Category Archives: United States

Eight Days in Cuba—Things are Changing Right Now. The direction of change is not totally clear however.

Posted on by Jack Rivkin
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I recently was part of a humanitarian group originating in Key West that visited Santiago de Cuba and Havana. We brought medical supplies and some writing materials to two clinics run by The Sisters of Charity of St. Vincent de Paul. We did have some free time over the 8 days and were able to experience the people, the nightlife and the culture. The participants in the arts, science, education and other fields are true professionals, having been selected in a classic communist manner at an early age to pursue a path. Although I must say the music and dancing on the street were amazing as well. And the old cars are ever present.Image

We also heard a variety of lectures on history, art, religion, restoration, and “la vida cotidiana.” Most of the lecturers as well as our quite knowledgeable guide, a former history teacher, were born after the 1959 revolution. They have an interesting historical view extending back to 1492, which doesn’t necessarily correspond to the history we in the United States were taught, read about or actually experienced.

While 8 days in a country combined with some reading does not make one an expert I do have some observations. Let’s start with some facts and maybe a few anecdotal factoids:

Cuba, an island nation, 90 miles south of Key West, is about the size of Pennsylvania, 44,000 square miles. The population is about 11.2 million with Havana, the capital and largest city at 2.2 million. The primary sources of revenue would appear to be tourism, sugar, mineral exports and remittances from Cuban-Americans to family members.  About 70%, –a declining percentage–of the work force is employed by the State. The State also provides free medical care, a monthly food allowance (good for about two weeks of the month we were told), and free education. What did happen after the 1959 revolution were the creation of schools throughout the country and the development of a universal health care system. The literacy rate is stated at 99.8%. However, we did run into several members of that 0.2%. The country has the highest ratio of doctors to population in the world, although there is a real shortage of medical supplies and equipment. We were often asked on the street if we had any medicines or soap(!). We were also told that the Universal Health Care primarily applies to the military and the police with long waits and limited supplies for others. Not sure Michael Moore got the full story.

There is a dual currency system. Those employed by the state are paid in Cuban pesos (CUPs). It is not totally clear what the differences in compensation are within this part of the economy, but we were told that doctors are paid about 300 Cuban pesos bi-weekly. In the last 5 or 6 years certain Cubans have been able to start their own businesses, typically on the street or in their homes. Some of these are a part of the Cuban economy, but most are in some fashion related to what is called the CUC (“kook”) economy. A CUC is a unit of currency convertible into a similar unit of the US Dollar, although a 10% tax and a small fee apply. This makes a US Dollar worth about .87 CUC. If one is exchanging any other currency for CUCs there is no tax. The exchange rate between the CUP and the CUC is 24:1. As several Cubans told us, the closer one is to the CUC economy the better off one is, in spite of as much as a 50% tax on reported CUC revenues. Those receiving remittances from relatives in the States or elsewhere are even better off. The Financial Times recently reported that such remittances totaled $2 Billion last year. That is not surprising. According to the US Census there are 1.8 million individuals identified as of Cuban origin living in the US of which 1.2 million are in Florida. The current US administration is allowing unlimited travel by Cuban-Americans to visit relatives and unlimited remittances of funds. This compares to one trip per year and $1200 under the previous administration. Some of the current Republican candidates made noises about returning to the previous policies, but that did not go over too well with the community. We had different types of Cuban-Americans on our flight: some couples who go at least once a month to visit relatives bringing gifts and money; some individuals doing the same but with some specific business ideas in mind; a man who was making his first trip in 43 years to visit his dying godfather.  On the Cuban side there are changes as well. There is now some house trading allowed. Cubans can own their own homes (not the land), many of which were given to them after 1959 or were built by the Russians during their 30 years of support. Available funds can be used to build or improve a home or be used as a part of the swap from a smaller home to a bigger one. Funds can also be used to start or improve a business.  This participation in the CUC economy can make an enormous difference whether it is remittances or income. Let’s take the small example of our guide. Our trip was 8 days with about 20 people as a part of the group. The recommended “tip” was about 2 ½ CUCs per day per person. A guide could walk away with about 400 CUCs for the 8 days and repeat that experience many times during the year. That compares to the doctor getting 7800 CUPs a year or only 325 CUCs at the 24:1 exchange rate. The buying power difference is huge over the course of a year. It is hard to see how this can last. Beyond the tips for the guides, all payments for food, lodging, souvenirs, artwork, etc., were in CUCs and the prices weren’t cheap. My biggest overpayment was for a 3 CUP bill with Che featured on the front. That cost me a CUC.

It is no wonder many of the doctors are happy to be lent out to other countries where there may be some income possibilities. Supposedly, there are 30,000 Cuban doctors in Venezuela now as part of an exchange for oil. Cuba imports about 100,000 barrels per day of high-sulfur oil from Venezuela. This supplements the 56,000 barrels per day produced domestically. This primarily goes to provide not-very-clean power for factories and the utilities.  This is tragic in a way. Cuba has reasonably high sun–DNI (Direct Normal Irradiance), as do most Caribbean islands, which makes solar power a real alternative. We saw a few solar panels out in the countryside, but no real significant use of solar for heating or electricity. Solar may not happen. There could be significant offshore oil and gas, maybe as much as 4.6 Billion barrels and 9.8 Trillion cubic feet respectively, according to the USGS. Apparently, Brazil and Spain are working with Cuba to explore these possibilities.

Wikipedia, provides a concise description of the country, its history, and its structure. I recommend it for those who are interested in learning more. While in Cuba, what was fascinating to me was the view of history held by those of the generations since the 1959 revolution. The view of history is not necessarily wrong, but like most histories, it extends from a very specific point of view.  That view is very much one of the US having an interest in controlling Cuba, extending from George Washington to the present. This view comes complete with quotes and the text of various laws and amendments over the years up to the present–the Platt Amendment seems to come up in most conversations. As the one older historian we heard from said, “It is easy to find in actions and words, proof that the US is not interested in Cuba being an independent country and is doing what it can to ultimately control it. This is reinforced daily. If we have too much rain or no rain the view is the US clearly must have done something to make that happen.”

I wanted to get some sense away from the dialogue of how pervasive this is. I bought three books (in Spanish) which I have been attempting to read: 1) Cuba y su Historia  2) Cuba-USA, Diez Tiempos de una Relación and 3) Obama y el Imperio. This last book purports to be a series of writings by Fidel Castro covering the period from May, 2008, to June, 2010.  These writings all reinforce what was coming from the mouths of almost all of those we encountered during the trip as expressed by the older historian we met. There is a general view that what happened in 1959 was the culmination of a Revolución (with a capital R) that began in 1868, with the true heroes being Cespedes, (not the ball-player who just signed with the A’s) and Marti. It took this long to establish true Independence because of the interference of the US–not much credit to Teddy Roosevelt or Generals Wood and Pershing at the turn of the last century.

All are hopeful that things are changing. It is not clear how quickly those changes will occur in the economy, the political structure and the daily lives of the people. As with many countries this year, there are changes in leadership occurring.  The first signs in Cuba are not encouraging. The Council of Ministers (31 individuals) has changed with the elimination of some of the more liberal members. Raúl Castro’s recent speeches have been somewhat hard-line. His primary speech in the Assembly focused on the US, corruption (with references to the US) and a reiteration of the importance of the Communist Party (about 800,000 members).  He may be catering to the “old white men” (a phrase from the historian about the leadership) in the Congress or he may be pulling back from some of the reforms. There has been an apparent tightening of security with some retentions and restrictions on gatherings. Something is happening. It may simply be a precaution during this period of transition.  It may be a policy shift. It may be some concern about the Pope’s visit in March.

Granted, Cuba is just another Caribbean island. And what happens there is unlikely to change the course of the world. It does have a long history with the US, though, and it is close.  The people, individually, are terrific. Some real talent exists, and maybe things can get better for them. It is worth taking a “humanitarian” trip to see for oneself. Be sure and bring soap.

A Brief Look at the World—China, the US, Europe and the Lake Forest Investment Society

Posted on by Jack Rivkin
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I am heading out to Chicago for one of the triannual meetings of the Lake Forest Investment Society.  We have been meeting three times a year (yes, triannual can mean three times a year) for many years to talk about the economy and the markets, including providing some specific stocks for a “portfolio.” The best performing security for the period between meetings gets its touter a free lunch. The portfolio, an unaudited, equally weighted hodge-podge of names is actually up  427% vs. the S&P at 130% over the 16 years this group has been meeting.  The Society originated as a group of ex-Mitchell Hutchins employees and some of their favorite clients who wanted an excuse to share some provocative ideas on stocks, the economy, the world and life, eat high cholesterol meals, and maybe play a little golf. Some of the members and their origins have changed over the years, but the dialogue continues. The following are some thoughts I expect to share at the meeting:

China’s Role

This global deficit crisis won’t really be resolved until China enters the picture. China needs an export market to provide sufficient jobs while it tries to move to a consumer economy. It cannot find itself with a slow-growth economy if it wants to avoid political disruption, particularly at a time of leadership change. The developed world, both the US and Europe, needs to be showing some growth in order to be consumers of Chinese goods. With new leadership coming in 2012 there is an opportunity for China to provide some form of quantitative easing through the purchase of longer-dated securities or other mechanisms.  This could be combined with the purchase of real assets and intellectual property as well in both the US and Europe. Until we see some movement by China, the developed world markets will face continued uncertainty, as the resources available to resolve the European crises, specifically, are just not adequate. However, I doubt China will move until both Europe and the US take stronger steps on their own to develop long-term deficit solutions and near-term stimuli.

The US’s Role

Contrary to what has been a continual reduction in GDP forecasts and increasing odds of a double dip by the pundits, I think the US could show decent growth in the second half of this year—not enough to create a lot of jobs, but decent. This does assume that the Super Committee or some variation thereof comes out with a long-term deficit reduction program combined with some near-term stimulus, and Congress actually supports this effort. I think the odds are greater than 60% that they will. This doesn’t necessarily provide a boost for the second half of the year, but it clears the air for next year and eliminates some elements of uncertainty in the minds of business and investors. My guess is we could have one more horrendous scare, probably coming out of Europe, before the world comes to its senses and responds to what could be a real crisis otherwise. What needs to happen long term is a whole ‘nother post, but one could read Friedman’ and Mandelbaum’s new book, “That Used to be Us,” to get a sense of some of what has to happen.

Europe

What a mess. It does not appear that the mechanisms exist to deal with the Greek deficits without putting the European banking system and maybe some other financial entities at grave capital risk. Whatever does come out of Europe as a solution—and I think it will take the Chinese to at least have the appearance of a solution—growth will be slow, as the European banks will not be in a position to lend for some time.  This is an opportunity for the Chinese probably to the detriment of the US, if they choose to pursue it.  China bashing in the US will likely drive China closer to Europe. China can also be more specific in its actions by dealing with individual countries and companies as opposed to the Union.

Other Topics

In spite of what most of the Republican primary candidates say—Jon Huntsman excluded–climate change is happening. We have no coherent policies in place and what was previously there is slowly being dismantled in Congress and by the Administration. Fiscally, we don’t seem to believe we have the resources to tackle this issue now, in spite of the long-term job creation possibilities.  And, the fascination with “fracking” and what that could do for energy independence is in the forefront with massive resources from the energy industry devoted to selling the story. In the meantime the failure of an over-funded science project, Solyndra, has raised issues about government involvement in clean tech.  These are their own topics, which I will deal with separately in other posts. In the meantime, back to the LFIS meeting, I will have a hard time coming up with a good stock idea. My personal portfolio is in cash and private illiquid companies. My compatriots will have some very interesting ideas, particularly at this moment in the market. I am not so sure the public market is as cheap as many opportunities in the private market today, particularly away from some of the frenzy around social media and other Internet related companies. Maybe one more crack in the public markets will get it there if it is combined with some stimulus in response.  In the meantime, real private companies are having a hard time finding funds from the traditional venture capital sources. We appear to be going back to the original sources of capital for venture companies, rich families either in the form of family offices or direct.  They can name their prices.  We are back to the old maxim that one makes the most money on a good price going in vs. the price going out.

Risk and Opportunity

Posted on by Jack Rivkin
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Mother Nature, the Economy, Intellectual Property & Innovation, Strategic Risk and Private Equity 

The first quarter of 2011 was rather tumultuous to say the least, and we are entering the second quarter with very little of that turbulence fully calmed and the human toll and uncertainty continuing to rise. This has heightened concerns about specific Risks and, more generally, the global economy…  Continue reading the text version →

Or fast forward to the Q&A session in the video below.

Reduce Oil Imports by 1/3? Can we do it all with fuel efficiency?

Posted on by Jack Rivkin
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The short answer is maybe. It would require that vehicles being sold ten years from now would have to average 75 miles per gallon—not impossible, but  improbable–unless. It requires political will, higher and real CAFE (fuel efficiency) standards and continued technological improvements or a gasoline price that rises substantially. The latter two are the factors about which I have the most confidence.

I hate to do this, but we need to understand the numbers. Try and stick with me on this. These numbers are rough but get us into the ballpark.

We import 9 million barrels of oil a day, about half from OPEC by the way. So we need to get rid of 3 million barrels a day or 1.095 Billion barrels a year. Now, those barrels don’t just go into making gasoline, but let’s make the leap of having all that reduction come from gasoline.  Based on refining experience, each barrel of oil typically produces about 19  gallons of gasoline (there are 42 gallons in a barrel). If we are to get rid of 3 million barrels of oil per day that means we need to reduce gasoline consumption by about 46 Billion gallons (42 gallons per barrel x 1.095 Billion barrels);  that’s out of the 160 Billion gallons consumed each year by the 240 million vehicles on the road today. (Notice that I capitalize Billion. We are talking BIG numbers.)  Those vehicles, each traveling about 12,000 miles a year, are actually averaging about 18 miles per gallon. To think about it another way (inverted), each vehicle is consuming about 0.0556 gallon per mile or 0.00132 barrel per mile. Pretty exciting so far…

Over the next ten years at a scrappage rate of 5% a year we will replace half of those 240 million vehicles. That’s where the reduction in consumption has to come from.  Let’s calculate what the mileage improvement has to be to eliminate those 1.095 Billion barrels a year.   Currently the half of the fleet that will be scrapped, which is less efficient than the whole fleet, is likely consuming about 1.8 Billion barrels a year or 4.93 million barrels a day. We would need it to be consuming only 1.93 million barrels per day or 0.705 Billion barrels a year or 29.61 Billion gallons per year. If each vehicle in that half of the fleet is traveling 12,000 miles a year it would have to be averaging about 49 miles per gallon. You can do this calculation yourself by dividing the total mileage for the fleet (1.44 Trillion miles) by the gallons expected to be consumed (29.61 Billion).  To get that average for the 120 million vehicles assuming a linear increase in miles per gallon over that ten-year period, the vehicles bought in 2022 would have to be averaging 75 miles per gallon.  While the all-electrics are already getting over 100 miles per gallon equivalent and many of the hybrids over 50 mpg it is still a stretch to think that we will get the average on all vehicles sold in a year up to 75 miles per gallon in 10 years or about 50 miles per gallon in 5 years.  It is not impossible, but would require one hell of a change in the growth path for highly fuel-efficient vehicles, supported by significantly higher CAFE standards.  The problem is we are starting with only 40% of all vehicles being subject to the higher CAFÉ standards. We have a lot of light trucks and real trucks on the road.

We should strive for all 3 million barrels a day coming from fuel efficiency. As I said, political will, CAFE standards, and technology are required, and higher oil prices are a given unless we do this. And, by the way, every million barrels a day of gasoline we don’t use, reduces CO2 emissions by 148 megatons per year.

Do We Need a Price On Carbon?

Posted on by Jack Rivkin
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In his January 10 Op-Ed piece in the NY Times, http://www.nytimes.com/2010/01/10/opinion/10friedman.html?scp=8&sq=tom%20friedman&st=cse, Tom Friedman makes several points about where things stand in the Energy Technology race and reaches the conclusion that China may be winning and will continue to win unless the US gets serious about energy legislation and carbon pricing. In recent days, starting with the State of the Union address, we have heard a bit more noise from the current administration on the energy front–nuclear power, additional subsidies, no capital gains on start-ups and maybe, a cap-and-trade system or some form of establishing a price on carbon. Maybe it will happen, and, maybe it is necessary for the developed world, where replacement of existing carbon-based energy is the principal requirement. In China, India, and much of Asia, new energy sources can be put in place to meet demand growth—a very different set of economics. And the markets are big enough to drive prices down a volume-related cost curve in addition to cost reductions from new technologies and systems. It allows room for more experimentation. It is a requirement if one really wants to be energy independent. Last year China did import 4.1 million barrels of crude oil a day, a little less than half of what the US imports. But this is likely to grow as auto sales grow, unless… See the April post, “China and Electric Cars—The Stakes Have Been Raised.”
China doesn’t appear to need a price on carbon today to look for alternative energy sources. It understands the relentless energy demand it faces as its economy grows and the pressure that would put on existing energy prices. And it understands, politically,  it cannot continue to pollute its air and water. In my visits there I have even seen some evidence that it understands the Climate Change risks from continuing CO2 emissions.

A brief story: In June, 2008, at a UNEP meeting in New York, I was asked if I could name one thing that one country could do that would accelerate the path toward alternative energy adoption and CO2 reduction. I responded “I guess the expected answer would be that the US should do almost anything. But since I do not think it will, my answer would be for China to institute a $50/Ton Carbon tax. This would accelerate the pace of change in China and would likely shame the rest of the world into responding in kind or with a serious cap-and-trade system.” Immediately the Chinese delegate asked to speak. She started with a very logical argument that China was in the early stages of entering the developed world with a low GDP per capita and such a tax would be a burden on many of the people finding their way into its new economy. However, she closed her statement by saying that China could not institute such a tax unilaterally (my emphasis). An interesting choice of words. The truth is, if China did institute an internal carbon tax, it would dramatically accelerate its alternative energy adoption and innovation. The US would spend way too much time figuring out how to respond and would then be in real trouble in Tom Friedman’s race.

At the moment, it is still a race. We shouldn’t require a price today on carbon to stay in the race. It should be apparent that the present value of tomorrow’s prices for carbon and the cost of climate change would justify alternative energy adoption and innovation today. Unfortunately, our system seems to require that the price be explicit before we really get serious. And, maybe, once the Western World as a whole has an explicit price, Asia will get explicit as well. Then we will see if it stays as a race between countries or simply becomes the race to save the planet.

Trade Deficits, Energy Independence and, Oh Yes, CO2 Emissions

Posted on by Jack Rivkin
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Our trade deficit with the rest of the world widened in September to $36.5 Billion, more than was expected.  Oil prices, a weak dollar and a rising deficit with China were viewed as the culprits. To the extent the trade deficit widens it reduces the growth of GDP. So economists are lowering their growth rate numbers for the third quarter and shaving numbers for the future as well. With President Obama’s trip to China in the news, journalists and others have jumped on the “undervalued” Chinese currency as a systemic problem that China must correct to solve the US’s trade problems and maybe those of the rest of the world as well.  It is highly unlikely, in my view, that a rise in the value of the yuan would do much beyond shifting the manufacture of some of the goods the Western world is buying from China to other Asian countries. I also think those countries, which already have strong trading relationships with China, would remain within the Chinese supply chain.  Nominally, our trade deficit with China might shrink, but it would rise with the other lower cost countries within the Asian sphere that are increasingly an integrated  part of the new center of manufacturing for the world. Of course, in the short term, deficits would rise as US companies would not easily shift from the established supply chains they have which are working well. Some combination of profit margins falling and prices rising on finished goods would be the more likely result.

So let’s, instead, turn to something that we control that would over time reduce our trade deficit—eliminating imported oil. I wrote about this in my post “Our Mileage Standards Are a Joke,” but let’s do it again with some refinement.  I apologize for all the numbers but we have to deal in facts if we want to get to a solution:

We are still importing close to 10 million barrels of oil a day, about half from OPEC (with Saudi Arabia and Venezuela the biggest), a fourth from Canada and a little more than 10% from Mexico. We have about 240 million cars on the road traveling about 3 trillion miles a year, consuming 4 billion barrels of gasoline or about 11 million barrels per day. At a scrappage rate of 4.5% a year we will have a new fleet of cars on the road in 20 years.  By the way, the current rate of new car sales is about equal to the scrappage rate.  We aren’t adding to the fleet. If we pushed our mileage standards up to get us to 55 miles per gallon on new cars in 20 years (which is where the rest of the world is going already), our usage would only be 5 1/2 million barrels per day on its way down every year after that as continued scrappage eliminated the lower mileage vehicles. Given what we are seeing already from the new start-up car companies and Ford and GM I think we could blow those standards away. I also think scrappage would accelerate if there was a real breakthrough in miles per gallon on a broader class of new cars.  The eVolt gives us a hint of what could happen.

So what about the trade deficit?  Well, the reduction of 5.5 million barrels per day of oil equivalent at, say, $70 per barrel (pick your price) is a $140 Billion annual reduction in imported oil. That is giving no credit for exports of the technology created to meet these mileage standards if the US government truly supports the development of these technologies within this country. The ARRA and DOE grants to new vehicle and battery companies are a start.  It also gives no credit for a possible share gain by US based auto manufacturers as the new technologies grab hold.

And CO2 emissions? A little more problematic a calculation since it depends on what gets one to 55 miles per gallon.  The simple calculation is the elimination of 83 billion gallons of gasoline at 20  pounds of CO2 per gallon or about 830 Megatons of CO2 per year.

Certainly, this is not the only thing we can do to reduce the trade deficit, but it provides a partial solution to existing geopolitical, economic and climate change problems that we don’t really seem to be addressing.

Cash for Clunkers is a bit of a Clunker

Posted on by Jack Rivkin
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On one level “Cash for Clunkers” (CfC) is viewed as a big success. The first $1 billion was used up in a month and 245,000 new cars, 45% from the US car companies,  were purchased.  Congress looks like it is adding $2 billion more to the program, which the government now believes will be spent in another month.  This compares to its initial forecast that the first billion would not be spent fully until November, when the program was scheduled to end.  The seasonally adjusted annual rate (SAAR) of sales in July was 11.2 million. According to Reuters, 994,000 new cars and light trucks were actually sold in July, down 12.1% from a year ago, but up 30% from the previous month.

Without going into great detail, here is a shorthand review of the CfC program. If one trades in a car less than 25 years old that gets a rated 18 miles per gallon or less, one can get a reduction in the price of $3500 if the car purchased gets at least 22 miles per gallon and the pickup in mpg is 4 to 10 mpg. If it’s over 10 mpg the reduction is $4500. One can further negotiate with the dealer on the value of spare parts in the car.  The actual engine block and other critical parts of the car have to end up in the scrap heap. The dealer has to certify a number of elements of the transaction before receiving the rebate. The money is being diverted from a loan program related to green energy.

This seems like a pretty good deal for a new car buyer, particularly if he or she was preparing to trade in or sell a used car anyway. It’s an easy calculation to determine whether the CfC provides a better deal than a straight trade-in.  11.2 million SAAR of sales is about at the minimum replacement rate for scrappage one would expect from the existing fleet of about 240 million cars and light trucks. No doubt, this did accelerate some car sales, likely borrowing from the future but reducing inventories—some might say too much—, providing traffic and cash flow to the dealers, preserving some jobs and boosting the economic statistics. Combined with some other factors, such as better employment stats, maybe this provides a boost to consumer confidence, which is an important factor in getting the economy moving in the right direction. I’m just not sure that the numbers really add up. Let’s look at a few.

If you want to see a very good analysis of many of the metrics on this program you can read Matthew Wald’s piece in the August 8, New York Times, “Doing the ‘Clunker’ Analysis”: http://www.nytimes.com/2009/08/08/business/08clunker.html?scp=1&sq=doing%20the%20Clunker%20calculus&st

I will paraphrase some of what he says and add a bit to it.  It looks like the stats on the clunkers are that they averaged about 16 mpg while the new cars purchase averaged close to 26 mpg. If, on average, these cars were driven 12,000 miles per year there would be a savings of about 280 gallons of gasoline per car. That’s about 1.6 million barrels of gasoline a year for the 245,000 cars or maybe $202 million less spent on gasoline (at $3/gallon x 42 gallons/barrel). Since a gallon of gasoline emits about 20 pounds of CO2, the 67 million fewer gallons of gasoline consumed reduces CO2 emissions by 670,000 Tons per year. Over a 25 year life that would be 16.75 million Tons of CO2.  Without taking into account the cost of money over 25 years that still comes out to about $60/Ton of CO2 that was eliminated from the atmosphere. Is this the target price for cap and trade or a tax? Granted, as discussed above, this program is doing more than just reducing CO2.  But, ultimately, at the lowest cost possible, reducing CO2 emissions is what has to happen. We found that the program worked better than expected.  Why not raise the bar to a bigger spread between the clunker and a new purchase.  Every purchase done today will be producing emissions for close to 25 years.  What if the spread would have been 15 mpg rather than ten?  Of course, at that spread the US car companies would not have gotten 45%.

I did have an interesting e-mail dialogue with a terrific car dealer in Wisconsin, Frank Hallada, who has both GM and Ford dealerships.  His experience is anecdotal, but somewhat telling.  I will quote him direct:   

“The “Cash for Clunkers” has certainly spurred interest in the car business.  The incentive is to the consumer with the clunker….. We have been giving the customer credit for the monies, much like a rebate.  We have currently delivered 13 new vehicles and have yet to receive an approval status from the government.  The paper work is the responsibility of the dealer and the dealers are finding it to be a bit complicated.  We have been told that we would receive payment in 3-7 business days of an approved claim.  We have 7 claims that are a week old and are still in the under review status.  I spoke with 3 dealer friends on Saturday and none of them have received payments.  We will be required to trash the motor of the clunker 7 days after payment from the government.  We will then sell the vehicle to an authorized salvage yard for no more than $50. 

I believe the program could have been successful with a $2,500 rebate.  All but two of our clunkers have a value of $1000 or less.  The demand has slowed in the last few days.  I think the biggest problem with continued success,will be the availability of new vehicle inventory.  I have sold out of the most popular models at both the Ford and GM store.”

I am not sure that the program is really accomplishing what it was expected to. It has been a nice gift to those with clunkers, particularly if Frank’s experience is typical. But, it is truly replacement demand, not new demand.  And, it probably means that the buyers took on additional debt to buy the new car, or used a substantial amount of cash that might have been available for other uses. $60/Ton of CO2 reduction, at best, seems a high price to pay, particularly if the loan program, which was primarily for capital stock which results in real growth, is not replenished.  If the additional $2 Billion is used up in this quarter, it will make the quarter look quite good, but the fourth quarter will look less good.  Another example of unintended consequences. And, no real step forward in true carbon reduction.

Auto Bailouts Revisited and a Change of Heart

Posted on by Jack Rivkin
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On January 2, William Holstein had an op-ed piece in the New York Times titled “GM’s Secret Success.” The piece made the argument that Rick Wagoner had overseen a major transformation at General Motors, and that the company was poised to reestablish itself. Holstein made the point that Wagoner should not be the scapegoat for 50 years of mismanagement. It was a terse but well-written argument to take a closer look at what had been accomplished and not react precipitously. It prompted me to pick up Holstein’s book, “Why GM Matters: Inside the race to transform an American icon.”

I have to say that, in spelling out the history of GM with a concentration on Wagoner’s roles in the more recent history, Holstein makes a very cogent case for why the “small” sum of $37 Billion compared to what has gone and will continue to go to the financial institutions, would be a very good investment on the part of the US government. He does see Chrysler ultimately being absorbed by another auto company, but makes a very strong case for GM. The case is based on a fairly detailed analysis of the changes that have been wrought at GM in terms of cost, design and new technologies. I was impressed. While Holstein wasn’t explicit on this point, one could imply from what he wrote, that the technological changes of which GM is in the midst, could be the foundation for a big piece of the type of innovation and growth that came out of the auto industry after WWII.

This is a bit of a stretch, but one could envision the manufacturing changes, on-board information systems driven by OnStar and the move toward electric and other drive trains as being a significant element in job creation, clean energy and energy independence, with ripple effects on other manufacturing efforts in the US and elsewhere. This could be a significant part of the revitalization of American industry based on technology and a willingness to change.

If Wagoner and his team actually can make it through this financial crisis, complete the restructuring of this behemoth of a company and become an example of what can be done in American industry, it would be a great success story in what will be a difficult period. No doubt, the equity value of the company could go lower or disappear in the near term, but this strikes me as a better bet than what one sees going on thus far with the stimulus package and the financial industry bail-outs

We all have a tendency to look for instant success. Listen to the pundits talk about the markets’ negative reactions to the various efforts thus far to right this ship, as if a different specific action on the part of Congress, the Fed and the Administration would have produced a different response in the markets. Changing a company of the size of GM takes enormous effort and time. I accept what Holstein has written, and I take back my view that a bankruptcy before money goes in would be a better course. I would urge all to at least read Holstein’s op-ed piece. http://www.nytimes.com/2009/01/03/opinion/03holstein.html?_r=1&scp=5&sq=op%20ed%20General%20motors&st=cse might get you there. The book is also worth reading, and I hope that Congressional and Administration staff members are reading it and informing their bosses. Chapter 11, alone, about the development and promise of the OnStar system could actually make one want to go out and buy a General Motors car. I think I will wait until the mileage gets better as well—but that’s coming.

I was going to have this entry in the blog be about the sad story of the US electric transit systems and GM’ and Standard Oil’s sad roles in their demise. I still may write that at some point, but Holstein’s writings make a strong case for not punishing the GM and the UAW of today for past sins. There seems to be a strong element of that at work, maybe combined with a number of Southern congressmen who see the demise of Detroit benefiting the non-US auto manufacturers in their specific states. They may not recall the subsidies provided to those entities to locate their plants in their territories, as they decry the loan requests of two of the Big Three.

Our Mileage Standards Are a Joke

Posted on by Jack Rivkin
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So how do all the issues below regarding the quid pro quo for a bailout relate to Contracarbon?

If the CAFÉ standards were high enough, and the economics worked, the need for oil from other countries (except maybe Canada) would ultimately go away. The 2008 CAFÉ standard for combined light trucks and passenger cars was 22.5 miles per gallon, up from 17.5 mpg in 1982 (!). For passenger cars only, we have gone from 24 mpg in 1982 to 27.5 in 2008. We have said we are going to 35 mpg by 2020. The California rules would push that to 37. Of course Europe, Japan and China are at 44, 46 and 36 already with objectives in the 50’s in the time frames we are discussing below. If we instituted serious standards and supported the new car companies that already can get us to 100 mpg or better, we could get to 55 or 60 mpg for the whole fleet by 2030. And the cost per mile could be significantly less than it is today. I can take you through the calculations, but, trust me; at least half the 10 million barrels of oil we currently import every day could be eliminated. That would happen through a combination of conventional fuel efficiency and alternative power trains.

The sooner we get to higher mpg the sooner this will happen. The US auto fleet of about 240 million vehicles takes about 20 years to turn over at the historical rate of scrappage—about 4.5% of the car fleet goes to the scrap pile each year. Currently, that is about the level of new car sales. That level is logical. In this economic environment and with some belief that fuel economies may improve significantly in the next few years, why would anyone buy a car unless her current car fell apart or was just uneconomical to operate? That doesn’t mean the person scrapping the 20+ year-old car would buy a new one. But as he traded up, ultimately, at the end of the food chain, someone would buy a new car.

The modest improvement in efficiency from older to newer cars does, by itself, reduce emissions. If we could quickly get to higher CAFÉ levels and keep the new car purchases at the scrappage level for a few years (and keep miles traveled flat), we could become significantly less oil dependent in 20 years and reduce CO2 emissions by close to 1 Gigaton per year. 20 years seems like a long time, and the goal of 60 miles per gallon for the fleet seems problematic—at least in the States. But, in the scheme of things, both objectives are reachable. However, they aren’t reachable unless we set them as objectives. In 40 years, if we can’t get to double those objectives, shame on us. The truth is, if we don’t develop the technology to do it, someone else will. That would be a big loss for the US economy. I take full responsibility for these calculations and conclusions, but the early work on this was done by Saurin Shah when he was at Sanford Bernstein and which he continued at Neuberger Berman. He has a chapter coming out in a book on transportation electrification very soon.

Trains and Planes, or more generically, public mass transportation becomes important as well. Reducing or stabilizing VMT (Vehicle Miles Traveled) by substituting mass transit can be a significant factor. Up until recently we were car-traveling about 3 trillion miles a year in the US. Currently, the average vehicle produces about 1.1 pounds of CO2 (or equivalent) per mile. (SUVs are at 1.6. A Prius is at .55.) In the last 12 months, for the first time in a long time, we dropped 30 billion miles. That’s 33 billion pounds or 16.5 million tons of CO2. I hope it doesn’t take a depression to keep those mileage numbers dropping. It does take a commitment to mass transit. More on that later.

Trains, Planes and Automobiles–but mostly Automobiles since that’s where the bailouts are going

Posted on by Jack Rivkin
Reply

I have to start out with a bit of a rant. Trust me, this will relate to ContraCarbon at some point.

 

I have a problem with money going to the US auto manufacturers before they go into Chapter 11 bankruptcy.  We know that under Chapter 11, the auto companies will keep operating, but they will restructure their finances and their operations. Creditors and equity holders will suffer. The US government will likely provide the funds to keep the companies running as Debtor-in-Possession. Some say that consumers won’t buy a car built by a company in bankruptcy. That may be, although the airlines go in and out of bankruptcy often and still carry passengers.

 

A few facts: In 2007, the US auto manufacturers directly employed about 240,000 (less now) workers in this country —a little more than half on the line. By the way, 240,000 is also less than half the number of jobs lost here each of the last several months.  The non-US auto manufacturers employed 113,000 workers in this country with a higher proportion working on the line. The auto parts manufacturers, employing about 640,000 workers, service both the US and non-US manufacturers, although the US parts content of a US manufacturer is higher. The retail segment, dealers and parts sellers, employs over 1,700,000 workers.  If you want more facts on auto employment and its projected future try these URLs:  http://www.bls.gov/bls/auto.htm; http://www.cargroup.org/documents/Apale_book8a_001.pdf. If you do check these out, you will notice that the reported numbers differ between the two reports. Just a reminder to take all “facts” with a grain of salt — even mine.

 

I have a view that car sales are pretty fungible, particularly in this economic environment. If GM sells a car, Honda probably doesn’t. Net job losses ultimately relate to overall car sales. So, how would you feel as an auto worker in Tennessee employed by Honda, or a Honda car dealer, watching GM and Chrysler (and maybe Ford) getting money from the US government to keep their workers employed while your job is being put at risk? How would you feel as an employee (or investor) in a start-up high-mileage/low-emission car company trying to raise a few bucks, watching all this money going to companies that are dealing with the mileage and emission issues incrementally at best?  [Full disclosure: I am a director of Idealab which has an investment in a clean-tech vehicle company, Aptera. I am also an advisor to that company. We are always trying to raise a few bucks. http://www.aptera.com].

 

Let us hope that, if the new administration proceeds with the auto industry bail-out, it will consider directing some of this capital to bail us out of our CO2 problem in the transportation sector.  That would require instituting some significantly higher CAFÉ (Corporate Average Fuel Economy) standards on new cars as a quid pro quo, providing incentives or funding with some of the bail-out allocation going to the clean-tech transportation companies, truly dealing with alternative power sources in an intelligent way and supporting mass transit.  Stay tuned for what might work