Ford-GM merger?

On Mon, 24 Jul 2006 08:05:18 GMT, Gunner wrote:

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And if my Aunt had some b***s she would be my Uncle, but she doesn't, she isn't, and she won't.

Moore's law states: "If some is good, more is better, and too much is just enough."

Moore's Law cannot form the basis for a viable business plan as it directly violates the time proven adage "the first thing you must do when you are in the hole is stop digging."

The gross income of either Ford or GMC already is greater than the total Gross Domestic Products of a number of third world countries, and based on gross income, a combined Ford and GMC would qualify for a permanent seat on the UN Security Council.

There are several inter-related problems that such a merger will not address and will likely make worse.

#1 -- There is a gross over capacity for the production of cars and light trucks, which in rapidly increasing as production plants in China and Russia come on line. I have seen this estimated from 33% to 100% of market. The concept of "market" is also part of the problem. Just because someone wants to buy a car does not mean they can/will buy a car, and just because someone can buy a new car does not mean they will, as they may decide the total return [economic, social, utility, etc.] is not adequate. When the new vehicle market is "adjusted" to include only those who can reasonably be expected to be able to afford a new vehicle [72 month financing anyone?] and exclude cheapskates (such as myself and Gunner) who will not buy a new vehicle [and eat the resulting taxes, depreciation, license, and insurance costs], current new vehicle production capacity is likely between

100% and 300%. That is to say capacity exists to build 2 to 4 new vehicles for every new vehicle that can reasonably be expected to be sold.

Moves have been attempted in some (American) states [Peoples' Republic of California for one], rationalized on environmental grounds, to ban operation of vehicles more than 5 years old (which would put a crimp in the 72 month financing plans) on the public streets, as I believe is the case in Japan. This would produce a few dollars boost in sales for the car companies [company?], insurance companies, and state revenues, but at enormous cost to the end user.

This gross over-capacity problem is *GREATLY* exacerbated because the buildings, equipment, and methodology are largely useless for anything but light vehicle production, and thus have mainly scrap or salvage value. This has serious economic implications in that these assets are difficult or impossible to redeploy, and the workers will require extensive retraining for employment in other industries at comparable wages. [Being able to as "Would you like fries with that?" in 7 languages does not qualify.]

#2 -- Ford and General Motors are now only nominally automobile companies. When evaluated from a profit generation standpoint, they are consumer finance and insurance companies, with a number of other highly profitable segments such as defense contracting [e.g. Hughes, Loral]. Automotive production generates little profit and frequently large losses. What automotive profits that are generated more than likely come from the accountants' trick pencil than transporters loaded with new cars.

Reasonably enough, the car people have lost influence in what are now largely non-automotive production and financial operations. Vehicle designs are now largely determined by marketing types who see cars as "personal lifestyle expression units," "social/status symbols," and "Phallus surrogates." (If you don't know - don't ask.) It appears that no one is attempting to produce a vehicle designed for durability, maintainability, low life cycle cost, and to transport people and their goods from point A to point B in reasonable comfort and safety. SAAB and Volvo came close but were acquired by Ford and GMC, and are now badge engineered Detroit iron.

#3 - The Officers and Directors of both Ford and GMC do not appear to be people that the typical individual would want to do business with (or even live next door to).

Historically any commitments they make are worthless. Examples include retiree health care, employee pensions, worker participation (e.g. Fiero and Saturn), and profit sharing with their vendors based on cost reduction from vendor investment in automation. Even though all of the examples were written contracts, they have been repeatedly abrogated and revised unilaterally by the two automotive giants to the great financial loss of the other parties.

A merger of these two companies would likely produce a totally immoral and even worse, totally incompetent board and officer corps, unless a requirement for the merger is the replacement of all existing board members and corporate officers. This is of special importance where this involves cross-links between the two companies and financial institutions such as banks and brokerage houses.

#4 -- Economy of scale, depending how it is defined and what metrics are used, appears to stop working above a certain size, and becomes a "dis economy of scale." That is the expected earning per unit of input goes down, not up, with increasing organizational size. Unfortunately, both Ford and GMC are already on the wrong side of this "power curve" and a merger will simply make matters worse.

Among my significant dissertation findings were:

Appendix G

Probing a fundamental economic business assumption -- The myth of "economy of scale"

One of the most basic assumptions in Management Science and Economics is the existence of an effect called "Economy of Scale." This is a highly plausible tenet that a state that as an organization becomes larger it becomes more "efficient" because not all functions and sub-divisions must be increased at the same rate. For example, any single organization requires only one president, and doubling production of an item does not require doubling the Engineering or R & D support staff. Indeed, the acceptance of this has become so ingrained that it is now frequently offered as a short-hand rationalé for almost any merger or acquisition, generally in the context "the consumer will benefit from the economy of scale." This of course begs the question "will any of the savings be passed on to the consumer," but a deeper and more fundamental problem exists: specifically, does "economy of scale" continue to be operational at the size and complexity of the new huge trans-national corporations, or as in so many other things does a point of diminishing returns exist? While this does not appear to be a VOTE question, as indicated in the other sections, very large organizations are playing an increasingly important role in the economy, and therefore it is worth probing. While different results may be obtained using a different selection of subjects or criteria for efficiency, chart1 dj1.xls plots the "efficiency" of the world's 250 largest corporations as ranked by their gross sales measured as per cent of gross sales. The assumption is that if an "economy of scale effect" does exist, profit measured as per cent of gross sales should increase as the size of the organization increases. Using data obtained from the 1998 Wall Street Journal Almanac, p203-7, profit as percent of sales versus gross sales was plotted and a first degree LSBF trend or regression line. The F-ratio for these variables was calculated using the Excel statistics utilities with the following results: Summary Groups Count Sum Average Variance Gross Sales 250 7415158 29660.63 6.5E+08 Profit as % of Sales 250 10.92407 0.043696 0.002311 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 1.1E+11 1 1.1E+11 338.4467 4.69E-58

3.860208 Within Groups 1.6E+11 498 Total 2.7E+11 499

I. The null hypothesis that there is no "economy of scale effect" for organizations of this size is rejected at the .05 " level, however the sign of the effect is wrong indicating a dis-economy of scale or decreasing efficiency with an increase in size, with expected profits as a per cent of sales falling to zero about 225 billion $US gross revenues.

II. This is so contrary to accepted wisdom that a second larger data set, the Fortune Global 500 was input and additional correlational studies were performed. The Fortune data had additional information such as the total assets, stockholder equity and number of employees. This allowed different definitions of organizational size and "efficiency" to be checked. For charts see:

This is a large data set with 500 subjects, and their combined gross sales of $11,453,516,500,000.00 is 41% of the entire world's output of goods and services, estimated at $27,684,197,390,000.00 by the World Bank for the same period. It should be noted that this is not a sample but a census. The following pages summarize the F-ratio test results to determine possible correlation. It should be noted that there are different numbers of organizations. This is because some organizations either did not supply the data or it does not apply, for example, the United States and German Post Offices are included in this data set, but because they do not have stockholders, they are excluded from measures, which require stockholder data.

Examination of the above table indicates the following points: I. Of the 16 possible combinations of the measures of size and "efficiency:" A. Six indicate a statistically significant dis-economy of scale; B. Nine indicate a statistically significant economy of scale; and C. One measure is not statistically significant. Because of the tendency for current corporate management to "maximize shareholder value" that is to maintain as a high a share price as possible, which general means maximizing the profit per share or the return on stockholder's equity, decisions are frequently made which attains this goal, but which also tend to reduce "efficiency" under the other definitions. This is not a problem as long as consistent definitions and goals are used throughout the organization and over time, however this is frequently not the case. For example, management of a large organization may decide to acquire or expand production capacity to increase market share which generally results in an increase in share value, however as the above table indicates, assuming an increase in gross sales and the number of employees, this is statistically likely to result in a reduction in the percent of profit from gross sales and to also reduce the profit per employee.

I thought I'd never get along w/o my truck when I bought a Saturn SL1 sedan. I quickly noticed that I could get 10' lengths of pipe, conduit, 2x4's inside by folding seats and angling to passenger foot well and could close the trunk. Not a huge load but usually enough for the minor projects.

But what to do about buying a sheet of drywall or something too big? I bought a light 5x8' trailer and put a hitch on my Saturn. As long as you don't get crazy you can bring stuff home just fine.

When I put a new roof on the house, we dumped the roofing into the trailer and unlike a truck, didn't worry about scratching the paint, had no problems just leaving things in the trailer for a couple days until we had time to dump it.

I did have to get someone with a truck to haul it since it was too much for my car to move. But that is all right since the same guy that towed my stuff to the dump likes to borrow my trailer so he doesn't have to remove the capper from his truck to haul his stuff.

My truck got 18 mpg my Saturn gets 37, I commute 70 miles a day. I don't miss that truck much at all.

Wes S

For what you save buying and driving the Saturn you can EASILY afford to rent the truck you actually need, from a pickup to a 16,000 lb liftgate truck the few time you actually need one.

Gary H. Lucas