Is Detroit Dead as a Dodo? Part 2

We wrote in the Is Detroit Dead as a Dodo? blog below that over 70% of the cars sold in Silicon Valley have foreign labels. The San Jose Mercury News reported in its Friday, July 20, 2007 edition the top 20 vehicle brands sold in Santa Clara County from January through May, 2007.

Here is the list:

Toyota Prius 1,627
Toyota Camry 1,611
Honda Civic 1,504
Honda Accord 1,211
Toyota Corolla 1,168
Honda Odyssey 823
Toyota Sienna 765
BMW 3-Series 721
Ford F-Series 591
Toyota Tacoma 589
Lexus RX 497
Honda Pilot 489
Chevrolet Silverado 483
Toyota RAV4 468
Mazda 3 413
Lexus IS 394
Lexus ES 390
Nissan Altima 374
Acura MDX 351
Infiniti G35 31
Total 14780

Note there are only two ‘American’ cars in this list and foreign labels make up for over 92% of the total! By the way, The Merc also reported that 30,463 new cars and trucks were registered in the Santa Clara County between January and May 2007, but did not provide a breakdown by make and model.

So, Detroit is still a dodo in the Valley!

Whither America?

There have been countless news reports and articles in broadcast and print media during the past year on how China and India’s explosive economies will marginalize the U. S. over the next 20 to 40 years. We say, “Not so fast.”

To back what Jack (yes, Neutron Jack, the former head of GE) and Suzy Welch wrote in a recent issue of BusinessWeek­­, the news of the death of American leadership is highly exaggerated. America has a solid political system and one of the most, if not the most, corrupt-free economies in the world. Our system, despite its flaws, works. Following the resounding defeat of Republicans in the mid-term elections last years, there was a smooth transition, everything kept working, and there were no riots, no killings of either the contestants or the electorate — quite common in developing countries. Of course, elections in China are a farce. Corruption is rampant and a way of life in China and India.

The U. S. has had a solid democratic system for over 230 years with no military coup d’état or other political turmoil. India has an almost-60-year-long stable government, despite a short period when Mrs. Gandhi almost became a dictator and eventually paid a heavy price for it. But will the left-leaning, phony-patriots turn back the economic reforms instituted in the 1990s? China is an unknown. It is credited with inventing gun powder, paper…yet, xenophobic leaders built a giant wall to keep foreigners out! In each of these countries, just between 200 million to 300 million (depending on which source you believe) make a decent living; the rest barely live on $1-a-day wages. How long can this imbalance last? How long will it be before another Mao Zedong (Mao Tse-tung) rise and start a Peasant Revolution and massacre another 20 million Chinese?

Sure, we have inequity in the U. S. too. We may have the world’s best healthcare available, but it is not accessible to everyone, with almost 45 million uninsured Americans. Every President for the past 30 years has promised reforms, but healthcare costs continue to climb at three to four times the annual inflation rate. We spend almost $1.5 trillion annually on healthcare — 15% of our GDP, and it is expected to grow to 25% by 2010.

Despite our current pathetic leadership in Washington and stricter scrutiny of incoming students, America still attracts the world’s elite that come here to pursue higher education and dream and build a better future. What attracts them is freedom and innovation. We still lead in innovative manufacturing, computer hardware, software, biotech, and are making headways in new energy sources.

So, don’t kiss America ‘Good-Bye’ yet. We will prevail for a long time, unless we let our ignorant leadership in Washington, political arrogance, and technological complacency take over.

Is Detroit Dead as a Dodo? Part 1

Anyone who has watched the U. S. auto industry for the past 50 years has to wonder, “When will Detroit ever wake up?”

Toyota entered the U. S. market in 1957 with its ToyoPet Crown (shown above), which was an ugly but a cute car. "Japanese Quality" was an oxymoron in the U. S. in the 50s and early 60s. Through the 1960s, Japanese car manufacturers kept exporting cheap, gas-efficient, low-end cars. Detroit laughed at the Japanese and said, “They can have the low-end market, we build luxurious, high-end cars.” Then, the energy crisis hit in 1973.

Detroit was caught with its pants down and the Japanese took advantage of it. Having pretty much conquered the low end, Japan slowly started attacking Detroit from the side—mid-sized cars—and eventually from the top—the luxury brands. And, started building cars in the U. S., beating Detroit in its own backyard and, often, front yard. Today, Lexus rules the high end, Toyota Camry and Honda Accord dominate the sedan market, and Japanese manufacturers lead in fuel efficiency and J. D. Power Associates' quality survey and customer satisfaction. (Forget the ‘initial customer survey’ that covers the first 90 days of owning your car, which Ford touts; we think it is a joke. If a car has problems in the first 90 days of its existence, it shouldn't have been manufactured and shipped in the first place!)

Amidst all this turmoil Detroit made even bigger blunders: GM acquiring Saab, Ford buying Land Rover, Volvo, and Jaguar, and Chrysler agreed to be bought by Daimler. In all these cases, instead of the European brand-name qualities trickling down the poorly built American cars, the horrible qualities of Detroit percolated up their respective brands. The result: Daimler got rid of Chrysler in a fire sale; Ford is selling off Land Rover and Jaguar, and wait for it to unload Volvo and GM to follow the suit. The Big Three haven't realized that they can not only NOT make quality cars, but their diversification strategies throughout history have been disastrous. Remember Chrysler/Kelvinator/Ground Systems Division, Ford/Philco/Ford Aerospace, and GM/EDS/Electro-Motive Division/Frigidaire/Hughes/Terex?

By the way, here is a breakdown of profit or loss per car manufactured in North America:

Nissan $1,575
Honda $1,368
Toyota $1,266
Daimler -$1,072
GM -$1,436
Ford -$5,234

Source: Harbour Consulting, as quoted in The Wall Street Journal, June 14, 2007.

Of course, Detroit blames the UAW and retiree-benefits burdens. We believe this is just an excuse. Poor leadership and incompetent management always beat up on demanding workers! Yet, you see these days on TV commercials the Big Three (or 2½) touting their gas-guzzling monsters, or flag-waving, patriotic American Revolution ads—hardly ever about quality (or lack thereof).

All that Detroit executives have to do is stop meeting in their ex-smoke-filled, currently mahogany-furnished boardrooms in Detroit; instead, fly to Silicon Valley and drive through the parking lots of high-tech companies and educational institutions, where they will find over 70% of the cars are imported or have foreign labels! These folks are tomorrow’s leaders in the making. By the way, Toyota's market share—including the Lexus and Scion brands—in Santa Clara County is larger than those of Chrysler, Ford and GM combined.

Detroit is a loser city—The Big 2½, Lions, Tigers, Red Wings, Pistons—having lost more than one-half of its population since 1950, to less than a million now. San Jose has beaten Detroit and is now the tenth largest city in the U. S. with a population of almost 950,000!

Going Private?

In the past few months we have seen many publicly held companies in the U. S. going private, often being acquired by leading private equity firms, such as the Blackstone Group, Kohlberg, Kravis, & Roberts, Silver Lake Partners, and the Texas Pacific Group.

Alltel, the wireless service provider, last month agreed to a $27.5 billion buyout by Texas Pacific and a unit of Goldman Sachs. KKR, notorious for taking companies private, invested $700 million in Sun Microsystems. Avaya is rumored to be selling itself to Silver Lake Partners and the Texas Pacific Group for more than $8 billion. Other notable buyouts include Chrysler, Bausch & Lomb, student-loan company Sallie Mae, Harrah’s, and TXU (Texas Utilities). Even Vitria, a small software vendor based in Silicon Valley, went private last year.

The reason most often given for these humongous buyouts is that these companies no longer have to be accountable for stockholders or waste resources on complying with the Sarbanes-Oxley Act. In fact, some companies have even bypassed NYSE and NASDAQ and chosen to get listed on the stock exchanges in Hong Kong, London, or Singapore.

We believe this is a copout. If a company’s leadership and its board are honest and ethical, they have nothing to hide and should open their kimonos for everyone to see. Now, with them going private, who knows what goes on behind the curtains?

Globalization Discussion at TiEcon 2007

We recently attended TiEcon 2007, held May 18-19, 2007 in Santa Clara, CA. At the pre-conference Charter Members-only event, Dr. Laura Tyson, University of California—Berkeley, talked about globalization of the economy.

Globalization is a great moderator; the GDP per capita is growing globally. There is more equal growth across the world. This also has a great decoupling effect—the United States will not lose its leadership anytime soon, but its influence on the rest of the world will diminish in this century, despite what leaders in Washington believe. Global interdependence is healthy.

Globalization in the 19th and 20th centuries was driven by the railroad, steamship, and underwater cables, which led to massive trade on a global scale. Globalization can be related to creative destruction. Yet, 90% of Americans fear their jobs will be outsourced/offshored and only 30% feel globalization is good, and moves are afoot in Washington to limit imports and impose levies on them—all in the name of keeping jobs in-shore and reducing trade deficits.

Globalization creates losers and winners and there is a role reversal between the developed (G7) countries and emerging economies. Emerging markets comprise 80% of the world’s population, control 40% of the world’s exports, and 96% of all new workforce in 2005-2010 will be created in emerging markets! Threats to globalization are not the economy, but politics.

Footnote: Chindia or Indina

It is noteworthy that in 1800 China and India accounted for almost 40% of the world’s GDP. Today, despite their robust growth and exploding economies, their combined GDP is less than 7% of the global GDP. However, by the year 2050, the leading world economies are expected to be China, the U. S., and India—in that order.

Ellison, The (Ex)Terminator

Oracle's CEO Larry Ellison said a few years ago there are too many software companies, especially, in Silicon Valley and most of them don't deserve to exist, implying they should either go out of business or be acquired. In the past four years, Oracle has spent over $24 billion acquiring companies of the likes of Agile, Hyperion, Peoplesoft, Portal Player, Octet String, Siebel, Stellent, Sunopsis, TimesTen, Thor Technologies, and others.

Oracle's CEO Larry Ellison has been called many names, but we call him a Take-No-Prisoners Winner. Larry fought the U. S. Department of Justice and won.

We are sure the buying binge isn't over yet.

What Shortage?

There are hot debates everywhere about the shortage of engineers in the U. S. and employers are constantly pressuring the US Congress for more H-1 visas. Is there really a shortage?

We believe the answer is an emphatic NO. All one has to do is look around Silicon Valley, for starters. Following the dot-com bust, thousands of engineers were unemployed for long durations. After drawing unemployment benefits for six months, they no longer appear in the unemployed category. Hundreds of engineers changed their careers -- became school teachers, worked in Starbucks, Home Depot, or Macy's, or opened franchises such as UPS or coffee shops. So, while the US Department of Labor reports unemployment rate in the Valley is ~4.3%, it is more like 15% to 20%, if one includes the underemployed.

Is there a shortage of engineers in the US? No, there is a shortage of cheap engineers! That is one of the reasons why:

1. Every major hardware and software company in the Valley has laid off employees and hired in Asia or done intra-company employee transfers on L-1 visas from overseas, paying them far less than what they did the employees they replaced.
   
   
2. IBM, inter alia, is reportedly laying off thousands of its employees in the US and aggressively hiring in India and China; see Robert Cringely's pulpit at:

http://www.pbs.org/cringely/pulpit/2007/pulpit_20070511_002058.html

Dogs, Math, and Science

I recently had lunch with the Marketing Manager for a Silicon Valley two-year community college. We were discussing the quality of education in the Valley and she mentioned over 90% of the students in Science and Math (S&M) in her college are Asian-Americans. Asked why, she said most American kids are raised by their parents with fear of S&M, so they don't love S&M.

This reminds of my childhood in India where most kids are raised with fear of dogs, because so many of them (dogs, not kids!) are stray and carry diseases. I remember walking my (late) Springer Spaniel in my San Jose neighborhood. Whenever I ran into Indo-American kids, they always asked me, "Does she bite?" American kids always asked, "Can I pet her?"

Of course, thing are changing: Many second generation Indo-Americans love and have pets -- cats and dogs.