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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 pro-
tect 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(operating and maintenance costs); (2) the labor force is obsolete as it does not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 manage-
ment; (2) present management lacks vision for moving forward with the manu-
facture of the transport vehicles the country (world) desperately needs; (3) man-
agement 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 sub-
sidy of fuel costs have left U.S. manufacturers producing products that are not
globally competitive; (4) continuing subsidy of personal auto use over mass tran-
sit has created a situation of very slow technology adoption cycles that have de-
pressed 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 tech-
nologically obsolete and must be replaced within the next 10-15 years. Why? Its car-
bon 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.

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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 re-
quired 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 tech-
nology 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 technologi-
cal innovation. There are few compelling reasons for consumers to periodically up-
date their vehicles to new technology. Needed changes to market drivers for shorten-
ing 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 trans-
portation 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

1 In Venezuela and Saudi Arabia, gasoline use is subsidized and costs twelve cents and forty-
five 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).

2A 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 de-
struction of public goods onto those market actors responsible for the taking of the public
goods in question” (Wikipedia).

3 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.

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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 lim-

ited to total maximum compensation of $500,000 per annum in 2009 dollars, ad-
justed 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 com-
pany 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.

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

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20-YEAR STRATEGIC VISION FOR GENERAL MOTORS

Rapidly differentiate by producing vehicles that no competitor is capable of manufac-
turing; 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 pro-
tect 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 vehi-
cle models are based. Drive train power is provided by plug-in hybrid/diesel en-
gines. 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 dis-
tribution 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 year-
to-year.

GM becomes the manufacturer of components only in situations where existing glob-

ally 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 compo-
nents 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 aver-
age mileage), (c) etc.

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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 poli-
cies 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 pos-
ture than is unmatchable by other car manufacturers, and directly meets the envi-
ronmental 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.

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