Automotive Industry Profitability Plan

A U T O M O T I V E

I N D U S T R Y

P R O F I T A B I L I T Y

P L A N

WHY THE U.S . AUTO INDUSTRY IS NOT PROFITABLE Technological Obsolescence (30% of the problem): (1) the products are obsolete. By now, cars should be able to get 100MPG (equivalent mileage), be able to protect occupants in a 40MPH crash, and cost no more than $3,000/year in O&M (operating and maintenance costs); (2) the labor force is obsolete as it does not have the training nor skills to work with advanced materials and drivetrain components; (3) the manufacturing facilities are obsolete in that they are not geared to mass produce the cars of the future; Incompetent Management (15% of the problem): (1) present management has not been good stewards of the capital they have inherited from past management; (2) present management lacks vision for moving forward with the manufacture of the transport vehicles the country (world) desperately needs; (3) management lacks the technical skills and knowhow for managing the manufacture of next generation vehicles; Expensive Labor Costs (15% of the problem): (1) domestic hourly labor costs are higher than the wages paid auto workers in the U.S. working for foreign auto manufacturers; (2) employer-based health insurance is one third more expensive than the single payer health care offered in other industrialized countries causing manufactured goods in the U.S. to be much less competitive in global markets; Lack of Adequate Federal Government Regulations (40% of the problem): (1) failure to reform U.S. healthcare has resulted in excessive labor costs; (2) failure to adequately address carbon emissions has left U.S. manufacturers behind the technology adoption curve relative to foreign manufacturers; (3) continuing subsidy of fuel costs have left U.S. manufacturers producing products that are not globally competitive; (4) continuing subsidy of personal auto use over mass transit has created a situation of very slow technology adoption cycles that have depressed auto markets. INVESTING IN THE U.S. AUTO INDUSTRY IS STRATEGIC Today, there are 250 million registered vehicles in the national fleet. This fleet is technologically obsolete and must be replaced within the next 10-15 years. Why? Its carbon emissions are a large contributor to global warming. The fuel this fleet consumes requires the nation to import ever growing amounts of foreign oil. Providing public funds to rescue failing manufacturers alone is not adequate. The most important role of the Federal government may be to set the economic ground rules for this strategic industry to succeed.

LYLE A. BRECHT

DRAFT 410.963.8680 - CAPITAL MARKETS RESEARCH - Saturday, October 10, 2009

Page 1 of 5

A U T O M O T I V E

I N D U S T R Y

P R O F I T A B I L I T Y

P L A N

For any rescue to succeed, the federal government needs to assist in creating the market conditions for the domestic auto industry to succeed. Otherwise, no amount of capital spent to rescue a specific auto manufacturer will be sufficient. What is required are regulations that encourage the manufacturers to: reallocate labor and capital towards technological innovations that enable the fleet to become successively less dependent on fossil fuels with each new technology adoption cycle; put in place an ownership structure that rewards management that is focused on technological innovation; create a capital structure that can support the necessary R&D at scale; and develop a cost structure that is competitive with that of any country in the world. BUILDING A MARKET FOR TECHNOLOGICAL INNOVATIONS Presently, the market does not sufficiently reward auto manufacturers for technological innovation. There are few compelling reasons for consumers to periodically update their vehicles to new technology. Needed changes to market drivers for shortening technological adoption cycles are: The Federal government should implement Cost Adjustment Surcharges to correct market mispricing of fossil fuels to add an end-user surcharge that progressively raises the equivalent price of gasoline to its economic cost of $9.00/gallon over a 10 year period to stabilize energy market-pricing;1 Implement feebates program for stimulating demand and retooling national transportation fleet to more than double CAFÉ total fleet mileage within 7-10 years.2 This is a self-funding program that requires $20 billion in stimulus funds for seed capital to initiate the program; 3 and

In Venezuela and Saudi Arabia, gasoline use is subsidized and costs twelve cents and fortyfive cents a gallon; in Europe a gallon of gasoline costs $9.00 because it is heavily taxed, with revenues going to support single-payer national health care and public transportation. The U.S. has the lowest cost for gasoline among industrialized countries. Thus, between 1980 and 2008, oil use in the U.S. is up 21% whereas in the United Kingdom oil use has remained flat from 1980 to now, while in France it's dropped 17% (Energy Information Administration). 1

A feebates program is a self-financing system of fees and rebates that are used to shift the costs of externalities produced by the private expropriation, fraudulent abstraction, or outright destruction of public goods onto those market actors responsible for the taking of the public goods in question” (Wikipedia). 2

Registered vehicles rated less than 40 mpg/combined mileage would pay a prorated annual fee. Registered vehicles with greater than 40 mpg/combined mileage would receive a prorated annual rebate. 3

LYLE A. BRECHT

DRAFT 410.963.8680 - BUSINESS DEVELOPMENT RESEARCH - Saturday, October 10, 2009

Page 2 of 5

A U T O M O T I V E

I N D U S T R Y

P R O F I T A B I L I T Y

P L A N

AN OWNERSHIP STRUCTURE FOCUSED ON INNOVATION The domestic automobile companies should voluntarily agree to receivership and be recapitalized: Under the recapitalization, a trust, the National Transport Trust, will recapitalize each automobile manufacturer that agrees to receivership with between $50-$100 billion in 40-year debt at a nominal interest rate of two percent (2%) and sell $50$100 billion in equity in the public markets for a debt/equity ratio of 1:1 for the recapitalization. The Trust shall be the sole arbiter for choice of members for boards of directors for each company until the company generates retained earnings to retire sixty percent (60%) of outstanding originating debt; Executive compensation during the recapitalization payback period shall be limited to total maximum compensation of $500,000 per annum in 2009 dollars, adjusted yearly for purchasing power parity that includes salary, stock options, and benefits; and A CAPITAL STRUCTURE THAT CAN AFFORD R&D Until all recapitalization debt has been repaid and for ten (10) years thereafter, all antitrust provisions of U.S. law will be waived for collaborative R&D programs initiated by U.S. auto manufacturers. The U.S. government will make available from its national research laboratories its advanced materials patents for the development of lightweight, high-impact chassis and frames, patents for high-energy battery technology; and The Trust shall provide up to $5 billion to purchase other patents for advanced drivetrain, braking, and other technology for use at no charge by each auto company agreeing to receivership and recapitalization provisions in this Plan. The objective is to produce vehicles that are ever safer and more fuel efficient with each new advancement in technology. A GLOBALLY COMPETITIVE COST STRUCTURE All workers must agree to wage contracts that are no more than three percent (3%) higher than the wages paid to workers performing similar work for foreign manufacturers of automobiles in the U.S. Offer a Medicare for All health insurance for all domestic auto workers. 4 Pay for this program through a Surcharge on fossil fuel usage.

Single payer health care would save more than $650 billion per year. See McKinsey Quarterly, “Why Americans pay more for health care” (December 2008). 4

LYLE A. BRECHT

DRAFT 410.963.8680 - BUSINESS DEVELOPMENT RESEARCH - Saturday, October 10, 2009

Page 3 of 5

A U T O M O T I V E

I N D U S T R Y

P R O F I T A B I L I T Y

P L A N

20-YEAR STRATEGIC VISION FOR GENERAL MOTORS Rapidly differentiate by producing vehicles that no competitor is capable of manufacturing; vehicles that redefine the light-duty vehicle market. What I am imagining are light-duty vehicles that are able to get 100MPG (equivalent mileage), are able to protect occupants in a 40MPH crash (w/o large collision body repair costs), and cost no more than $3,000/year (in 2009 dollars) in O&M (operating and maintenance costs). Part of this vision is to develop a closed materials cycle where chassis, constructed of carbon fiber, are recycled back to the manufacturer for retrofitting with the latest drive train, electronics, and updated lightweight composite-honeycomb body panels every 3-7 years. I envision three basic sizes of chassis upon which all light-duty vehicle models are based. Drive train power is provided by plug-in hybrid/diesel engines. These vehicles are useful for city or highway travel, in all weather. Brakes are four-wheel disk. The new GM serves primarily as an assembler of vehicles and holds the intellectual property associated with the design, engineering, procurement, marketing, and distribution processes. Assembly, using flexible-programmed robots performing small batch processes for vehicles on order (as opposed to assembly for inventory), occurs in virtually every state of the United States. Refurbishing and remanufacture for retrofitting new components can occur locally. [By increasing the modularity of components and reducing the scale of assembly, I believe it is possible to improve build quality while reducing finished costs.] Thus, the prospect of ‘junked’ cars is obsolete. This is a closed cycle that essentially ‘locks’ (switching costs are very high) the consumer into GM vehicles purchases from yearto-year. GM becomes the manufacturer of components only in situations where existing globally sourced component manufacturers are incapable of producing a necessary part. GM obtains the royalty-free use of the patents for carbon materials and composite material manufacturing from the U.S. government labs and publicly funded research university labs who hold these patents. It licenses the drive-train or other components from suppliers, as may be necessary for a specific build cycle. Rapid market growth for new-technology vehicles can be prompted by increasing costs for holding old technology vehicles. For example a GM/Federal government partnership can promote policies that: (a) increase fuel costs to EU levels within 10-12 years, (b) provide annual feebates (scaled rebates for vehicles operating w/more than 50MPG vs. scaled fees for vehicles operating with less than 50 MPG combined average mileage), (c) etc.

LYLE A. BRECHT

DRAFT 410.963.8680 - BUSINESS DEVELOPMENT RESEARCH - Saturday, October 10, 2009

Page 4 of 5

A U T O M O T I V E

I N D U S T R Y

P R O F I T A B I L I T Y

P L A N

Such market incentives for speeding-up technology adoption cycles are win/win: for the new GM in selling new technology vehicles, for the nation in creating many thousands of new domestic jobs, and for the Federal government in promoting policies to curb carbon emissions, reduce dependance on foreign oil, and in producing solid annual GDP growth to reduce annual federal spending deficits. With this strategic vision, GM again becomes an integral part of the U.S. economy, regains the trust and appreciation of the public, positions itself in a competitive posture than is unmatchable by other car manufacturers, and directly meets the environmental challenges of the 21st century. The future for GM can be very profitable. The task is to position the new GM as a different car company, with a radically different product than other competitors.

LYLE A. BRECHT

DRAFT 410.963.8680 - BUSINESS DEVELOPMENT RESEARCH - Saturday, October 10, 2009

Page 5 of 5