One of the things you hear over and over again from critics of Detroit, especially ones from the left, is that their current woes are all management's fault because they kept making big cars.
Management has made a lot of mistakes. But making big cars wasn't one of them. That's because they couldn't profitably make small cars in the United States. And the reason they couldn't is that their labor costs were too high. All in, Detroit was paying about $30 more an hour than other companies to make cars. At that kind of differential, you have to concentrate on large cars with big profit margins, not economy cars where consumers fight to save $15 on the headlight bezels.
That has changed, as Freddie rather vigorously points out in the comments. But corporate culture is a powerful thing. One of the fascinating things about mergers is just how resistant corporate culture is to change; you can fire nearly everyone, and as long as there is still a core of old workers, they will fight to the death to keep doing things the old way. 30 years of complacence followed by 30 years of worrying how to meet the UAW's bill left a corporate culture that was not geared towards innovation, nor towards making small, efficient cars.
Moreover, there was no good way to recruit new talent who might have changed things to a sinking ship. Very few people set out to work for Detroit these days unless they're serious gearheads, or happen to already live there. Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package. Even the car freaks would often rather do something else--write about cars, or work for the NHTSA.
Into this mix you have to throw the dealer network, which has as much of a stranglehold on Detroit as the UAW. As I understand it, until gas hit $4 a gallon and the bottom absolutely dropped out of the market, the dealer network continued to pressure GM and the others to concentrate on high margin SUVs with lots of extras. Libertarians who get all huffy about the UAW should be even more revolted by the dealers, which have browbeaten state legislatures into giving them ridiculous powers over the auto makers.
The entire thing is a toxic mess, left over from the days when interlocking oligopolies contentedly conspired to suck every last dollar out of captive consumers to whom Detroit would happily have given Flintstones cars if they could have figured out how to do them in two-tone vinyl. But things that look like lunatic mistakes on the part of management were often quite rational responses to intolerable pressures. I'm still not clear on why the cars had to be ugly, and all of the indicators cunningly hidden behind the wheel where they wouldn't distract the driver, of course. Management did many stupid and inexplicable things.
Having driven the companies right up to the verge of bankruptcy, the conceded literally only when it became clear that the union members were about to get their contracts unilaterally rewritten by a judge, lose their health benefits, and possibly get their pensions crammed down by the PBGC, which maxes out somewhere slightly north of $40K per annum. Then the unions ever so generously agreed to cut health care costs by 30% in exchange for job security guarantees. And now that their game of collective bargaining chicken has resulted in the obvious disaster, they want us to pay to save their jobs, at a cost of over $300,000 per.
It seems to me at least as plausible to believe that the unions were behaving like morons in the belief that the government would bail them out, as that the big bankers were. What is the prudential reason for the rest of us to encourage this sally into the land of moral hazard? If GM goes bankrupt, my Mini will not suddenly stop working.
Bailing out the auto industry offers no net gain to society. It is a straight transfer of resources from one sector to another: we tax money, or borrow it from a finite pool of capital available to the nation, and spend it on auto workers. The people who pay the taxes, or the people who would have borrowed that investment capital, now have less to spend. Whatever they would have bought goes unbought; whoever would have made it goes unemployed. To coin a phrase, what is made on the swings is lost on the roundabouts We have the illusion of a gain only because that other group of people is invisible. Even if we don't bail out GM, they will not be visible--we will never know who didn't lose a job or a business because we declined to spend one squillion dollars saving the Chevy Cobalt.
But let's say it was all management's fault. What's the argument for bailing them out then? Does someone have tens of thousands of auto engineers, marketers, and senior management buried under a rock somewhere, waiting to replace the incompetent managers? Because it seems to me that we're just pouring money into the same deep hole that will periodically reward our efforts by coughing up the Pontiac G6.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
There is an assumption here that if you borrow money it's from some venture capital that would have otherwise hypothetically exited. I don't think that's right at all.
Megan,
Where do you get the $300,000 per worker number? And does that include employees of suppliers?
I'm posting this comment again here because I'm curious about whether a broader set of considerations than labor-vs-management sniping might bear on this question. Or maybe nobody cares, but here goes:
I was just watching a few episodes of Ken Burns' The War this weekend, and I was struck by the importance of American industrial capacity in making Allied victory inevitable. Do we really think that the need for a capacity to mass produce heavy weaponry in a sustained fashion has gone away forever? While we may be engaged in asymmetric conflicts now and into the foreseeable future, it doesn't seem clear to me that our interest in retaining the capacity to massively produce weaponry domestically has disappeared. Some significant and lasting subsidy is justifiable, I think, even in the face of the near criminal incompetence of the management of these companies. A bankrupted Big Three will produce a Three that aren't so big anymore and can't move as seamlessly to producing what we might need for a more symmetric conflict. Or they may cease to exist entirely. Do we really want to rely on foreign manufacturers to shift production to help our war effort if we ever need to fight another war on a grand scale?
What part of management caved to labor demands because they didn't have the foresight, or just plain "I will not pay this much" attitude is so difficult to get. Oh the poor owneris being held at gunpoint by his employees. You destroy your own job by not working. GM caved, they didn't have the desire to take a class-action lawsuit, or operate illegally and take the fine. I agree, UAW wasn't thinking clearly either, but ultimately they don't sign their own paycheck. Further I agree that GM is a sinking ship, a reminder of the consequences of bad management and unwilling labor, let it sink to the bottom. But don't pin this on a group of people whose only job is to make the car. Instead blame those who oversee making the car, distribute the car, advertise the car, memorize their AVC numbers, work to minimize costs, and ULTIMATELY MAKE THE DECISIONS THAT THEY ARE RESPONSIBLE FOR.
Hindsight is 20/20, so this is all good from here. But even then GM management knew they we're paying more than they should, and they bought into it.
The argument for buying them out is very simple.
It keeps Michigan and Ohio from becoming permanently red states.
Other than that bribe, what, exactly does the average UAW worker have in common with the Blue side of the Janus Party? Midwestern UAW workers are more culturally conservative, older, more likely to be veterans, and more likely to have children in a nuclear family. Every single one of these indicators trends Republican.
These highly-organized, highly-vocal voters in swing states are unlikely to be stirred by appeals for the expansion of the nanny state, Affirmative Action, gay marriage, the welfare state, or political correctness.
Team Red must keep beating the religion drum to keep middle-to-low income rural-to-suburban religious women voting for them. Women trend more religious than men - and outnumber men by a huge margin in both the born-again community and the retirement homes. Both these groups would easily be swayed by appeals to a larger welfare/nanny state.
Religious conservatives and Cubans for Team Red, Jews and organized labor for Team Blue.
Where do you get the $300,000 per worker number?
Fantasyland. This is utter and complete bullshit. No one was getting $300k a year.
I've stuck up for you, Megan. This dreck is awful. I could get why you would make some half-hearted defense of the austrian economic school. I didn't expect you to turn into a wingnut moron ranting about unions.
I think when a large number of pundits and commentators-- and you are hardly alone here-- demand that the unions make concessions, and the unions make real major concessions, and the rhetoric from those attacking them doesn't change one iota... well, that demonstrates the degree to which those pundits and commentators should be taken seriously. You guys got a great deal of what you wanted; your arguments didn't change.
The unions have done nothing but fall back for years, but it's never enough. Because the people arguing against them aren't really interested in concessions, but in the elimination of the labor movement from the United States.
There's many things to say, but little room for genuine dialogue. I will say that it is foolish to take managements word for it when they claim over and over again that the problems of Detroit all boil down to the unions. Some of the problems are with the union contracts. A lot of the problems are with mismanagement. Management has one responsibility in any industry, which is self-preservation. Taking your cues as to what the reality of the situation is only ever going to get one half of reality.
Greg -
You're making a huge assumption - that supporting these grotesquely inefficient companies indefinitely makes us more capable of mass producing heavy weaponry in the future than we would be if we instead left room for more competent companies to come in and do it right. You're effectively arguing that US companies are incapable of competing in this area, and thus we have to either embrace incompetence or else end up with nothing at all. What is the basis for your assumption?
GM about twenty years ago should have given up the ghost and admit they they could no longer support their business model. Market share and profits could no longer support the benefits they had promised.
Rather then shrinking GM to a profitable core, they tried to do too much with too little. But management was stupid, they were constrained. Look at the mess they had when they closed down Oldsmobile. Generous buyouts, money to pay off dealers etc. Made what should have been a rather easy business decision, an expensive divorce.
If auto industry people are serious about a bailout I will offer support, if every company who takes government money agrees to reduce the compensation of every worker, from top to bottom, by 25% and substitute stock in their respective companies. If all they need is a bridge loan to a better tomorrow, why not take the offer?
I think they should declare bankruptcy. GM can not profitably sell 4 million cars a year but if they had a fresh start they could still produce 3 million cars a year.
The question is not do we bailout GM to prevent massive job losses, as if GM will lose every job forever. The question is how many jobs do we save if we prevent GM from declaring bankruptcy. A restructured GM is worth something. A crippled GM taking government controls and government money is almost worthless.
Greg: A very good point - similar to the one for agricultural subsidies. There is a very strong argument that we should keep certain essential industries in the United States, even if it means paying a serious economic cost for it.
However:
GM makes money abroad, and loses money at home.
GM builds and sells more cars abroad than in the US.
GM spun off companies like Delphi, and buys (or outsources the building of, and increasingly the development of) most small parts to second and third tier integrators.
GM is listed on the public exchanges, and is regularly bought and sold by plutocrats and oil-rich SWFs - neither of which are known for a love of America.
At one point people used to joke that GM was an HMO that owned a finance company, and had a sideline in cars. Now? GM is more and more an HMO that owns international manufacturing trading house. GM proper makes less and less, and less and less of that is made in America.
Your point could be used to argue that we do need US ownership rules for Toyota Motor North America, or American Honda, or Johnson Controls.
Not so much about GM though.
"No one was getting $300k a year."
Meagan never claimed that the workers were getting this much. I don't know exactly what figures she's using, but it's obvious that she's looking at the proposed (one time, not per year) cost to the taxpayer per job 'saved'. What size bailout is being discussed, and how many people are directly employed by the Big Three? It might be substantially cheaper to give them each $100,000 to ease the transition until they find more productive jobs, rather than 'save' their current ones for now.
As for the employees of suppliers, wouldn't there still be jobs supplying someone else? There would be upheaval and perhaps net job losses among the suppliers, but the net losses wouldn't be 100%.
and you are hardly alone here-- demand that the unions make concessions, and the unions make real major concessions, and the rhetoric from those attacking them doesn't change one iota
That's part of what I find most shocking. The UAW renegotiated wages down, benefits down, everything down on my father during the 80's. His company went through a rapid fire change of hands and the end result was he lost his pension. He got .10 on the dollar to what he put into it.
I don't think Megan is saying that a union member gets paid $300k, she's saying that's the cost of the bailout divided by the number of workers.
This is yet another industry that headed for disaster when the top managers became bean counters or lawyers or real estate people and not people who loved the industry. If the managers were still gear heads, all the companies would be in much better shape.
Meagan never claimed that the workers were getting this much. I don't know exactly what figures she's using, but it's obvious that she's looking at the proposed (one time, not per year) cost to the taxpayer per job 'saved'
It's really obvious she doesn't know how many jobs she is talking about either.
Greg: You're also making another assumption, which is that the Big Three are the only auto companies with plants in the US. The fact is that the Big Three manufacture an awfully large percentage of their vehicles in Mexico and Canada. Meanwhile, foreign manufacturers, especially Japanese manufacturers are making more and more of their vehicles in the US. If the Big Three went under, the Japanese-owned plants would still be running and, presumably, expanding to meet the void left by the Big Three.
Sounds like the Democrats are really gung-ho for a bailout right now. But I bet they really, really want it to pass before Obama takes office. This one won't be popular at all.
Ms. McArdle, thank you, seriously, for your Victorian serialization. Just a fortnight ago, we had the preamble about 'how you couldn't stand John McCain' (something dastardly of a masculine variant). Such sentiment!!! He had said, 'Those jobs are gone forever' regarding Michigan auto jobs. Now we find that we have married the UAW and won't be getting in bed with it. Such delicacy of feeling and independence, such an invigorating Victorian moral gesture.
On purely partisan matters, I guess I'd hope G.W. Bush sticks his middle finger up at the auto industry. That would be something to run on for the next forty years in the midwest.
Unfortunately, that's a prescription for people living here to be warming their hands over burning trash cans and talking about how big an asshole he is. It's not a good thing.
Ed Marshall: The UAW renegotiated wages down, benefits down, everything down on my father during the 80's. His company went through a rapid fire change of hands and the end result was he lost his pension. He got .10 on the dollar to what he put into it.
As far as I can tell, that's pretty much the rate of return GM shareholders got.
People seem to forget this. A pension isn't like money put into a retirement fund. It does not operate according to the dry cleaner principle.
A pension is deferred compensation, invested in your employer. Instead of giving you cash now (or a 401(k) match), your employer agrees to pay you less now in return for paying you more in the future.
It is, financially, no different than investing in your employer - and just as in that scenario, past performance does not guarantee future returns, may lose value, do not fold, spindle, or mutilate, etc.
Ed Marshall:
Unfortunately, that's a prescription for people living here to be warming their hands over burning trash cans and talking about how big an asshole he is. It's not a good thing.
I think you've gone insane.
To quote Palmerston: We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.
I pick my party based upon my interests - even stronger than that I pick parties based purely upon my interests.
Should my favored party fail to provide, I shall promptly and gladly switch allegiances. This is a democracy, and I see all parties, politicians, officials, and functionaries as servants, here to do my bidding and to be dismissed at my pleasure. They should sacrifice for me.
To hope that your interests are harmed so that your party succeeds? To be willing to sacrifice your own well-being for the well-being of a political faction?
You have it backwards!
This is insane!
Interesting responses--Thanks! I think what's most crucial here is that we don't let the problems of today dominate our choices to the exclusion of a consideration of problems that may arise in the future. If we push Megan's argument somewhat unfairly down the slippery slope to the point that the Big Three really disappear, we're potentially giving up a resource for which foreign-owned but domestically-produced manufactures can never be an adequate substitute, in my opinion. And as to Canadian (sorry Windsor!) and Mexican manufacture of purportedly American cars, I would suggest that a bailout of the Big Three be conditioned on holding onto American plants and closing others in Canada or Mexico. If we can make a bailout of finance conditional on reasonable executive compensation, we can make an automotive bailout conditional on retaining American manufacturing jobs. So we ought to make sure the manufacturing stays here for both economically nationalist reasons and, crucially, for those national security reasons (if they're compelling, that is).
The bailout will likely come after the inaugeration. Here is what is going to happen:
The government will take a large equity stake in the companies. Since the companies still won't be able to make cars profitably, the competition will have to be taxed to cover the costs.
All most unions do is drive up the cost of goods sold. Period.
Oh, and they keep bad state troopers employed in Alaska, bad teachers in the classroom, etc etc.
Greg,
I've put a lot of thought into your question over the past few weeks.
I'll add the gloss that during wartime, U.S. manufacturers made a remarkably rapid change to a wartime footing -- car assembly lines made tanks; lipstick tins made shell casings, etc. etc.
Yet now, it takes a decade to get a (crappy) hybrid on the road?
But to answer your direct question: I don't see any realistic need for a massive build-up in heavy armor or other industrial capacity. As you noted, future wars are likely to be asymetrical (thus unlikely to outpace the normal military-industrial complex).
On the other hand, if we were enter into the type of conflict that would require the use of 50,000 tanks (the number of Shermans produced in WWII) . . . well, that's why nuclear weapons were invented. Literally.
There's simply no realistic defense need for domestic(-headquartered) automakers.
Greg. 1) Rumsfeld was correct in that we go to war with the Army we have. 2) Which manufacturing giant were we fixing to fight? Anyway, I'm sure our dimwitted financiers can pick out the tank and real Hummer lines. 3) We'll leave less of a carbon footprint with VW diesel engines. In a pinch, Mitsubishi can make us some Zeros. 4) If we're going to be fighting in Manchuria, it would be cheaper for Dell to license out manufacturing in Guondong, save on transport costs.
I'm afraid the bailout is a fait accompli, well-earned payback from our new President and a grateful Congress.
I'm also afraid that no amount of cash infusion can change the underlying problems with that business model. Pro-UAW folks can rant all they want about bad management and lack of gratitude for (too little, too late) concessions, but legacy costs are the one problem that no management can fix. It's just a matter of time.
The best we can hope for, as taxpayers, is that Congress enacts some sort of public benefit in exchange for our largesse - increased CAFE standards, further UAW concessions that could let the company actually survive long-term, some sort of real commitment to hybrids, etc.
Good post and a clever title.
As I've noted elsewhere, including on my site, this country needs to have at least one viable domestic automaker for national security reasons (a post-bankruptcy re-incarnation of one of the big three would do).
I might be able to offer some insight into the ugly cars bit. When I was in university, I did a work term at General Motors. It was during the time the original Cadillac CTS was being launched. (The one with very sharp edges.)
This was a very polarizing car. A lot of people, especially young people, loved the look. But a lot of people hated it as well. So the CTS eventually got softened into blandness. Good design tends to be polarizing.
As well, there are a whole bunch of features that designers need to hit. Each car must have X cubic ft of space, each Buick must have the signature grill, each car needs Y cupholders, etc. Often times it looked like in the need to hit the feature checklist, the overall design was compromised into bland and ugly.
If you look at really well designed stuff, like Apple's stuff, what's striking is not what they include, but what they omit. But skipping features for more nebulous or polarizing looks is a hard sell, and really requires someone with power pushing it.
There's also the fact that the US retained a tariff on foreign SUVs and light trucks of 25% compared to the normal tariff of 2.5%. This would naturally seem to bias the American automakers towards these kinds of cars, making their slowdown in popularity all the more painful.
I have the same problem bailing out the car companies that I do with bailing out the banks: I have heard nothing about how the underlying problems will be addressed. Whether it is the unions fault, or managements- their business model simply isn't working. Simply pouring money into it without changing anything is simply delaying the inevitable.
The real question is what happens to the legacy pension/medicare costs if the Big Three fail? Does it end up being paid for by the government anyways? If so, then I can see a very big reason why these companies would be propped up.
Why should we spend more to "save Detroit" than we are spending to rebuild New Orleans?
In both cases, wouldn't everyone except the political class (and various retainers and hanger on) be better off with tickets out of town to a better place and a grubstake to help them start over once their there?
"Which manufacturing giant were we fixing to fight?" Good question. 1) Who knows how to answer this looking even 20 years into the future, let alone 100. Path dependence can be harsh. 2) Who might we fight is a question less important than the question of whether some manufacturing giant upon whom we've decided to rely for our heavy manufacturing faces a situation where it has to choose sides between us and and our enemy of the moment. I don't know the answer to any of this, but I do know that our relative animosity to the UAW or CEOs or high finance or the current political powers-that-be shouldn't necessarily outweigh the fact that domestic manufacturing capacity (even latent) has saved our collective asses before. If we fail even to consider that these aspects of our domestic economy have worth beyond the bottom line on the ledger, then I think we're a bit blinded by the contemporary.
Here's a yes-but comment:
Yes, American cars suck -- I haven't driven one in many years, since I last took my grandmother's Taurus for a repair. And the unions in Detroit have probably behaved idiotically. And I detest the idea of pouring billions of dollars of American taxpayer money into subsidizing the manufacturers of the Chevy Suburban to fail to compete againt Toyota, lose, and eventually go bankrupt anyway.
But. Let's look at the northern Midwest, and Michigan/Detroit in particular. This is a region teetering on the brink of sinking into the kind of third-world-underclass-in-a-first-world-country status of northern England, or the Urals. Detroit is circling the rim of a kind of societal death spiral; it could end up as a hollowed-out wasteland, with no profitable industries, permanently collapsed real estate values, no middle or upper class, no tax base -- just crumbling neighborhoods full of people on federal assistance. It's one thing for the garment industry to collapse in Massachussetts or North Carolina -- they had other industries to pick up the slack, and other reasons for well-off people to continue living there. What does Michigan have?
If you were in Africa, and you were looking at this kind of potential broad-based social and economic collapse, where there's a possibility of a whole region's society just falling apart, you would look for some kind of structure that you might be able to relatively cheaply maintain and that could then hold the rest of society together while it regroups. Rather than wait for a collapse, where you'd have to put everyone in relief camps with all the associated social and economic ills, you'd try to prop up their agricultural economy somehow, even it wasn't strictly sustainable. In Michigan, we have something equivalent, and it's the auto industry. Hold it together, and you still have a Detroit to try and save. Let it go bust, and the city dies. And that means half of Michigan dies, and much of Ohio and some other places too.
Or maybe something will arise from the ashes of GM's bankruptcy -- a functioning truck division and the guys who tried to build the Volt, say. Maybe. One can hope.
"The real question is what happens to the legacy pension/medicare costs if the Big Three fail? Does it end up being paid for by the government anyways? If so, then I can see a very big reason why these companies would be propped up."
The retirees are already eligible for Medicare when they hit 65. They would just lose their gold-plated UAW health insurance and would have to pay out of pocket to supplement Medicare with private insurance. As Megan mentioned above, the Pension Benefit Guarantee Corporation would cover their pensions, to the cut-off limit. That would probably precipitate a bailout of the PBGC*, but, as Megan notes, it would likely be cheaper than bailing out the automakers.
*The PBGC's premiums have always been set too low to cover the risk of this sort of thing; the fear was that if the premiums were set too high, they'd discourage companies from offering defined benefit pension plans.
Greg,
You are right that we need to have a viable domestic automaker for national security reasons, but that doesn't require propping up the Big Three in their current configurations.
A private equity firm could buy GM's senior debt as GM slid into bankruptcy, bring in new management (there's still no shortage of manufacturing expertise in this country -- think Boeing, John Deere, etc.), use bankruptcy to get out of labor contracts and cut costs, cut capacity, and rebuild GM as smaller, profitable company. A slimmed-down, profitable GM could then merge with what was left of the other two domestic automakers as the industry consolidated.
I like Kia. They have good cars at good prices. Hooray Kia!
[Y]ou would look for some kind of structure that you might be able to relatively cheaply maintain and that could then hold the rest of society together while it regroups.
As long as the unions exist, this will be impossible. It's a rather suicidal pact they make, preferring deferred compensation and undeliverable promises of job security to the honesty that is cash up front with no promises about the future.
3 things that come to my mind:
1 - America has got to sort out the cost of healthcare problem. It is clearly killing America's ability to compete with foreign manufacturing not to mention the myriad other problems with it.
2 - I find myself increasingly trying to coach myself to not care about money or material possessions, and that sucks. I am educated and in a so called recession proof field but I am just losing confidence that any of that matters, when it comes to making good money and getting ahead. I mean I saw talk of a credit card bailout on one of these threads the other day. JFC.
3 - I don't have an economics degree but my gut says let them fail. I don't see how the whole country would go down with them is simply why. Yes there are sad individual stories, but that there is called life.
Greg, your idea of forcing the big 3 to close their Mexican and Canadian plants is crazy
1. I cant speak directly to any particular facility, but in general GM etc makes money overseas, but loses money in the USA. If you want a viable company,you dont keep the unprofitable factories and close the others
2. It is probably illegal under NAFTA
3. Why piss off the Canadians. Remember, they supply more oil to the USA than anyone else, I believe.
"e" the argument about health care costs is a bit of a red herring. In Europe its called high taxes. In Japan they have some sort of mandatory contribution system (like a tax, but not exactly, IIRC)
Freddie,
I am getting the sense that you're clearly passionate about unions. That's swell although, full disclosure, I can't say that I share that passion.
However, the subject at hand is the state of GM, what should be done and how that particular union relates. On that subject I do not really get the sense that you've ever sat down and compared the financials of the various U.S. and foreign auto companies. They're all available via the SEC's EDGAR search tool. Under the 10-K's (and to a lesser extent the Q's) there is extensive documentation of their various costs, especially in the footnotes. Given that many/most major European and Asian car makers are listed in the U.S. as well, you'll have access to their filings too. I'd be curious to hear your thoughts as to why American auto companies are pretty uniformly unsuccessful as a cohort while European and Asian car companies manage to often make money (the ex-Brits being an exception that comes to mind).
I'm pretty indifferent as to whom you'd like to assign blame to, but I would be interested to see how you might come to the conclusion that the legacy and present union obligations were not a significant contributor of their inability to be profitable. That hasn't been the core of Megan's thesis, but it's certainly been a supporting argument as to why GM should be allowed to fail.
I understand that you pride yourself on being a critic of the right and all communities benefit from smart gadflies, but if you're not willing to do this kind of serious analysis when Megan is echoing a long-running critique made by analysts (smart or stupid) that follow the company, then I get the sense that you just have buzzword radar. If that's the case, please stick to a quick boiler plate comment like "the libertarian right monotonously reiterates the following about [fill in the blogosphere topic of the day] despite all evidence to the contrary. Until they are willing to reconcile themselves to the widely-known facts on [aforementioned subject], I can only look on bemusedly as they fumble around with their adolescent pseudo-intellectual posturing." If you would like to add more post-graduate vocabulary or the voice of Benjamin Harrison, that would be fine too, but I think it captures the core of your point here.
- Ben
e: Actually, you've got it entirely backwards.
When other countries give money to workers for health care costs, and then these workers sell things more cheaply in America, that foreign government is subsidizing the American consumer.
They are giving us free money. Let's not stop them from doing this.
"1 - America has got to sort out the cost of healthcare problem. It is clearly killing America's ability to compete with foreign manufacturing not to mention the myriad other problems with it."
Health care costs haven't kept other American manufacturers (e.g., United Technologies, Boeing, John Deere, etc.) from making money or competing successfully with foreign manufacturers.
Re: Management has made a lot of mistakes. But making big cars wasn't one of them.
And to be a bit fair here, people were buying big cars too. If they hadn't been, the auto companies would not have been making them. Even Toyota was starting to break into the SUV and truck market, enticed by the profits it saw there.
Re: Bailing out the auto industry offers no net gain to society.
Actually it does-- because it's much cheaper than the alternative if those companies go belly up.
CAFE standards hurt the auto companies, so the real cost of meeting these political demands was much higher then most people recognize. An honest way, a lower cost way, to have increased mileage it would have been to increase gas taxes.
The current system encouraged resources to go into cars that the public did not want to buy. Higher gas price would have increased demand for high mileage cars.
But politicians were afraid to raise fuel taxes and decided to slap Detroit around, until Detroit needed a bailout. But Pelosi and others still have not learned basic economic lessons and continue to demand that auto companies build politically popular cars that don't sell in the marketplace.
Despite all the pressure from politicians, Detroit has not been able to find a way to meet their demands and be profitable.
I have some sympathy for the managers at these companies. Trying to make profitable cars, while dealing with a hostile government, a difficult union, located in a community that made recruiting fresh talent difficult and fierce competitors was an uphill battle.
As far as health care costs, even if we had national health care auto company employees would not have the very generous benefits they have now. And if the corporate tax rate was lower firms would find it easier to provide benefits,
Even Toyota was starting to break into the SUV and truck market, enticed by the profits it saw there.
Yep. The local Toyota dealers were nearly giving away Tundras a few weeks ago. Hybrids and compacts were nearly impossible to find.
As for keeping the automakers around to fight a mass conflict like WWII, that was part of the justification for the Chrysler bailout in the 70s. They manufactured the M-1 Abrams tank. They don't do that anymore, they sold off that division. Military trucks aren't made by the Big 3 - Stewart and Stevenson made one line of them, and LockMart is one of the competitors for the next round. About the only vehicle they do make is the Hummer. And that could be handed off to a competitor like Toyota or BMW that has US plants for manufacturing.
It's good you mentioned the dealerships. Most regions do not make it easy for Detroit to shut their dealerships down. There are all sorts of complicated rules and regulations that limit competition in retail that hurt BOTH the Big Three and consumers all the time. I also understand that when internet selling of cars began, that dealers pressured local govts to force the companies to only sell cars on the internet through local dealerships thus killing interstate competition. And of course, there are the service woes that make a good retail experience difficult for many.
It is little known that a big part of Lexus's intitial success was creating a brand new dealer network and enforcing strict rules about creating new dealerships to ensure the quality of the overall buying and servicing experience.
The bailout money is moving from industry to industry now. What is the next flagging sector to be rescued? Pretty good odds on the newspaper industry, I would venture. They are hemorrahaging cash, their stock prices are in the toilet, and more importantly, they are patriotically biased towards the left (at least the ones that are circling the drain these days). SO maybe newspapers are next, we'll see. . .
And what about the Postal Service? Recent articles indicate that the USPS is planning to cut 40,000 jobs and conduct forced buyouts due to lagging revenue. Are they next in line for a bailout? I argue that yes they are, and that a bailout could be done for them largely on the cheap.
It is as much of a stretch to bail out the U.S. Mail as it is to ensure that next year's Chrysler Canyonero will be Detroit, isn't it?
Remember the Saturn.
It was GM's answer to these same problems years ago, and was for a time a successful, small, efficient car made in America.
Why didn't Saturn grow then as older-GM failed?
I think it's because GM management totally misunderstood its success and its place as a "safety brand" in the GM ecosystem. In the last 5-10 years, GM talked about Saturn as a successful "brand" and started shipping bigger, more expensive, and less efficient cars over to be badged "Saturns."
You used to be able to get a 40 MPG Saturn ... now you can get an SUV. Such progress ...
"And to be a bit fair here, people were buying big cars too. If they hadn't been, the auto companies would not have been making them. Even Toyota was starting to break into the SUV and truck market, enticed by the profits it saw there."
We can criticize Toyota for making both small hybrids and large SUVs. It seems a mixed message, socially ...
But it's exactly the right, and safe, business decision. They have cars, no matter which direction the market turns.
This was Detroit's error, one repeated from the 70s. Detroit wants small cars to be cheap and crappy so that they can up-sell you. So every time small cars return in vogue, they loose. Contrast again to the Japanese, who can turn from their big SUVs to show you a nice little car.
Are not Ford & Opel/Vauxhall workers unionized? Do they not have legacy costs there? The one big difference is that in the UK, Belgium, Germany, Czech Republic, and other sites of manufacturing plants in Europe, health care and pension costs are not predominately borne by the corporate entity.
Not to say that the unions or the dealer networks are blameless in this fiasco, but I think you're glossing over management’s bad choices.
It was more profitable to build a Silverado or Tahoe than it was to build a Cobalt, but there was no push from anyone in Detroit to have a contingency plan in place if, for instance, the cost of a barrel of oil rose to $140. Toyota took a big loss on every 1st-gen Prius it built, but it proved that the technology was commercially viable, and that car and that company are synonymous with hybrid synergy drive innovation. That translated into better sales figure than most of Detroit's biggies. The Silverado hybrid, by comparison, is synonymous for having a 3-prong electrical outlet in the back for contractors to use.
As in every other facet of contemporary life, businesses and labor unions are going to have to make some earth-shatteringly tough decisions. Detroit, unfortunately, is woefully behind every curve available.
For instance, if Detroit had introduced a C1-based Focus with a clean-burning turbodiesel engine, which got a 40 - 50 MPG rating and cost about the same as, say, a VW GTI, ($24k) people would have looked at it very seriously, and I’m sure Ford could have made a profit on it because of that demand. No 0% 72 month financing, no $3,000 cash back incentive would have been needed to artifically inflate demand.
It could have, but didn’t. Now they’re f*cked. They should do what other f*cked companies do, and that’s declare bankruptcy and restructure the whole operation. Not come to beleagured taxpayers who are already funding two wars and a bailout of the banking system for some sugar.
Ed, as anyone with half a brain could clearly understand, the 300K in no way refers to income, but the cost, to the taxpayer, of saving jobs that - although far short of 300k - pay well above the national average, particularly in benefits. The UAW was able to strong-arm the big three into extraordinarily generous compensation packages for their workers - this is indisputable fact. Combine these enormous costs with the utter lack of creativity coming out of all of these companies and you get a disaster. Bailing the companies out achieves is an utter waste of money. Instead, sell off all their assets and put workers into well-designed retraining programs with good benefits - for a time - and allow someone with brains to take over these places.
It isn't like the Big Three didn't build any small fuel efficient cars- the problem is that they couldn't build them profitably for sell in the US. This was true before the most recent oil spike, during said spike, and today.
Bankruptcy is the correct path forward. Something will emerge from the restructuring-Americans still buy cars today, and will do so tomorrow. It is almost certain that the best facilities will emerge as a smaller, more cost effective car company/s, and/or be bought and utilized by the foreign firms. However, capacity for autos is too high today, and some of the plants will have to be closed permanently.
Oh, and those European health plans that will save American manufacturers have to be paid for- and the Europeans do it by having the employees and employers do so through high payroll taxes and premiums. There is nothing free about their healthcare.
>>At that kind of differential, you have to concentrate on large cars with big profit margins, not economy cars where consumers fight to save $15 on the headlight bezels.
I wish you would substantiate claims like this. This only makes sense if it's not feasible to compensate by producing more small cars in the same amount of time. More importantly -- where's the analysis of how smaller cars are doing right now as compared to bigger cars? How about two years ago?
More importantly, given that the argument is true, what's to excuse them from ignoring a shift in the market with rising oil prices? Why couldn't they anticipate a change in this cost-benefit? That's just bad management.
Interesting post, builds on the previous one. Together, they make me think of something I heard on the radio the other day. Some guy with a book out was claiming that our financial sector is grossly inefficient and that our economy would be much more efficient with a significantly smaller financial industry. Having worked in that industry, do you think that's true? What % of GDP is our financial services sector, and what % is it in other industrialized countries, or to historicals, or to some other relevant comparison? If GDP isn't the right way to measure it, then I'd be curious to hear what is, and how we compare...
@Yancey Ward - in Germany, for example, the model is mandatory purchase of statutory health insurance at a cost of about $100/month, and there is an option for additional private coverage. That's paid for by the policyholder, and is a bargain compared to what my employer and I pay now for health insurance coverage that is distinctly worse than what Germans receive. Also, because reimbursement is streamlined, the cost to administer the program is significantly lower than in the US.
The Swiss model is even more market-oriented, yet remains universal.
Here's my question, as a blindsided taxpayer: as galling as it is to bailout financial firms and bloated car companies, I can accept that there's probably a lot of merit to the "too big to fail" argument, at least in the short-term.
But what, in the long-term, is being done to prevent these same or different firms, whether it be AIG or GM, from still being too big to fail? Shouldn't one of the conditions of the bailout be that GM divide into smaller business units, some of which will fail and some of which will succeed? Or, if we're going to argue that our future military success is dependent on having a large American auto manufacturer, shouldn't we be rewarding Ford, not GM, for at least having managed to be the least disastrous of the big 3?
In fact, the "Big Three" have far more supervisory and management people/line-workers than any other industrial enterprises in the USA.
In one of them, there are SEVEN LAYERS of management from 'grunt' white-collar through Division Gen'l Mgr. That is not only unconscionable, it is statistically fatal to decisionmaking.
I'm not holding a brief for the UAW. But some things simply scream "utterly stupid management" louder than others.
I suggest that the CAFE standards caused the SUV craze.
1) CAFE originally did not apply to vehicles over 8,500 lbs. This was to protect small business, which needs them to operate.
2) Materials costs are a relatively small portion of the cost of manufacturing a car. Labor and benefits are the biggest part.
3) Customers will not pay as much for a small car as a larger car. Everyone likes bigger cars, even in Europe. If gasoline is cheap, people buy bigger cars. CAFE requires automakers to push on a rope.
4) Foreign automakers don't have the legacy costs US automakers have. They can make a profit on smaller cars.
5) US automakers continuously improve products that make a profit. They do try to improve products that don't make a profit, but given the other constraints the small car is last in line.
6) Trucks and SUVs don't count towards CAFE. The US automakers could offer better value on them than on any car. They are still better designed and more efficient than equivalent foreign made trucks and SUVs, though the gap was closing.
Without CAFE, we might actually have a more efficient fleet of automobiles. The larger cars are still more efficient than a Hummer or Suburban or Navigator.
This is one of the big reasons why I am so unhappy with our government. They seem to think that "Let there be light." was a Congressional resolution.
How is it that the party that helped create the problem will also claim credit for solving it, whether it gets solved or not?
The problem with medical costs in the US is the same as the problem with college tuition:
The people deciding how much to spend aren't paying for it.
College students get other people to pay, or they get loans that will be paid back after they have an income. They don't pay much attention to the total debt. Then.
Patients have the insurance company or the government to foot much of the bill. My macro economics professor back in 1981 convincingly demonstrated that there is practically infinite demand for free healthcare.
If we get government funded healthcare the government will make treatment decisions. Doctors will not like that. Patients will not like that at all. They don't in Europe.
My father-in-law's surgery for colon cancer was delayed for months because doctors were on strike in Finland. By that time it had spread. My own father in the USA had his operation two weeks after he was diagnosed.
I realize that the plural of anecdote is not data, but imagine if your dog controlled how much veterinary care he got, and could look past the shots and other discomfort. He'd get his teeth cleaned every six months. He'd either eat only the most expensive veterinary provided dog food, or he'd eat the tasty stuff and get blood thinner prescriptions. Your bank account would be empty!
They don't call GM Generous Motors for nothing.
I'm generally with brooksfoe on this one, though that might have something to do with me originally being from the Great Lakes region. When the factory goes under, the factory town is left desolate. Stuff like this has happened on a smaller scale all across the region for decades. But we're talking about a major American city here. A crush of tens of thousands of workers looking for employment in a single city? Whatever we do, we have to consider the kind of poverty, disruption, homelessness, crime, and violence that's going to cause. It won't just be Detroit's problem, either. That sort of thing causes spillover to other cities.
BULLSHIT Megan.
BULLSHIT BULLSHIT BULLSHIT
There's a mechanic in Alabama who retrofitted a H2 Hummer with all MG parts and it now has both increased horsepower, and gets 30-40 MPG for only around 7K.
GM engineers saw it, and said their supervisors said it was impossible.
What we have is a lack or new ideas, a lack of vision, and a fat, old lazy corporate culture of "playing it safe".
It's what happens when companies get to big to be able to fail. They only look at quarter to quarter profit levels, and don't bother investing in their future, both in terms of capital and long term business planning. They see employees as a liability.
technology and innovation is something Detroit hasn't invested in , and it's coming back to bite them, and all of us, in the ass.
The $300,000 per job number isn't out of the ballpark. Detroit is asking for $50 billion in low interest loans, and employs about 200,000 people -- that works out to $250,000 per job.
(Of course, loans presumably don't cost as much as their face value, assuming that Detroit is able to make any payments, and some of the jobs would stay even if the companies declared bankruptcy, or would be transferred to the Southern auto plants, and if AIG is any example, once you give the auto companies $50 billion, they will be back a little while longer for more, but all of that considered, $300,000 per job is decent for a WAG.)
The following is good on this issue:
http://online.wsj.com/article/SB122608860916209213.html
If we have to bail out the US automakers, I suggest doing it by replacing the federal fleet.
I suggest they pay in advance. I suggest they buy MSRP for top model small cars with all the trimmings. I suggest they buy only GM, Ford, or Chrysler.
I suggest that Congressional leadership use these small cars instead of their SUV based limousines.
B*Shit:
Did this customized Hummer meet EPA standards? I think not.
Popular Mechanics used to do that regularly in the '70s with all sorts of cars. They never reported emissions. Now cars commonly have to pass an emissions test at state inspection time.
dad29:
Yes, GM is an enormous company with a relatively small product line.
The bigger an organization gets, the longer its management chain.
Authority gets pulled up the chain, management doesn't trust people. Responsibility gets pushed up, nobody wants to take blame.
Information flowing up gets edited, summarised, and digested. Important details get lost.
Decision loops lengthen.
It's not a pretty picture.
It's a bit like the federal government, in miniature.
Unlike the British auto industry of the late 60s the American auto industry still makes decent cars and has a product people do buy. The problem is that they are so saddled with union obligations that they can't make a profit selling cars. It doesn't matter that American cars are of decent quality and fill a demand because they can't be sold at a high enough price to pay the over head of rich union pensions and health care.
In a normal world, the big three would file Chapter 11 bankruptcy and reorganize. They would be bought out by new investors, the union contracts would be rewritten by the bankruptcy courts and the Big 3 would be reorganized and emerge out of bankruptcy competitive again. While that would be good for the industry, the economy and the country, it would be very bad for unions and current auto executives. Since the auto executives and unions are about to have their guy in the Whitehouse, they will get a bailout that will allow them to stay in business for a few years longer. Of course, since the bailout does nothing to address the underlying problem of union contracts and pension obligations being too large to be supported by the market, the bailout will do nothing but pay pensions for a few years and give some executives their golden parachutes before we will have to do another one.
Make no mistake about it though, this is not an "auto industry bailout". America has a very healthy auto industry that produces millions of cars people want to buy. America even has profitable auto operations. They are just non-union and owned by foreigners. This is a union and top executive bailout. If we had an honest press, that is how it would be portrayed. Instead, since our media now functions as a ministry of truth for the coming Obama administration, it will be portrayed as "saving jobs".
As far as the dealers go. Yes, dealerships are nothing but parasites propped up by state law protectionism. But that being said, if the dealers are so hard on Detroit, why are they not equally hard on Toyota and Honda? Dealers need to go the way of the buffalo. You ought to be able to buy a car from Ford.com just like you buy a computer from gateway or dell. But I wouldn't blame the dealers for all or even a significant portion of Detroit's woes.
My family owns part of a Chevrolet dealership and a Toyota dealerhip in Houston. The dealer network only only lobbies the manufacturers based on demand driven by the consumer. You can't put the blame on the dealers for demanding SUV's when, for many years, it was the consumers that wanted to buy them. From 2000 to 2007, any dealer that would haved demanded a higher allocation of small economy cars would be getting his/her butts kicked by the other dealers.
Two points:
1. I think the possible plight to Detroit is overstated. If the big 3 where to poof out of existence tomorrow, they would leave a huge hole in the supply of vehicles. People are still willing to buy vehicles, and are willing to pay for them. They would also leave behind a great deal of manufacturing capacity to make vehicles, and skilled labor. Someone else will simply step in, and use the available resources to fill the new need in the market. Perhaps not all they former employees be hired, nor will all the plants be re opened, but the entire state will not be standing over burning trash barrels.
2. Why are auto manufacturers still use dealers? Very few people buy cars on an impulse, most research ahead of time, and most do that online. The ammount of people researching vehicles online will only increase over time. Furthermore, people seem to really want to customize their products wether its vehicles or cellphones, and are willing to pay for it, including the cost of all the parts they end up throwing away. So have customers order their vehicles online, customized just the way they want them (use just in time manufacturing to slap one of 10 different fenders on the car) and have the car delivered to the customer 2 weeks to a month after the order. Sure, there is a delivery fee increase, but look at all the savings you get by getting rid of the dealer network. For repairs, certify independent mechanics to work on your cars, and have them bill you directly for warranty work. The only thing you still need a dealer for, is so people can test drive a vehicle. You can either keep a much smaller and cheaper dealerships for that, or you could go so far as to pay or give perks to existing owners who are really enthusiastic about their vehicle.
Freddie
My mother worked on GM’s assembly line in Wilmington DE for many years, and I often saw her come home nearly choking with frustration at what the unions were doing to her company and their products. Even liberals can see what unionism and asinine workrules have done to public schools, but they still adamately refuse to see that the Wagner Act model does not work in the industrial sector. The raison d’etre of Wagner Act unions is antagonism between the shop floor and management, and when there is not enough antagonism they will create it. That’s why union stewards devote 85% of their energy to defending/retaining the 3% of alcoholics, druggies and hardcore malcontents on the assembly line that no one else wants to work for anyway. Its why their number one priority was to strangle the Saturn unit infant in the cradle, [with their team concept] and get production transferred from Spring Hill, TN to the Wilmington plant, which had one of the worst customer satisfaction ratings of any plant in North America. It’s what’s killed any innovative leadership that’s tried to emerge in Detroit in the last 35 years. Maybe other industries have been able to hold on (Catepiller, Boeing, etc.) but I'd still rather work for Intel in Silicon Valley, or BMW in SC, than face the morale problems workers in union shop companies face every day.
2. Why are auto manufacturers still use dealers?
Because the dealers own the State Legisltures. Most states, all states I think, have laws making it illegal to buy a car directly from a manufacturer. You have to go through a dealer. It is one of the most outragous ripoffs of the consumer today.
Moreover, there was no good way to recruit new talent who might have changed things to a sinking ship.
Paying for it, or don't labor markets work?
I find the entire arguments about the auto industry fascinating, mainly for 2 reasons:
1. They are seen as the last major American, blue-collar, male-dominated manufacturing business.
2. It takes so freakin' long to change gears in the industry.
What I mean by #2 is the following: in most industries, if the market suddenly demands a radical change in the product, the turn around can be within 6 months. If we all start demanding light bulbs that use less wattage, bang, 6 months later, GE's promoting those mercury-filled death traps and we all wear hazmat suits to change a broken one. If we all want health food, suddenly kids cereals have 1/2 the sugar and 2x the vegetables. Heck, even computers and software can find a young upstart or R&D team to give a basic carbon copy of another successful product by Christmas the following year. Most of our products are therefore quite fungible and changeable in a short period of time.
Not so with cars. It takes 2-3 years for an auto company to change from building trucks with hemis to trucks running on hybrid power. It's a long slow process. What is more, cars are long term products: we don't just throw out a new car after a year, but hold on for at least 3-5 (me longer, but I'm considering people with leases here). Because they're long term, the market is stagnated some more--it takes at least 6 years for X product to saturate. The current gas mess shows this problem: we were all locked into our old cars when gas shot up, and we couldn't all buy a prius.
All this means that a tanking auto company takes years to turn around--and a slight change in the gas market throws the whole computation out of whack.
We've read thousands of stories of Detroit's demise. But they keep on keeping on. I think that, while, yes, Detroit the city is in the trash, the American auto industry isn't, we're just thinking it is because it isn't turning around on a dime. Poor decisions by the companies have caused a lot of their own problems--for example, Ford putting a descendant of Henry Ford in charge, despite his having little experience in the car industry and being a guitar playing hippie out of whack with Ford's "truck first" mentality.
That's not to say their all in the black and hiding it. I think we need to evaluate a car company's bottom line or sales over a 5-6 year period rather than 1 or 2. These last few years have been bad, but bailing them out isn't the same as bailing out Lehman or others; the latter were "OMG, this panic is less thana few months old, and we will fail tomorrow, guaranteed" versus "OMG, we can dig out of this in 5 years, but some extra money would help to keep the pro-union newspaper stories happy."
But we're talking about a major American city here. A crush of tens of thousands of workers looking for employment in a single city? Whatever we do, we have to consider the kind of poverty, disruption, homelessness, crime, and violence that's going to cause.
Perhaps we should also discuss the fact that Detroit has many of those problems already, and has even during great times for US Automobile manufacturers.
1 - America has got to sort out the cost of healthcare problem. It is clearly killing America's ability to compete with foreign manufacturing not to mention the myriad other problems with it."
But many of these *countries* are having the same problem with "legacy costs" that the auto manufacturers are having. The manufacturers themselves may not be dealing with it, but the governments are. Japan is staring down the barrel of an aging population and a low birthrate.
Somebody pays. Always.
ken magalnik, Car makers use dealers because there are state laws specifying many of the relationships between independent dealers and the manufacturers. Indeed, manufacturers are effectively banned from owning and controlling retail distribution. It is a constraint they can't fix and have to live with.
Other constraints: more retirees than current workforce; more workforce than they need, but collective bargaining agreements require some job security levels; absolutely insane Corporate Average Fuel Economy regulations (and the devil is in the details) coupled with a political class that cannot accept managing fuel consumption through fuel price floors; excess brands that cannot be discontinued without massive payouts to those protected independent dealer franchises; and on and on.
GM and Ford (Chrysler, not so much) have made tremendous progress fixing their products, rationalizing procurement and production, fixing quality and design, and now negotiating some adjustments to labor costs. Too little, too late, and they still have all those constraints where they can't make progress. They have just run out of time.
Nationalize Healthcare
This is America, and this is a capitalist country. If Detroit runs its industry into the ground - and its been doing just that for my entire life - they should be rewarded by going out of business, just like any other business would be. My father owned restaurants - he did well when business was good. He lost a ton of money when it went bad. My old telecom company paid me an excellent wage. Then I lost a good portion of my 401(k) when the bottom dropped out of the market and they declared bankruptcy. No one stepped in to save these companies - why should *I* pay to save this rotted corpse of an American auto industry, when their cars blow, their executives get paid an absurdly large amount of $$ for total incompetence, their unions are unwilling to negotiate rationally, their CEO thinks global warming is a farce, and we all know this will only postpone the inevitable?
Can someone tell me which industries are "Bailout" industries so that I can choose a career where the competency of my company is totally irrelevant? This is so ridiculous...
$300K a job in 2008 dollars? I have seen even worse in past government bail-outs. But I cannot think of any of them where the job is still there now.
If the federal government is politically boxed into showing real concern, I suggest they offer $100,000 to each GM, Ford and Chrysler worker made redundant (except for senior mangers); as a limited period offer of course. It would be cheaper, more popular in Michigan, and a far more effective fiscal stimulant when and where one is needed. It might even go part way to solving the problem permanently.
Palin f'ing nonsense.
Management is not culpable for failing to adapt to change; its the antiquated business model. I thought the strongest impulse was the one of survival. Not so in McArdle world.
It is worth remembering that the industry (with the help of the UAW) was well along in a major restructuring, and in creating new, more efficient vehicles like the Ford Fusion and Chevy Malibu that can compete head-to-head with the best from Japan and Korean. Then the bottom fell out. Every link in the auto chain relies heavily on credit -- companies, suppliers, dealers, and most important, consumers. The impact of the credit crisis is crippling all carmakers. For U.S. carmakers, it could prove fatal
I encourage anyone who thinks bankruptcy or liquidiation is a "rational" path to spend a few minutes with the Center for Automotive Research report. http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf
Failure of a major U.S. based automaker would have a profound impact of the U.S. economy.
"Management has made a lot of mistakes. But making big cars wasn't one of them."
ok, sure. Toyota, Honda and Nissan all make big cars.
What's the difference?
The "Lesser" (?) 3 MANAGED their companies such that that wasn't the only product line they could make money on.
The frustration i have with your post Meg, is that any 2nd year Econ undergrad could make the tie between gas prices and product line. AND it is not like the Big 3 weren't in this same position in the 70's.
If VW can build the Polo in germany, with the highest labor costs in the world, and sell them for a profit, then GM can build a decent small car in Detroit.
The issue isn't that they can't build and sell small cars profitably, it's that they can't build and sell shitty small cars profitably.
Their issues with labor are real, but their real problem is a product problem, not a labor problem.
Failure of a major U.S. based automaker would have a profound impact of the U.S. economy.
Tom, no one is denying that, are they? I think what they're saying is that committing billions to a stagnant company will also have a profound effect on the U.S. economy, so it makes sense to talk about which disaster we prefer.
Sorry Megan, that is letting the big 3 off the hook way too easily. They can sell small cars at premiums too, but it requires adding value, in either design, quality, or technology. Ideally all three. Americans are very willing to pay premiums on hybrid or sporty toyotas and civics. They also pay a healthy premium on small Volkswagens, Audis and Minis.
It can be done. American car companies just don't know how to or don't want to do it. Small American cars = shitty. Maybe because dealers don't want quality small cars, they want to sell higher priced, larger, and equally shitty cars. And management caves. But don't give management a pass on this because they allow dealers to muscle them around. They have sucked up to dealers for far too long. Dealers have grown fat off their dealerships, and they need to be told who is in charge.
It's amazing, the Ford Ka is agreat car and much beloved in Europe, yet Ford won't sell it in America? crazy!
I've said it before, but it must be repeated, my name says it all.
It seems this thread is full of people who know nothing about economics, cars, or GM.
GM does build small cars - GM sells more cars overseas than in the US. Want to know why GM doesn't sell these cars in America? Because US crash standards are gratuitously different from those in the rest of the world, and because the US consumer won't buy them.
Every year GM sells four million or so small cars outside the US - where, we note, they have no legacy costs.. If they could make money selling them here, they would.
The other side is the health care argument. If the US health care system is dooming manufacturing in America ...
Why the hell are Toyota, Honda, Hyundai, Kia, BMW, VW, and Mercedes falling over themselves to build plants in America?
It's like this thread is full of zombies. "Hybrids! Health care! Whole Foods! Kickball! BRAAAAAIIIINNS!"
The easy way to test all your arguments is to take a quick look at what GM does overseas and Toyota does in America - and then we can see where the problems are.
sy, KinofCain, Mark J, et al claim the Big 3 just don't want to build small cars, even if it would keep them in business. Seems to me we went down this road a decade ago when Eastern, Continental, Pan Am and the rest decided to commit suicide via union obstinence while Southwestern, Jet Blue, et al grew to replace them. The only constant is a sclerotic union bureaucracy that doesn't realize it's not 1934 anymore. It's time to take the training wheels off, Wagner Act unions just don't mesh with a modern political economy.
1. $4/gallon gas was a hell of a motivator in the States for those autos to be profitable here. Its just counterintuitive to that whole increased fuel efficiency standards mandate the Big 3 keeps fighting.
2. A. Location, location, location.
B. Access.
C. Desire to take over GM's territory upon its extinction.
Anyone: does Conrail provide a model for doing something here? As I recall, all the eastern railroads went bankrupt (led by Penn Central) and then Conrail was formed (as a quasi-government company), excessive mileage was rationalized, new work rules were instituted, etc. Eventually, Conrail became profitable and was sold off piecemeal to Norfolk Southern, CSX, and small independent lines. I think the Conrail shareholders, including the government, made out o.k.
Why should the Bush Administration want to save Detroit/Michigan - it's a perfect Democrat paradise with high taxes, low productivity and a gangsta mayor? What's not to like? Michigan is the prototype for what America could be if the Dems are allowed to introduce all their policies.
I have to say that the the-greedy-workers-MADE-the-poor-defenseless-executives-make-nothing-but-huge-gas-guzzling-SUVs has to win the Chutzpah Award for 2008. Coming from a Randian -- a school of thought that, as far as I can tell, consists of worshipping a Swashbuckling Capitalist Executive fetish -- it is particularly amusing.
"Everybody knows" that foreign companies can outcompete US companies because our companies pay for health care of their employees. I would like to challenge that assertion.
Consider a unionized industry where the workers make more than average in a nation with a progressive tax system*.
Now how do wages get set in a unionized company? Here is a simple model. Each worker has a living standard, not a specific dollar wage, below which they would vote to strike but above which they would vote to keep working. If they get enough money for one plasma TV they would strike to get a second one, but they wouldn't strike for a third one. Similarly, the company has a dollar cost per worker-year, not a wage figure, above which they take a strike.
If the minimum union demand works out to less than the maximum company payout, the negotiation completes successfully. The bigger the gap, the more surplus there is to distribute. If the minimum demand exceeds the maximum payout, there's an impasse and the company eventually dies.
If the nation adopts a single payer system, ...
1: The company can afford to pay a bit more, 1/100M of the nation's health care bill per employee.
2: Taxes go up. Since the auto workers are reasonably well paid, each one pays more than 1/100M of the nation's health care bill. They want the extra amount the company can offer, and more, to avoid a strike.
I do realize that the health care for retired employees does matter. That does matter some, and I don't know how much. However, didn't the union take these obligations off the hands of the company a few years back, in return for a one-time fee? Very clever on the part of the union ... a boon that would have been subject to bankruptcy was taken out from under.
Industries where the average employee is well paid will not do better under single payer than they do under the current system, but low-productivity industries will do better. I for one do not want to kick Boeing and Google and Yahoo and Intel out of the country to make room for bringing back the sweatshops.
-dk
* Yes, it's not as progressive as some people would like. Still, it's clear that an auto worker whose family consists of 1/100M of the nation's population will pay significantly more than 1/100M of the nation's tax burden, while consuming about 1/100M of the nation's health care.
While I do agree that the big three were in a difficult environment due, in part, to labor costs, you dramatically underestimate the depth of their management failure.
The differences in labor costs on a Honda built in North America and a GM build in the US is relatively small. It would be more than offset by the nationalistic preferences of American consumers if the vehicles being sold were identical.
The broader problems with the big three are all due to management... (a) the failure to invest in the long-term future of the companies rather than quarterly returns, (b) the lack of risk analysis associated with possible changes in gasoline prices, and (c) the decision to abandon large sections of the market to other manufacturers (forgetting the importance of market share rather than just per unit profit).
In sort, they have had 30 years of management designed to produce short term stock gains rather than to build the companies. These decisions cannot be blamed on labor costs or government regulations. Even their legacy labor problems are due, in part, to this management style. Management agreed to labor contracts that included huge future liabilities in order to avoid relatively modest increases in wages/benefits.
Ed Marshall, you are an idiot. The 300K is a per head dollar amount by simply dividing the total proposed bailout amount by the number of auto workers.
One of the reasons WWII required such heavy manufacturing was because of the inefficiency of the whole operation. A B-17 carried only 8,000 lbs in bombs and took a crew of 10. A B-52 can carry 60,000 lbs in bombs with half of the crew. The real difference though is in the accuracy. A handful of modern jets with a dozen men can inflict as much destruction (without nukes) as a stream of 1,000 WWII bombers with over 10,000 men in the air.
Think of ships. A modern container ship can travel twice as fast with five times the load of a liberty ship.
Examples go on and on. We now rely much more on technology and much less on raw manufacturing power of the type that won WWII. No matter who it might fight, it's a different type of military we have today, and not one which would benefit much from maintaining a huge, inefficient manufacturing base.
I agree with a lot of what you are saying, but I think you are going overboard with the argument that GM couldn't make profitable small cars in the US. Look at VW, for an example. They have big labor costs, face even stronger unions than we have in the US, and pay more taxes to boot. They don't even have especially good upper management. But they've managed to design a number of small cars that command a premium in the marketplace. GM, with rare exceptions, hasn't. Automobiles are not a commodity--price is not the only way to compete. The failure of the US car companies is as much a failure to design cars people want to buy as it is a failure to achieve a competitive cost structure.
Product, product, product.
Detroit produces crappy product. It has for generations. And every piece of crap going into those crappy cars was designed and spec'ed by a management that still believes in land yachts and planned obsolesence. The decreasing number of buyers [ie suckers] need a 60 month loan to buy a car designed to start falling apart after three years.
GM is the company that introduced its first new engines in ages just a couple years ago. It had pushrod activated valves, because overhead cams "only produced 10% better efficiency".
Small cars are intentionally cheesy looking, poorly made, and cheap, to encourage "moving up".
Read the Reckoning by Halberstam. Brock Yates wrote a good explanation too.
The union contracts may need an overhaul, but management needs a mass lay-off.
I regard the automakers in Detroit as perhaps the most egregious excuse-generators in the world. They are the masters of what can't be done. They can't build cheap cars. They can't build good cars. They can't build efficient cars. They drag their heels on innovation, design, safety, and economy because they can. They can because there has been a population of Americans that will only buy domestic cars. It's an aging and geographically shrinking population - augmented somewhat by rental car and fleet companies and state, local, and Federal governments.
But the rest of the world moves on. As the domestic automakers raked in the profits on SUVs, they squandered opportunities to innovate and define the future of the automobile. They left that to the Japanese, Europeans, and Chinese.
I have three questions for the US automakers:
1. With access to the top engineering, design, and business students from the Michigan universities, how do you account for such prehistoric thinking in these areas?
2. Did you ever consider hiring a half-dozen Economics summer interns and ask them what might happen to the US auto industry if gasoline approached $4 per gallon?
3. How long did you think it would last?
And a follow-up question:
Who, specifically, was responsible for the Pontiac Aztec, Chevrolet Corsica, and Chevrolet Avalanche, and why were they not fired and escorted off-site for even thinking such vile thoughts?
I have hope for domestic automobile production. The Japanese are building great cars here, and home-grown innovators like Tesla and others can be nurtured and grown to fill the void.
I find greater comfort in a re-birth than in propping up the dinosaurs. They aren't too big to fail, they're too big to succeed.
Megan, Megan, Megan (shaking my lowered head). You're from New York City and clearly you dont know a thing about cars.
My dad's Taurus didn't even make it past 90,000 miles. And it was butt ugly. The car was poorly engineered and poorly designed. He hasn't bought an American Car since. Think about how many '90s Tauruses you see compared with how many '90s Accords you see. American trucks are reliable and desireable, but the American people have simply given up on American cars.
Compounding poor design, we have poor marketing. Did you know that Saturns now cost MORE than equivalent Chevys? WTF!?! Saturn is an inferior brand, yet it is more expensive than the flagship brand.
Another marketing fiasco: GM has 43 different models under 7 different marques. And that's not including Saab and other European marques. Can you name a single current Buick model? Ridiculous!
And you gotta tell me where you got that $30 more per hour number. The Average UAW wage is about $25/hr, so unless Toyota is paying negative five dollars per hour . . .
"There's also the fact that the US retained a tariff on foreign SUVs and light trucks of 25% compared to the normal tariff of 2.5%. This would naturally seem to bias the American automakers towards these kinds of cars, making their slowdown in popularity all the more painful."
Exactly right. If the gov't takes an ownership stake in the big three, which is how I suppose this will go down, the pressure to re-introduce tariffs on all non-US cars will be much greater. I expect Congress will yield to this temptation, and here we go again, right out of the old Keynesian playbook, right into screwing the car buyer blind. After all, nobody wants GM's cars. What other way will they keep the company afloat?
I suggest that all employees of AIG will be forced to accept bonuses in the form of GM vouchers. To see those guys tooling around in Buick Rendevous(s) might be only revenge we get out of this nonsense.
So its fine to bail out the subprime, deregulated, mismanaged industry. Since they had no help from the UAW in thier ill fate, they are worthy of a socialist bail out?
Spare me the scapegoating and lets discuss making the level playing field on trade. China has all but threatened the multi nationals if they seek entry into their future consumer market. You are trading with the communist.
http://www.nlcnet.org/article.php?id=562
Might we not be better off if the goverment gave low cost loans to people to buy cars instead of just handing the cash to the big 3? In the end the money ends up in their hands anyway. It also puts a lot of other people to work (those tier ones being put into bankruptsy by the big 3). It gets people back to work and paying taxes. Oh by the way, I don't want to subsidize the UAW employees sex lives (GM largest purchaser of Viagra in the world, $17 Million last year). Time for more consessions if you would like to keep your jobs. The $25 Billion equates to 1.25 Million vehicles at $20,000 each! If we want to get into smaller cars its more!
It is now time for GM and the rest of the auto industry to retool to mass transportation models and green vehicles.
THAT is a bailout I could get behind. We need work, we need mass transport, and we need sustainable goods.
Get the engineers to work. Retrain the workers while they're idle (at the government's expense).
MOBILIZE.