Tax Funded Head-Start for Low-Cost-Country (LCC) Toolers

Taxpayer Funded Head-Start for Low-Cost-Country (LCC) Toolers

By: Joe Brown

May 09, 2009

 

Common Theme Playing Throughout North America

 

Thirty minutes before your shift starts you calmly stroll
through the parking lot, newspaper tucked under your elbow, coffee in hand.

 

Everything looks status quo, but you wouldn’t know since you
arrived quite early. As you pass the time clock to catch up on the news in the
employee break room something in your peripheral catches your eye. Gone are the
normal columns of timecards, replaced by slips of paper in the ugliest shade of
pink you’ve ever seen.

 

After a quick double-take, the knots start forming in your
stomach, breaths become quicker and soon enough you’re damn near a full-blown
panic attack.

 

Heading out to your car you pass by a few of your close
friends and coworkers who are moments away from having their lives turned
upside down. At a loss for words, your eyes glaze over them and pass right by
them without a sound.

 

On the drive home you can’t imagine the shock and anxiety
your pregnant wife will experience once you break the bad news. You imagine the
angst and confusion your two young children will have from this, regardless if
they fully understand.

 

After putting the kids to bed the two of you stay up talking
for hours stressing over the adjustable-rate mortgage that’s due to spike next
week. Car loans, student loans, piling utility bills and a lengthy list of
other debts consume your thoughts. Finally, you both relax after you decide to
tweak the resume and fill out applications to three of those places you’ve
thought about applying to before.

 

The next mornings’ news leads off with GM’s decision to more
than quadruple their normal summer shutdown from two weeks, to nine weeks.

 

A short time later Chrysler announces preparations to file
Chapter 11. By now, the phone is starting to ring incessantly, and you know why
but you can’t handle it. It’s easier to turn the ringer off.

 

Even though your wife’s due date is in 12 days, those COBRA
payments have drained the little savings you had left ever since your employer
reduced health insurance coverage and cut your divisions’ hours.

 

Surprisingly, you have maintained your emotions fairly well
considering the circumstances. When your tax bill arrives its obvious the funds
in checking and savings combined won’t cover it. Determined to do the “right
thing”, you exhaust any and all resources to pay your taxes. Unfortunately, it
means selling your most prized possession; a fully restored—with your own
hands—1967 Ford Mustang Shelby GT500.

 

Another week passes by when you
check your email to find more gut wrenching news. Two of your closest coworkers
wrote to let you know that the same employer who unexpectedly terminated their
North American operations have announced plans to open three new plants in
China, Korea and Taiwan.

Suffice to say that the hair on
the back of your neck is raised and your blood starts boiling. That quickly
turns to sadness when it’s announced that Chrysler will be shutting its
Twinsburg, Ohio stamping plant down. The same plant where you spent the first
10 years of your career, starting out as zit-faced teenage apprentice. But
that’s nothing compared to what could possibly happen next, as unimaginable as
it sounds. 

 

As the tension mounts with GM
& Chrysler bankruptcies, several people you trust tell you that as insane
as it sounds, the U.S government may provide more funding—taxes from you and
me— only to have it funneled directly into Low Cost Countries to build new
plants and create more jobs for their people.

 

Good lord, can you imagine the social unrest and potential
upheaval if that happens? I’m not sure I could blame anyone for completely
losing their marbles if should that be the potentially doomed, if not
predetermined, fate.

 

Welcome to America.

 

Rocking the Cradle of Innovation

 

What if we added that not only were taxpayer funds being
funneled to China, the very recipients of these taxpayer funds, (GM, Chrysler
and hundred’s of Tier 1 parts manufacturers) gave the Chinese competitors to
North American manufacturers a 5-9% cost advantage by paying these Chinese
suppliers on far better terms than they would pay say a company in Grand
rapids, Detroit or Windsor.

 

I am guessing—hoping—outrage would be rampant throughout
North America

 

Several weeks ago, I did my best to shed light on what would
happen to the North American tooling industry under pre-planned Good GM &
Bad GM bankruptcy, and for that matter what will play out in Chrysler should
Fiat-Chrysler be birthed from bankruptcy.

 

For those who have or currently are working in the tooling
industry, I think a more telling term instead of ‘tooling’ would be backbone of
manufacturing and the cradle of innovation.

 

Before government can help level the playing field it would
be wise to educate the other 99% of the population. Let’s assume our neighbors
and friends are rational people then the only thing left to do is to put it in
terms that they can easily relate to. After becoming more educated, the most
desirable action they can take is to inundate their local, city, county and
state elected political representatives. 

 

Perhaps that’s easily accomplished by explaining it in terms
of one of the two ultimate guarantees in life—taxes.

 

Price & Cost Mistakenly Linked Together

 

It should be noted before you review my calculations that I
will never be confused for financial wizards like Harry Markowitz or other
Nobel-prize winners. However, if I can calculate this then one of the many
multi-layered and advanced-degreed execs in the finance and cost analysis divisions
of the OEMs can too, right?

 

Of course they can, but with the smugness reminiscent of the
‘smartest guys in the room’ and the arrogance to think the public is naïve
enough to believe whatever they say. That’s nothing new, though. Heck, that’s
been going on since I was in diapers.

 

Recent efforts by many of those in the tooling industry have
been focused on ending the insanity of industry-wide shutdowns due to the
abusive trend of delinquent payments to North American tool, die and mold
companies. It’s no secret that those in the weakest position have been forced
to finance the vehicle manufacturers’ new vehicle launches for years. Toolers
have been the high interest rate credit cards” of the OEM’s new vehicle
launches for over a decade.

 

If that’s the wound then I guess that would make the point
that these same auto companies and tier 1 parts makers are giving LCC’s
progress payments, the salt being continuously dumped—not poured—into the
wound.

 

It’s so inconceivable that this would be happening, but the
fact is, almost without exception, mold and die build outfits in China, India
and Korea are being paid for their work under payment terms that our shops have
been asking for, for years.

 

But, I digress. There are some sharp folks without hidden
agendas that are fighting for the Tier 2 and Tier 3 companies. You can rest
assured of that.

 

Financial contributions from government are the primary
reasons keeping GM, Chrysler, and hundreds of Tier 1 part manufacturers afloat
at the moment. It’s not government’s money, rather yours and mine in the form
of taxes.

 

Unless we’re all susceptible to Jedi-mind tricks, who in
their right mind would vote to support a continuation of financial support to
these domestic OEMs as they feed their addiction to communist labor coupled
with irresponsibly myopic management skills which have slashed hundreds of
thousands of jobs in the North American tooling industry?

 

When Rick Wagoner appeared before the senate committee, he
was asked if any of the governments’ financial support would fund overseas
facilities. He responded with,”Sir, let me just be clear. No funding that comes
out of this would go to fund the facility overseas.”

 

Then I’m not sure why the president of GM Brazil said
shortly after that Wagoner & Co. told him they would invest $1 billion to,
“complete the renovation of the line of products up to 2012.” I’m thrilled
for the Brazilian people who’ve benefited by this with good-paying jobs
surrounded by a prosperous economy. But I don’t know why it’s at the American
peoples’ expense!

 

I’ve never seen more side-stepping some of the empty
promises, aloofness and flat out omissions of truth that’s come out of certain
execs at two of the Detroit Three. I’m leaving Ford out of this because of
certain commitments to North American tooling they’ve made—at least for the
time being. Also, it’s hard to ignore the strategic initiatives Alan Mulally
and Bill Ford Jr. that have moved the company recently.

 

Like the infamous Chicago White Sox leftfielder, Shoeless
Joe Jackson, I hope the legendary story of the young boy tugging on Jackson’s
shirt as he left the courthouse after facing charges of conspiracy and
game-fixing, the youngster said, “Say it ain’t so Joe!”

 

Is that what the North American Tool, Die and Mold industry
will say to the US Task Force and the Canadian government if they move forward
to use taxpayer dollars to save General Motors and Chrysler without instituting
some form of “most favored nation’s status” on tooling payment terms.

 

Are we really going to see US and Canadian taxpayer dollars
used to continue to have GM and Chrysler and their Tier 1 parts suppliers have
North American TDMs wait 5-18 months after shipment for payment on tooling,
while these same companies benefiting from taxpayer dollars offer tool shops in
China and India progress payments.

 

I decided to take a stab at figuring out what the “finance
cost penalty” is for a North American tooler on a typical job with PPAP payment
terms versus LCC who receives progress payments.  I surveyed a number of LCC firms that have
sent me emails asking me about using their services.  While their terms varied from down payments,
payments at T1, and at shipment, with some holding small percentage until PPAP,
the most any company responding from China would expose after shipment was
10%.  Most respondents wanted 100% before
the tool was shipped.

 

Before I give you my “finance cost penalty” (Or maybe I
should call it instead:” The Taxpayer funded LCC Head Start”) let’s look at
some other important issues that benefit the LCC over the US and Canadian
taxpaying toolers in this model where the LCC is paid before shipment and the
NA tooler is paid 5-18 months after shipment.

 

Under these payment terms the LCC toolers are not exposed to
the bankruptcy of GM, Chrysler and any of the Tier 1’s.  Or if they are exposed it is limited to 10%
of the purchase order.  North American
toolers are chewing their fingernails to the quick wondering if they will have
to sue their Tier 1 clients to get money should Chrysler or GM cancel a tooling
program at the Tier 1 level leaving the cash strapped Tier 1 with the choice of
paying for contracted tooling that is worthless to them or stiffing the tooler.
Or will North American toolers hold hostage other tooling destined to this Tier
1 until Bad GM and cancelled Chrysler tooling programs are paid placing Toyota,
Honda and Ford at risk as well as earning a troublesome reputation for their
actions with other Tier 1 parts clients?

 

Under these payment terms the LCC toolers do not have to
invest their capital in delivered goods and thus can invest their capital in
new high tech equipment.  Whereas the
North American tooler has a significant amount of capital tied up in delivered
goods – constipating their balance sheet and credit capacity and is at the
mercy of a bank to continue lending in the current environment.

 

With those other tangible—though not as yet
quantifiable—advantages for the LCC let’s move to the cost disadvantage that US
and Canadian taxpayers are unwittingly delivering to China’s tooling
manufacturers.

 .

 

Trade Terms	At Order	T1	Shipment	At PPAP	Total
Chinese Firm A 1	50%	30%	20%	0%	100%
Chinese Firm A 2	40%	30%	20%	10%	100%
Chinese Firm B	30%	30%	30%	10%	100%
Chinese Firm C			100%		100%
N. American Firm	0%	0%	0%	100%	100%

 Note: Firm A offered two alternatives

 Note: Firm C did not explicitly express
“progress payments”, but their comment was “100% before

Shipment is the Chinese norm”

 

	Months
Tool Build Profile:	Build Period	Carry Period	Cradle-to-Grave	LCC Cost
Scenario A	4	8	12	$114,195
Scenario B	5	9	14	$114,195
Scenario C	8	10	18	$114,195
Scenario D	11	12	23	$114,195
Scenario E	5	14	19	$114,195

Note:
$114,195 was Harbour Felax Group Study, “Vendor
Tooling: The Not-So-Missing Lin”, (3/9/09) report

Page 335 LCC average $ amount
of sampled and compared tooling

 

 

		Holdback	LCC	LCC
Scenario	Holdback	Interest Cost	All In PO	Base Cost
	A	B	C	C – B=D
Scenario A	$11,420	$228	$114,195	$113,967
Scenario B	$11,420	$285	$114,195	$113,910
Scenario C	$11,420	$457	$114,195	$113,738
Scenario D	$11,420	$628	$114,195	$113,567
Scenario E	$11,420	$285	$114,195	$113,910

 

Note: For the sake
of being conservative we backed out a 10% interest component for the “Carry” Period
to arrive at a Base Cost (or the cost without finance charges)

 

 

Interest Costs:
Model assumes linear value creation in the PO during “Build” and 100%
PO value during “Carry” periods.

 

Interest Rate:  6 % p.a.

 

Scenario	Base Tool Cost	Build Interest	Carry Interest	Total interest	Total NA Cost	LCC Cost	Financing Penalty
Scenario A	$113,967	$1,140	$4,559	$5,698	$119,665	$114,195	4.99%
Scenario B	$113,910	$1,424	$5,126	$6,550	$120,459	$114,195	5.74%
Scenario C	$113,738	$2,275	$5,687	$7,962	$121,700	$114,195	6.97%
Scenario D	$113,567	$3,123	$6,814	$9,937	$123,504	$114,195	8.70%
Scenario E	$113,910	$1,424	$7,974	$9,398	$123,307	$114,195	8.23%

 

Note: Harbour-Felax Group Tooling study indicated in
addition to finance charges the following items were not considered in tool
costs from LCC’s

 

1.
Freight, duty, packaging and insurance cost are “set amount
allowable” by OEM versus real costs.

2.
Increased program management effort due to travel costs, language issues, time
zone, management, premium freight and overhead.

3.
Travel costs alone to Asia for one trip can easily exceed $10,000

4. Cost
of Quality; Many Tier 1 suppliers sited this major issue especially with tool
sources in China and India

 

 

Considering the findings of the calculations above I want
you to keep a few things in mind. 
Several of the assumptions made that went into each scenario and
calculation were conservative. Also, don’t mistake those of us in the tooling
industry who say that government “doesn’t get it” for rebel-rousers with
regards to their lack of understanding the impact toolers have on the economy,
national security and innovation in North America. 

 

Let’s assume this article finds its way to one of the
highly-paid spin doctors—cunning and charming as they may be—who rhapsodize to
the media about promising new agendas while systematically deflating suspicions
and accusations.

 

It should be thoroughly understood that GM spokesman Greg
Martin has gone on record stating that GM will absolutely not use any
of the $15.4 billion in federal aid to fund overseas operations, according to
The Detroit News. Any of you within earshot of the Auto Task Force and
government make sure they know that every cent of these loans needs to be
audited. If the money is not monitored, then this could potentially be a
cataclysmic failure with social peace and harmony amongst much of the middle
class at stake.

 

But the chicken-little predictions will never manifest
because GM is being forthright. Again, the federal loans—all $15.4 billion—will
not be used to support
any of the foreign plants or infrastructure. Forgive my suspiciousness here but
wasn’t it announced recently that GM will divest 13 of its 47 U.S plants by the
end of 2010. By 2014 an additional three will be dissolved as well? Then what
does it mean when other reports show GM’s plans to increase the amount of
imports from their LCC locations such as China and South Korea? Think about
that for a minute. A company being dragged into bankruptcy with consistent quarterly losses more than the GDP of
some countries is not going to use any of American and Canadian taxpayer
dollars—a whopping $15.4 billion—worth of your
contributions to pay for plants they can’t afford but plan to use more
(overseas) while closing those in their homeland. Geez, it kind of makes you
think that the only other case would be these LCC governments subsidizing GM or
Chrysler like they have their own for many years.

 

However, I have some confidence so far regarding the
impartial and rational demeanor of President Obama’s Task Force. Surely, the
resumes and accolades they own are impressive.

 

The tooling industry has busted its tail in an uneven
playing field for far, far too long. I truly hope they “get it” and know that
this crucial component of the prosperity of North America is at risk—when it’s
obvious it shouldn’t have to be.

Tags: global protectionism, Joe Brown, LCC's, Lintrio, Tool & Die Updates