The Roemer Report February 1985

TRUCKING AND THE SATURN PROJECT:

GM’s recently announced Saturn small car division has generated an avalanche of press coverage and some probable overkill by politicians seeking to get on the economic development bandwagon. We think what is really relevant for truckers is not the final plant location, but the major shift in management principles that the Saturn project represents. GM, after all, is the classical manufacturing organization. When it sneezes, plenty of people catch pneumonia. When it totally changes its company culture, its new direction becomes the direction that many other manufacturers will adopt.

WHAT SATURN TELLS US: When GM bought Ross Perot's Texas-based electronics firm, E.D.S., last year, there was an expectation that the electronics firm would have its aggressive entrepreneurial management style modified in a manner befitting the more conserva­tive button-down tradition at GM. Just the opposite happened. GM Chairman Roger Smith decided he loved corporate "lntrapreneurship" and began molding a new GM to fit this style. Saturn is an effort to basically dump all of GM’s traditional manufacturing, labor and management baggage. The division starts with a clean slate. Here's what it means: (1) U.A,W. workers will have to accept a lower wage rate than they are accustomed to getting.

(2) A number of innovative new transportation, warehousing and manufacturing systems will be invented, Many of GM’s traditional systems in these areas simply will not permit the production of a quality small car at a marketable price.

(3) A whole new breed of young, action-oriented "intrapreneurs" will be running the Saturn operation. In short, traditional manufacturing will be re-invented from the ground up by this new division. its success will probably determine the viability of General Motors as a producer of automobiles. We suggest that our readers keep a very close eye on this project. Why? GM is pouring billions into R & D and management systems -- many of which could be transplanted into your own organization. We may be recreating basic manufacturing in this country. If so, Saturn could be a maternity ward that delivers this new future.

SORTING OUT MIXED ECONOMIC SIGNALS: These days the economy is send­ing out mixed signals…Consumer confidence is up but U.S. exports are down…Retail trade is high yet the nation's money supply is low…Most economists do not read these conflicting signals as por­tents of recession, however. In fact, a slower rate of growth is necessary to sustain recovery. But a sudden slack-off after dizzy­ing growth is not without risks. For instance, the anticipated 2.5% to 4% growth rate probably won't have enough oomph to reduce unemployment. Also, a sluggish pace makes the economy more vulnerable to international ups and downs, like foreign debt defaults or the mushrooming federal deficit. The Federal Reserve Board could assist the recovery by loosening its purse strings a bit this year. Inflation is stable, wage demands are modest, and commodity prices are soft, creating ideal conditions for a slightly freer flow of funds…In any case, Washington's 1985 priorities should be clear:the White House and Congress must transcend inertia and bipartisan politics to trim federal spending now. Although David Stockman’s "tough love" budget plan would halve the deficit by 1988, the Pentagon probably won't buy his deep defense-spending cuts.

THE CREDIT MARKET CAROUSEL: At first glance, last year's credit market seemed to mirror 1983 s. Interest rates and inflation behaved remarkably well while the mighty dollar grew steadily stronger…But things are rarely as they seem. Beneath what looked like a 1983 economic replay, many subtle but significant changes were taking place…The government fed its wolfish deficit a whopping $180 billion from credit markets…Though still uneasy with fixed-rate long-term bonds, corporations continued to borrow heavily…The housing market, spurred by purchases of single-family homes, launched a revival …Treasury bond rates shimmied all year, jumping to 14% in the second quarter but settling somewhat by year's end…The Federal Reserve Board traded its "firm father" approach for the role of benevolent watchman. When credit demands heated up in the first half of 1984, the Fed permitted interest rates to rise. Then, in the frosty third and fourth quarters, it coaxed them down a bit…How will these changes Impact on 1985? Most analysts predict growth acceleration early this year with interest rates climbing and inflation hovering between 4 and 5%.

CONGRESS MAY EASE 55 M.P.H. ENFORCEMENT RULE: For openers, nobody is treating the government-mandated 55 miles per hour national speed limit like the Holy Grail.

Motorists are now averaging 59 m.p.h. This month, Congress is scheduled to hold hearings on whether or not there should be a change in the federal compliance rules. A central part of the debate will be a two-year, Congressionally ordered study by a committee of the National Research Council(NRC) on the costs and benefits of the national speed limit law. The authors of this report want to see an enforcement system that penalizes states more heavily for motorists traveling at higher speeds. Congress is also scheduled to review the question of whether to allow an exception to the 55 m.p.h. limit along

Sparsely populated rural stretches of interstate highways. These areas actually amount to about 70 to 75% of the system. It's a scenario long advocated by drivers in the West. Basically, the 55 m.p.h. limit gets a positive response in the East while generating anger from motorists In the West. About 100 years of travel time could be saved for every highway fatality, according to the report. But the panel estimates that an increase in rural speed limits to 60 or 65 would result in 500 more fatalities yearly and would burn 10 million more barrels of fuel.

IS DETROIT ON A ROLL? Can the auto boom that began in mid-1982 continue through this year? The Big Three are betting on it, building cars as if the industry's 30-month winning streak was far from over. Riding high on economic optimism, the nation's auto builders anticipate at least one more year of healthy profits. Sales of cars, freight trucks and minivans are speeding ahead, and union roadblocks seem unlikely. Yet economic warning lights are flashing…The swelling federal deficit is one hazard. Some economists believe it could drive interest rates back up to the 14-to-16 percent range by 1986. This, combined with predicted tax hikes, would decrease disposable income. As a result, would-be new-car buyers would purchase used cars instead, or extend the lives of their current cars…Imports pose another problem. Detroit's 1984 gains were not Japan's losses. Honda surged ahead of Nissan, selling twice as many cars as it did the year before, and claiming second place behind Toyota in the import race. The Big Three must continue to convince consumers that theirs is the best value in the marketplace…One more cause for concern is the sensitivity of the industry. Regardless of production or marketing strategies, car sales are cyclical. History shows that industry recoveries generally last 24 months; the present one is already two-and-a-half years old. If the market could sustain its growth into 1986, it would be the first four-year boom since 1962.