Survival of the Corporate Fittest: The Future of Automotive Companies

Trains Lose

On May 10, 1869, the golden spike was driven home at Promontory Summit, Utah, and the first transcontinental railroad spanned the United States. For the next 60 years railroads were king, moving people, freight and the U.S. mail throughout the nation. By the time the U.S. entered World War I, the railroads employed 1.8 million people—more than one percent of the entire population at that time.

The railroads were so powerful they even controlled time itself, or at least its observance. Before 1883 clock setting was a purely local matter and regional governments decided for themselves what time it was based upon the position of the sun in the sky. But on November 18, 1883, the railroads established standard time within zones throughout the U.S. and Canada, which is why the Department of Transportation, which regulates the railroads, remains the nation’s timekeeper.

But the advent of highways and airlines encroached upon railway market share territories. Rather than evolve into a multi-modal transportation industry, the railroads refused to change with the times and many went bankrupt in the 1970s.

Oil Gains

When geologist M. King Hubbert predicted in 1956 that U.S. oil production would peak sometime between 1965 and 1970, his employer, Shell Oil, listened and made the corporate decision to evolve from an oil company to an energy company. Rather than continue to rely solely on traditional drilling and production, Shell has invested heavily in alternative energy sources, including wind, solar and biofuels research. Their projects include the creation of synthetic biofuel from waste paper or seawater algae (as an alternative to turning corn into ethanol), and construction of massive wind turbines to provide clean electricity in the U.S. and Europe.

In a similar manner, Chevron in February 2008 teamed up with Weyerhaeuser, one of the world’s largest forest products companies, to research the creation of biodiesel fuels made from wood chips. ExxonMobil funds climate and energy research at Stanford and collaborating universities around the world, including projects in hydrogen and solar power, biomass and advanced combustion of hydrocarbon fuels. (Although filling the gas tank remains painful, at least we know the money is going somewhere useful.)

Cars—Well . . .

U.S. automotive manufacturers find themselves at a crossroads today. With their current crop of gas-guzzling SUVs and pickup trucks becoming economically unfashionable and infeasible, it won’t be enough for Ford, Chrysler and General Motors to retool their factories; they’ll have to retool their thinking and decide which of the two examples above to follow.

If Hubbert’s peak oil theory is correct, the days of the gasoline-powered internal combustion engine are numbered and another way must be found to fuel transportation both public and private. Although all three U.S. automotive companies are introducing “greener” vehicles—hybrids, cars with greater efficiency or the ability to burn biofuels, the predominantly electric Chevy Volt—increases in technology, production runs and market penetration won’t be sufficient to lower America’s fuel usage for years to come. This will also require fundamental changes in the supporting infrastructure, from the inventory carried at the local auto parts store to the inclusion of electric plugs at parking lots or natural gas pumps at the corner filling station.

Legislative endeavors currently underway in Congress, prompted in part by ex-oilman T. Boone Pickens and in part by skyrocketing crude oil prices, intend to push that envelope by introducing natural gas powered vehicles which can be refueled at home, thus undercutting part of the infrastructure problem. The technology is proven, and these cars are already available overseas through Volkswagen, Opel, Mercedes, Honda and even GM and Ford. But it seems an act of Congress will be required before the concept is adopted for the private U.S. market.

Return of the Railroad

Meanwhile, deregulation and restructuring of the railroads in 1980 led to a resurgence in its viability as a bulk transportation system. According to the Association of American Railroads, an 85% improvement in fuel efficiency since that date has led to the ability to move a ton of freight an average of 436 miles on one gallon of diesel fuel, with resulting reductions in emissions, costs and road congestion. Over 40% of all U.S. intercity freight transportation is again riding the rails, four times the amount in Western Europe.

Detroit, are you listening?

America’s Free Market…or the Lack Thereof

Conservatives talk about how great America’s “free market” is, while those on the political left are critical of the “free market’s excesses.”

What are they talking about?

We have nothing even closely resembling a “free market” in the United States, and the latest news surrounding Fannie Mae, Freddie Mac, and the Federal Reserve underscores that point.

People are generally confused about Fannie and Freddie: Just what or who are they? Well, let’s start with Fannie: Fannie Mae is the nickname given to the Federal National Mortgage Association (FNMA), an agency created four years after the Federal Housing Administration (FHA), which was one of FDR’s New Deal programs. The FHA, born in 1934, sought to “standardize” mortgages by insuring loans that conformed to government guidelines. The FNMA (Fannie Mae) would then buy these mortgages from the originators and pool them into marketable securities – i.e. financial assets that could be bought and sold by investors. An FNMA security might contain 100 mortgages, for example, and that way, if five of those mortgages failed, investors would only lose out on 5% of their investment. In this way, the government sought to lower the “credit risk” premium of mortgages and make homeownership more affordable to average Americans.

Sounds good, right? Well, there’s always a catch. But first, let’s continue with Freddie Mac.

In 1970, the government gave Fannie Mae the authority to purchase and securitize any mortgage – not just those that adhered to FHA guidelines – and created the Federal Home Loan Mortgage Corporation (FHLMC – “Freddie Mac”) to do Fannie’s old job. Now the government had it’s hands in virtually every kind of mortgage imaginable – though exactly where this power was enumerated in the Constitution is unclear.

Of course, Fannie and Freddie aren’t truly government agencies. In rejecting socialism, the government opted for fascism: government partnership with business. Fannie and Freddie are “privately owned” publicly traded stocks on the New York Stock Exchange, so their profits are privatized…but their losses are always socialized.

Since the mortgage meltdown – created by the Federal Reserve’s inflationist monetary policies – Fannie and Freddie’s stocks have been in the toilet. Over the past couple of weeks, each of the firms has lost billions in market capitalization. On July 10, Fannie closed at $13.20 and Freddie at $8 – the 52-week highs for the stocks are $70.57 and $67.20, respectively. During the next day’s trading, Fannie and Freddie hit session lows of $6.68 and $3.89.

And then the Fed intervened.

Chairman Bernanke announced that the Fed would stand by to bail out the firms, and the stocks – down as much as 40% for the day – rebounded, closing at $10.25 and $7.75, respectively.

Think this isn’t a big deal? Consider this: The swing from $6.68 to $10.25 for Fannie Mae represented a change in value worth nearly $3.5 billion, and Freddie’s swing from $3.89 to $7.75 was worth $2.5 billion. In all, $6 billion changed hands on Friday, all based on a few words from the Fed chairman. The investors who threw in the towel, recognizing that, in a free economy, Fannie and Freddie would be done-for, were suckers. Those who stepped in to buy the stocks at that point, confident that the government would intervene, profited by billions.

And they call this a “free” market?

Just imagine if some investors might have had some advance knowledge that Bernanke would make those comments.