Monday, January 25, 2010

The Old GM Again?

I parked next to an imposing, new black GMC Terrain SUV the other day. The GMC badge, as the Sierra truck commercials say, is supposed to represent "commercial grade" light and heavy duty trucks built for the demanding user, not for namby pamby wannabes. After getting over the boxy looking body, the vehicle felt very familiar, in fact it felt just like the successful, and innovative Chevy Equinox SUV.

Going back to the Web reviews, the Terrain is in fact, just a rebadged Equinox, with a new skin. This is very disappointing, because it goes against all the hype about the new GM, namely a company with a focused portfolio of distinct brands, each bringing their own distinct combinations of innovation, performance and value to their customers.

Apparently, according to one car reviewer, the Terrain was a sop to those GMC dealers who cried for a "new" crossover SUV. So, GM gave 'em what they wanted. This is the old sin of Chrysler and GM in the past, rebadging vehicles and selling them through different dealers at different prices, alienating the customer. As GM announces today the appointment of a "new" (or rebadged board member) CEO, let's hope that this diluting of brands stops before it becomes a disease again.

Saturday, January 23, 2010

Cutting Off Your Nose

Failing to renominate Ben Bernanke as Fed Chairman is akin to cutting off your nose to spite your face. Until the global financial meltdown, the primary role of the Federal Reserve Chairman had been to oversee monetary policy, interact with other global central bankers, and to testify before Congress with sober, wise, and inscrutable remarks that kept the Fed Watcher industry at full employment. In this role, given that he understands economics is more complex than Ayn Rand, he is far superior to his predecessor, Alan Greenspan.

Unfortunately, the global financial meltdown required, perhaps for the first time since the 1981-82 recession, a different role and a different skill set. Getting a handle on the lax underwriting standards at banks required a Chairman who understood how the Fed's army of bank examiners worked and how they could have become a real asset in taking control of the culprit banks. Emerging problems in the securitization market from 2005 required a deep understanding of the manifold conflicts of interest among the players in the markets from the investment banks to the rating agencies. Bernanke failed miserably, notwithstanding any revisionist history about low interest rates having no impact in fomenting the crisis.

However, it would have been reasonable to assume that a Secretary of the Treasury would have been able to supply the capital markets expertise. Secretary Geithner, having come from the New York Fed was part of the problem. He was the CEO who fiddled while the credit crisis simmered among the New York money center banks. Recent documents and e-mails show that he appears to be deeply conflicted in his relationships with some of the key players in the crisis. As much as I hate to say it, this is all water under the bridge.

Talk of circumscribing the powers of the Fed, creating another institution to oversee monetary policy, and nominating Paul Krugman for Fed Chairman are all absurd notions, and they should be dismissed on their face. These measures would cause consternation among global central bankers and send the dollar down (except there's the question of what currency to hold, surely not the Euro?) These are all nothing more than political grandstanding by both parties. Bereft of ideas, and lacking in both insight and the ability to work across the aisle, they choose to appeal to the basest political instincts of some of their vocal constitutents.

Paul Volcker can still effectively fill the vacuum and help us out of this dilemma. As an outsider, he can speak freely and serve as a "heat shield" for Bernanke and Obama. About a year ago, he wrote a paper that decried the ability of money center banks to engage in proprietary trading, while shifting ultimate risks to the taxpayer. At the same time, they can compete for insured deposits. His ideas fell on deaf ears.

Reconstituting Glass-Steagall, the Cassandras said, would render our markets uncompetitive and trading would move elsewhere. Just where might that be? Wall Street traders wouldn't like the coffee in Beijing, the bars in Dubai, or the comedy clubs in Berlin. These are empty threats and posturing that are aimed at paralyzing meaningful reform.

Renominate Ben Bernanke--it's the only realistic and pragmatic choice and move away from looking in the rear view mirror.

Give Paul Volcker a real portfolio to get something done. Tell the chairman of both parties to call off their dogs. Let Volcker, Bernanke, Geithner and a few key leaders of both parties get in a room to agree on key principles for meaningful financial reform of the capital markets, securities regulation, investor protection, and corporate governance. As John Lennon said, "Imagine."

Tuesday, January 12, 2010

More Ethanol Follies

Stanford University's Woods Institute researchers, Diana Ginnebaugh and Mark Jacobson presented a paper at the December 15, 2009 meeting of the American Geophysical Union in which they find that combustion of E85 produces different byproducts than does the burning of gasoline, including higher amounts of aldehydes, which are precursors to ozone. The additional aldehyde concentration compared to gasoline is smaller at higher temperatures, like in Los Angeles, but it is markedly higher in colder temperatures like here in Minnesota.

Cornell Professor David Pimentel was one of the earliest and most prolific critics of ethanol, both from the energy balance side as well as from the ecology and biodiversity side, which is his specialty.

In 2006, then Cargill CEO Warren Staley came at it from a totally different angle:"If it's ethanol and biodiesel, we have to look at the hierarchy of value for agriculture land use: food first, then feed and last fuel," he said. Using scarce land for transportation fuels was not good stewardship when world food production would have to double in the next twenty years in order to feed growing and more affluent populations.

What kind of dollars have we thrown at this folly? A recent study by Rice University's Baker Energy Center finds that the U.S. government spent $4 billion on biofuel subsidies in 2008 in order to replace about 2% of the domestic gasoline supply. The average cost to the taxpayer was about $82 a barrel, or $1.95 a gallon.

Tuesday, January 5, 2010

Doing Nothing Is Sometimes Best

For several years, Jeff Immelt of GE has spoken about GE's appliance division as being a non-core business that was out of sync with the GE Capital juggernaut and with the industrial businesses. Appliances were increasingly becoming commodities, with Whirlpool becoming the closest to a dominant, global marketer. The entry of manufacturers like Samsung and LG into the U.S. market increased the level of innovation and competition. A sale of the entire business to Whirlpool was probably not feasible, due to both economics and to anti-trust issues. A sale to either Samsung or LG was probably not in the cards either, as both those companies had created brand equity quickly and already had efficient manufacturing capacity. There were some concerns about a potential fire sale, but then the consumer meltdown began, and GE took the divestiture off the front burner.

Now, with the passage of time, GE Capital looks like the non-core business. GE recently announced the formation of GE Home and Business Solutions, which will be comprised of GE appliances, lighting and electrical switches, and sensors and factory automation. What gives? It's all the talk about the Smart Grid. In this new vision, which is being driven by the Department of Energy and the electric utilities, an intelligent grid will, among many other things, manage load and offer time-of-day rate savings to consumers by communicating with and controlling "smart" appliances, like refrigerators, air conditioners, washers, dryers and cooking devices. As this vision evolves, there would ultimately have to be a replacement cycle for the major energy hogs, especially refrigerators and air conditioners, but also the laundry products. This cycle would probably be subsidized with rebates, as has the early generation of Energy Star appliances.

So, the commoditization of appliances would be halted temporarily, as manufacturers ride this new cycle and attempt to differentiate their technological solutions for communicating with the Smart Grid and for controlling the compressors and motors in the units. There will likely have to be some modifications to the motors and compressors themselves if they are to be subject to frequent cycle adjustments by the load balancing mechanisms. Lighting is clearly part of this issue as well, which is included in the GE Home and Business Solutions Group.

Combining these with factory automation and sensors gives the company the potential to compete with Johnson Controls and Honeywell in these areas. The new executive in charge of this division is also tasked with developing the new generation of GE leaders, which is quite interesting because this business will need lots of new ideas, including embedded electronics, hardware and software in order to succeed. It sounds like a fertile ground for the next generation of leaders. Although it's not a slam dunk by any means, by not reacting rashly and by waiting, GE Home and Business Solutions may have a meaningful, value-creating opportunity on its hands with appliances as opposed to a fire sale.