New auto factories?

This is a clear proof that financial heads still rule the automobile companies. They have been very successful in taking their companies' towards financial disasters and have not seemed to have learnt anything out of it. Check this link

http://online.wsj.com/article/SB124884028240989277.html?mod=googlenews_wsj#articleTabs%3Darticle

In spite of the existing recession and the low capacity utilisation of the auto industry, Honda and Nissan have announced setting up of new plants in China. The article says that they are doing this to end the slump. Wow! Ever heard a dietitian tell her obese client to eat more? That is what is exactly happening here. Logically the move makes no sense. But finance has nothing to do with logic.

The way I see it, setting up new plants in China to sell cars in China will impact the transportation costs. Instead of importing vehicles from Japan or any other part of the world, the cars can be made and sold locally. They would also benefit from the low labour rates in China. Wonderful - the cost per car comes down. But, what about the capital cost of setting up the new plant? Well, that could very easily be engineered to reflect as depreciation at a low level. This way, the Chinese venture would easily show profits. And the existing plants? Again, the finance wizards are sure to have done something here also. They would probably defer the depreciation for the existing plants or hive them off as a separate company and ensure that the parent company 'shows' profits.

The first thing that makes me sad is that banks do not seem to realise this game. They seem to merely look at ratios and freely lend to companies. So, an over leveraged company can easily pass of its debts to another subsidiary and present themselves to banks for new loans. And, most of these companies do get the new loans they had applied for.

The worse thing is that the manufacturing companies themselves do not recognise their follies. Sometime everything is going to catch up. The recession is here and nothing has happened to make it go away. Some people never seem to learn.

Cheaper way to get energy efficiency

Energy efficient processes have for long been peddled as expensive applications with high pay back periods. The manufacturers of such devices have always lobbied for government support in the form of lower taxes and support. They would then devious devious spreadsheets and use novel jargons to justify and promote their products. Somewhere this is what has prevented these manufacturers from making their products mass based.

Check this link

http://www.fastcompany.com/blog/ariel-schwartz/sustainability/clayton-homes-brings-energy-efficiency-modular-design-multi-famil

A company is designing new homes that are supposed to be energy efficient. They would save the user around USD 40 per year in terms of energy costs. Most important part, they are also cheaper than the regular homes.

This is what the energy efficient products should be. Their capital cost should be at least equal, if not lower than the regular products they seek to replace. That is the only way they are ever going to build up some mass appeal. Rather than using 'clean energy' as a marketing pull they should use the plain simple total cost of ownership concept.

Toyota closing the NUMMI plant

It seems that after the pull out of GM, Toyota is considering 'closing' the NUMMI plant. See the link.

http://www.nytimes.com/2009/07/25/business/global/25toyota.html?_r=1&hpw

The article says it all actually. Workers have willingly given suggestions because they have been guaranteed jobs. And when one facility is closed the motivation in others is surely going to take a hit.

My take is that there is something more than what is in print in this case. I still feel that Toyota can definitely bear the loss making plant for around a year at least. May be this is a ploy to get the unionised workers to the bargaining table. Maybe it could be to prompt the government to dole out sops.

That the plant was a joint venture with GM, and it survived so long is itself a surprise in a way. GM and Toyota have totally different cultures. Now with GM gone, Toyota should have been very happy. So, this announcement of 'closing' comes as a surprise. Somehow I cannot see this happening. We can wait and watch, the drama should climax soon.

How the growth comes

Growth actually comes only when the consumers buy more products. With the population increasing at a steady rate, higher rate of money growth ensures that people buy more. It is this increased propensity to consume that creates overall growth. We would need more electricity, more turbines and more mining. So, if the consumer spend does not increase, and assuming that there is no existing unfulfilled demand, any other indicator measuring industrial growth would be pure a pure illusion.

Check this link -
http://www.hindu.com/2009/05/10/stories/2009051055611400.htm
In a survey conducted by CII for March April 2009, they have said that there is a slight improvement in the manufacturing sector. They have created some categories like negative, moderate and high growth and have said that most of the sectors have inched up in the March April period.

For first, the measures of classifying industries in the three segments have not been specified. I am sure that the survey must have had some measures, but the CII press release or the reporter, assuming a reader of limited intelligence, spared him of details. That these details would have allowed him to make his own unbiased judgement is a different story.

Inn many cases many surveys with an aim of proving growth. Their aim is of course something very noble - maybe to lead to an increase in the sentiment. They use, abuse and twist standard measurements to prove the hypothesis that they had started with. This is a major reason to give categorical data and avoid specifying the survey method and assumptions in reports. The company chieftains having an access to the complete report are of course too busy to go in to the nitty gritty issues.

As far as growth is concerned, without an increase in consumer spending all growth would either be for two reasons -
1. A buildup of inventory
2. Data / Method manipulation
An inventory buildup is nothing but postponing the slowdown. Besides blocking capital, it could have disastrous results of building up stocks that may not sell. Data and method manipulation is like a self fulfilling prophecy. It keeps the firms happy till the time they suddenly have to shut shop. This may be partly due to the psychological behaviour that says that humans create self belief worlds to avoid recognising situations that are potentially dangerous.

A good measure to measure the automobile sector growth would be to trace the out flow of auto loans issued by the finance companies. Finance industries are highly regulated and getting this data would not be a problem. Measuring gowth on the basis of factory dispatches would be skewed by the change of pipeline inventories with the dealers.

In all this circus I can conclude that companies are intent to hide the real growth or fall. They use selective measures at different points of time to prove the point they want to prove. Maybe in some other post I will discuss the motivations for this.

My simple prescription - macro indicators like growth can be measured by very simple and straight indicators. To make real use of the published growth indicators it is very important to investigate the method used and the assumptions. Any jubilation or a planned course of action without this simple probe would be a dangerous step.

Survivors of Overcapcity in Chinese semiconductor industry

The capacity utilisation in Chinese semiconductor industry is at 40%. Check this article here for details.

http://www.circuitsassembly.com/cms/news/8212-nearly-60-of-china-chip-manufacturing-goes-unused-in-q1

Who will survive, the large plants or the small ones? The obvious answer and also suggested by the article was that this low capacity utilisation was a death knell for small and marginal players. There is an assumption here that smaller companies would be unable to compete on technology and price.

The costing that have been arrived for large companies have been with the assumption of close to a full capacity utilisation. These large companies with a larger components of fixed costs would not be able to sell the products at the same price in case of a recession. The smaller and flexible companies with their abilities to produce smaller batch sizes at the same prices as before. So, who would survive?

Besides this it depends a lot on the source of capital. A company with little or no borrowed funds would have no fixed interest burdens. They would definitely find it easier to survive. Assuming that the smaller players would probably be less leveraged this again gives the advantage to smaller players.

The large players however might be able to influence government policies. They might be able to extract interest set offs and other tax decisions. Being larger they of course have a louder voice to influence the government. However this alone will not be sufficient to ensure their survival . The demand needs to pick up faster. All said I would vouch for the smaller players surviving.

Product proliferation

Companies had recklessly increased their product offerings in the last few years. I think in one my the earlier posts I have called this a corporate Hara kiri. Production capacity was a constraint and an increase on variety would mean a higher setup time component. This would further reduce the output.

One thing that has changed is that Production capacity is not a constraint now. Demand has drastically come down. In this period if surely makes sense to offer more variety of products and try to win over more customers.

There are two costs associated with variety. One of them is the cost of setup and changeover. The cost is the value of time in which the machine and operators are not productive. It does not involve an actual cash outflow. More changeovers would mean more idle time and less production and hence the cost. This cost is applied assuming that capacity is a constraint. If there is excess capacity more change overs would not have any impact. This part of the costs could be totally ignored.

The second set of costs would be the costs of inventory. Higher variety would mean a higher variety. Companies would have to take care of these costs. Higher inventories could cause a drastic increase in costs. Companies could look into modularisation or product postponement as a solution to this.

Companies have to and should expand their product offerings. That done, they will have to do it smartly and avoid the costs of inventories that it would create. Costs of set up could be ignored. Check this report on Grainger coming out with its largest ever catelogue.

http://www.inddist.com/article/CA6634851.html?nid=3901

A few months back I would have called it a stupid move. But, with the current reality and the an assumption that Grainger will manage it well, I think it was a smart move.

Location

Dell shifts from Limerick to Poland. Check the link below

http://uk.reuters.com/article/UKNews1/idUKTRE5076PT20090108?pageNumber=1&virtualBrandChannel=0

This change is a continuation in the changing paradigm at Dell. For one it started selling computers through a third party (Walmart) last year. Dell has traditionally been strong in the B2B segment. The move to retail computers through Walmart was probably to take a pie in the individual consumer market. This decision could have been taken as Dell sees a reduced growth or stagnation in the B2B market.

In the individual consumer segment (home segment) the major differentiation is on price, except for Apple of course. This is forcing Dell to look at all possible sources to save money. This includes shifting to a different location and even getting more work done by its vendors. This is a new game for Dell. And like I had written in an earlier post, it is too early to say if Dell will thrive in this change.