companies were facing. These details made for a very interesting read.

The storyline in the book alternated between each of the Big Three, which gave a complete perspective of what was happening in each. At the time, all three of the Detroit car companies were heavily dependent upon gas-guzzling trucks and large SUVs, vehicles that each company made enormous profits from. And with these three US manufacturers holding over 90% of the US truck market and with trucks outselling cars by a factor of nearly 2 to 1, their sales made for tidy profits. In this period, cars were just not that profitable and were viewed by most as boring offerings.

But then Hurricane Katrina hit in the summer of 2005 and suddenly gas prices shot up a dollar a gallon and sales of gas guzzling vehicles plummeted. With no attractive fuel-efficient cars to offer, sales shifted dramatically from large US makes to small economical cars from Japanese manufacturers.

The Big Three quickly found themselves with parking lots full of unsold vehicles and excess manufacturing capacity. Each of them, in their own way, made plans to shutter plants to reduce their excessive manufacturing capacity. But the prior contract agreements with the UAW and the legacy “Job Banks”, a union guarantee that even laid off workers would still get paid by the manufacturer, minimized the potential savings of simply closing plants. Therefore, costly worker buyouts, in some cases exceeding $100,000 per worker had to be offered as well. Added to this the high cost of healthcare coverage for both active workers and retirees limited the savings the car manufacturers could realize. These “legacy costs” added thousands of dollars to the cost of a US car that foreign competitors, with their national healthcare systems, just did not have thus giving foreign car companies a financial competitive advantage.

Negotiations with the UAW began to occur and with the losses mounting, progress over reducing these legacy costs began to be made as the Union realized bankrupt car companies would be bad for all parties concerned. At one point during this period, GM was losing a billion dollars a month and Ford and Chrysler were each having record losses.

Chrysler, the one company in better financial shape, thanks to their relationship with Daimler (Daimler-Chrysler at the time), struggled with making progress with the union. That is until Daimler decided to unload Chrysler selling them to Cerberus Investments.

Meanwhile, Kirk Kerkorian was trying to wrestle control of GM from its management team by purchasing up to 10% of its stock and placing his right hand man on the GM board. His efforts ultimately failed which left GM in a precarious position having had the added distraction of fending off Kerkorian. To try to sell its backlog of vehicles, GM launched the idea to offer, “employee pricing” to everyone. While it helped them unload many more unsold vehicles, the pricing meant little to no profit and in some cases even a loss on the transaction.

At Ford, a different approach was being taken. Their plan was named the “Way Forward” which included plant closings, improvements in quality and new car offerings to spur sales. To finance this effort, Ford planned to borrow 20 billion dollars by mortgaging everything, even the Ford name. But Bill Ford didn’t think all this would be enough and so was trying to bring in a new executive to replace himself. After several highly qualified candidates declined, Bill brought in Alan Mulally from Boeing (a story that is told very well in American Icon: Alan Mulally and the Fight to Save Ford Motor Company by Bryce G. Hoffman). Ford’s borrowing in 2006 when credit was available was quite fortuitous given the collapse of the credit market in 2008.

In 2008 when GM and a Cerberus owned Chrysler went in search of credit to help fund their cost reduction plans, none was available. Knowing that the only way forward for GM and Chrysler was to continue to reduce their size and work force, these buyout and closure costs along with a plummeting of the US auto market from a high of 16 million vehicles to around 10 million units, resulted in their largest losses ever. The catastrophic decline in the auto market even left Ford with their largest loss in their 100-year existence.

Secretly GM approached Ford about merging (a fact I did not know) but Ford flatly declined. Jilted, GM next approached Chrysler about combining their two companies but was again turned down once it became apparent to Chrysler that it was just an attempt to save GM.

That Fall, just as Obama was about to be elected president, GM approached President Bush about the possibility of garnering government loans—a request for 10 billion of the TARP money that had been allocated to rescue the banking industry. The answer was no.

After Obama won the election and promised he would not let the US auto industry die, GM, Ford, and Chrysler went together to Congress to ask for help. Congress’s initial rebuff following a grueling two days of questioning was made only worse by the highly publicized debacle of the CEOs winging it from Detroit to Washington on their corporate jets to beg for billions in relief. Their only hope was a more successful second trip to Washington, this time each CEO having been driven in a hybrid vehicle made by their own company.

By this time Ford, given their previous borrowing, decided to forgo any loans from the US government. So it was just GM and Chrysler that requested loans. These loans came with very strict requirements which GM and Chrysler were ultimately not able to meet. This failure led to them both declaring bankruptcy with even the CEO of GM becoming a casualty, one of the few private company executives ever to be “fired” by the federal government.

With active US government participation, a new, but much smaller GM emerged from bankruptcy with the government becoming a 60% owner (this prompted the phrase “Government Motors”, technically a true moniker at least until the new GM issued stock and the US government sold off their shares to recoup their investment cost). For Chrysler, the government forced them to merge with Fiat, the Italian maker of these cute little cars.

Within two years, all three companies returned to profitable operations and today, are much stronger and much more able to compete in the US market. Looking back to these disastrous events that took place almost 10 years ago, it’s frightening to think how close the US auto industry came to becoming extinct. Since hindsight always provides a 20-20 perspective, it is easy now to say that had not the hard decisions been made and the hard work expended, our only choices today when purchasing a car would be a foreign-made or foreign-owned model!

And thanks to this book, I now had the story behind how it all came to fruition.

Car Books – Third Gear

Continued from Car Books – Second Gear

This is a car book I wanted to read even before I knew it was a car book. Ever since the story began to unfold of the Volkswagen Diesel Emission Scandal in 2015, I knew this would be an intriguing story to read. As I learned new details almost daily from my online Autoweek news magazine at the time, the fraud became even more incredible and I hoped someone would write a book. Thanks to Jack Ewing writing Faster, Higher, Farther: The Volkswagen Scandal, that book is now published and thanks to my wife’s unprompted gift of it to me for Father’s Day, I now know so much more.

I was already familiar with how Volkswagen got its start, essentially as a propaganda car company by Hitler prior to World War II so I was a little puzzled when the book traced the beginning that far back. But through an abbreviated history of the company, along with its founding of Audi in 1969 and its close relationship with Porsche, important details were provided about the automotive environment at Volkswagen. And learning about the senior management of the company and their business philosophies—their attitude of make it work or you’re fired—helped me understand how such a scandal could actually transpire.

As I read, there were several learning’s that surprised me.

Turns out, this was not the first time a car company or engine manufacturer had implemented a “defeat device” to disengage emission equipment to improve performance. In the 1990s, there were three separate cases, Cadillac, Ford, and Cummins Diesel that had programmed Engine Control Units (ECUs, the onboard computers) to disengage in certain situations. In each case, the ECU was programmed to recognize when it was undergoing testing—when the engine was driving the wheels but the steering wheel was not being turned—and employ all emission equipment to function properly during the testing. Once deceit was proven, the Cummins case alone resulted in a 1 billion dollar fine by EPA.

The introduction of the Turbo Direct Injection (TDI) Diesel by Volkswagen in 2009 supported Volkswagen’s professed goal of becoming the world dominant automaker outpacing all other car companies in numbers of sales. Diesel-power, while less common among passenger cars in the US, offered advantages of reduced carbon dioxide emissions and better fuel efficiency (relative to gasoline) and afforded Volkswagen an opportunity to compete against Toyota’s highly fuel-efficient Prius. But due to the higher operating temperature inside the cylinder, diesel engines produce much more nitrogen oxides, the gases that cause smog and have a direct link to asthma and other deleterious health issues. The challenge presented to the Volkswagen engineers in 2006 was to create a clean diesel engine for this planned 2009 launch.

Since Audi had marketed a diesel engine since 1999, the engineers looked there first to see how they had addressed emissions difficulties. When they began to examine the ECU programming, they found an unusual section of code that had been included to reduce the loud clacking noise diesel engines make when they are first started. They realized, this was a defeat device as it turned off emission equipment to reduce the noise.

When the engineers kept encountering issues achieving the clean diesel goal, it was suggested that Volkswagen use a similar defeat device to address the poor car performance that resulted when the emission equipment was fully operational. It was reluctantly pursued and since Volkswagen did not write their own ECU code, they had to instruct Bosch, the ECU manufacturer to include it, which broadened the scandal even further. As with the previous devices, these were programmed to recognize when they were being emission tested in the laboratory so that emissions would be within acceptable levels.

By mid-2015, thanks in no small part to their TDI diesel cars, Volkswagen overtook Toyota as the largest global carmaker in terms of sale volume. But interestingly, it was events in Europe that began to unravel the fraud.

Diesel cars are much more common in Europe because of diesel’s price advantage over gasoline and diesel’s superior fuel efficiency. But in spite of still meeting less stringent European emission standards, actual pollution within cites was found not to be decreasing as it should (based on calculations) but rather was increasing. The European organization similar to EPA contracted with West Virginia University (WVU) to test several diesel cars both in laboratory settings and on the road. The WVU staff just happened to test two Volkswagens and a BMW in California where the California Air Resources Board (CARB) had even more stringent requirements than EPA. The results were eye opening. While all three cars easily passed the laboratory test, only the BMW met emission requirements under actual road conditions. On the road, the two Volkswagens exceeded the nitrogen oxide limit by as much as 20 to 30 times.

Still not understanding that fraud was at play, future testing was conducted by CARB. Conflicting data continued to pile up between laboratory and on road testing. Then CARB decided to extend the standardized lab test sequence and discovered a remarkable result. One minute after the test was scheduled to end, emissions jumped dramatically on the car still rolling on the tester.

CARB first asked Volkswagen kindly for explanations but since none were forth coming, began to demand answers. No reasonable answers were provided and so in July 2015, CARB chose to use their nuclear option threatening not to certify the 2016 diesel cars that were already sitting in US ports, an act that would actually preclude their sale not just in California, but anywhere in the US.

From the time of the original WVU study in 2014 through all of the testing by CARB in 2015, Volkswagen continued to obfuscate the truth about the scandal by providing misleading and confusing answers to CARB. Volkswagen eventually admitted to a technical issue with the emission systems in early 2015 and agreed to recall and fix affected diesel cars. But following CARB’s retesting of the repaired diesel cars which still gave failing results, Volkswagen finally admitted that a defeat device had in fact been included in all 11 million diesel cars sold worldwide, a fraud on par with Enron.

The legal process that ensued was complex since it involved government regulators, states, VW dealers, and car owners. Partly due to Volkswagen’s covering up of the fraud, the legal settlement between Volkswagen, US authorities and car owners amounted to 15 billion dollars, well above the previous 1 billion defeat device fine, only to be increased by another 5 billion the following year related to another type of Volkswagen diesel sold.

While this was not the type of car story that would typically pique a car lover’s interest of cars, it was nonetheless, a very interesting tale of just how bad and how potentially unscrupulous a car company could be.