Saving The U.S. Auto Industry
The U.S. Auto Industry is at a major crossroads. The last three of the U.S. makers are all in deep. General Motors, once a world giant, may not survive to see 2009. If GM falls it is thought that some major suppliers would also fall. They’d all seek bankruptcy protection but what would emerge a few years down the road is anyone’s guess. We may be witnessing the end of the U.S. Auto Industry.
Auto manufacturers from other countries operate assembly plants here, so I am speaking about American owned and managed auto manufacturing. The UK was once big in the Auto Industry but what manufacturing it has left is mostly owned by companies outside their country.  Ford used to own Land Rover and Jaguar. BMW still owns Mini. For a while at least VW had a major stake in Rolls Royce or Bentley.
In May, as gas prices reached new heights, I wrote a piece called, U.S. Auto Industry Got Caught With Wrong Product Mix Again. In there I talked about how imports got their foot in the door in the 1970s with reliable & fuel efficient vehicles.
In the 80s the government bailed out Chrysler. They came back with the minivan and did well. They along with Ford & GM, however, relied too heavily on trucks & SUVs. GM had a great electric car but they ended that project just after purchasing the use of the Hummer name.
GM has shown the world the 2010 Chevy Volt, an advanced electric hybrid. They are about a decade late to the party. Toyota is about to introduce the 3rd generation Prius and Honda will soon have a new Insight on the market. Chrysler, meanwhile, has announced the year-end closing of the plant that
makes the regular & hybrid versions of the Chrysler Aspen and Dodge Durango SUVs.
President-Elect Obama and Democrats in Congress are pushing for a bailout of the auto industry in this lame-duck session before the new Congress is sworn into office in January. As much as the bailouts disgust me, as much as I think the Auto executives are to blame for a decade or more of bad decisions, I think the bailout may be wise for the sake of keeping the world economy from completely caving in.
I’d like to see a few things in exchange for a bailout. First, executive salaries cut to meet that of a union worker with their level of seniority. The U.S. should get X-number of vehicles over the next decade. These can be used by various government agencies.
Along with the bailout needs to be stricter fuel economy standards to force the U.S. makers to be competitive in the world. If not, let them fall. It will hurt many directly and many more indirectly but while other companies had to learn to produce efficient vehicles, companies like GM focused on the design of the side vents on the newest Escalade. Detroit, it is time to step up and face the music. Become competitive on the world stage or die.
They should fail if they have not met consumer demand. End of story. Granted Chrysler may have “come back” but at what price? Money was yanked from the hands of producers and given to a failing company. If they had failed there is no way to tell what might have come in its place. With every bailout you stunt the possiblity of innovation. Also, don’t forget that the rise of SUV was a direct consequence of the CAFE. You can’t legislate more competitive companies. Please, lets just allow the losers to go and let the winners buy up the pieces and move forward. The “local knowledge” of the many, many thousands of minds know better than any politician or “central planner”. How much ego does it take to think you can actually write laws to create the proper balance in the marketplace?
Steve, I completely agree. Cut executive level salaries, put tighter restriction on these unions — that for the most part, inflate costs. And use heavy restrictions and penalties on Outsourcing overseas (which is something that should be done to all companies in the US).
It’s not even just the auto industry that will be in trouble, but other industries that rely and are bonded tightly with these industries… (ie. Travel and Leisure segments)… I hope this bailout will pass – because, personally, my job could be on the line.
The bailout extension is for the Big 3 as you state and not for Honda, BMW, Toyota, etc. One underlying fear is that the Pension Guarantee Corp may be stuck with too many additional dependents in an economy that is spiraling downward. The long term problem for the Big 3 has been their attempts to be all things to all buyers. In addition, their family room designs require cheap credit to support irrational demands.
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The typical family in the 60s had only one car, we now average 2.6 per household unit. The democratization of driving has meant that we can all aspire to be petty tyrants of the road. Reminds me of the same absurdity of our too numerous local governmental units, both are out of control and too often represent abuse. Now the sellers of these tools of abuse have become sicker than the health of their customers. We need to change our priorities. Gas taxes need to be raised, highways should be tolled, and parking lots reevaluated for tax purposes.
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“We can’t solve problems by using the same kind of thinking we used when we created them.†Albert Einstein
Steve:
While I agree with your various views on transportation, including using the vehicle that is the right size for your need and using the most fuel-efficient vehicle that you can, unfortunately most of America does not agree with us. I was discussing this matter with a neighbor who has been in the auto industry for over 25 years, and I was complaining that for years the US auto industry only made hybrid SUVs, when, in my estimation, they should be making an entire fleet of hybrids, including smaller sedans (like the Saturn Ion I drive) and compacts.
He told me that Americans want their SUVs. I made the naive argument that people wanted fuel-efficient vehicles because they cared about their effect on the environment, but my neighbor showed me that isn’t true. That in fact, the fuel prices have been the leading cause of why Americans purchase hybrids and other fuel-efficient vehicles.
So, while I love the current gas prices, I am worried that if they remain for too long, Americans won’t be incented to be frugal with gas by limiting driving and through purchasing fuel efficient vehicles. And, of course, Detroit will continue to crank-out whatever the focus-grouped Americans tell them to.
You forgot to mention the need for major concessions from the UAW. Before I get going with this, let me state I am not anti-union. I beleive unions, when practiced correctly, are a major tool against unethical management practices. Saying that, the UAW is one of the worst examples of a union. They are corrupt greedy union with no sense of reality. I have been a white collar worker for one of the big three before. The UAW gets benifits that the white collar employees could only dream of. Is there any valid arguement as to why a person with a HS diploma should be making 50k+ a year? We don’t even pay our teachers that who are required to get graduate degrees. I do beleive they should be making a living wage, but is the guy who installs headlights really worth more than an EMT (who makes less than 50k). The UAW fought all those years for benefits they didn’t deserve and now they might lose it all.
I also firmly beleive all the executives are overpaid.
Given the hand these big boys had in creating their own problems, I’d say they need to go out of business. Hopefully, their closed plants can be retooled and their younger workers learn how to work in the emerging New Eco-Urban Economy of the 21st Century that invests in alternative energy, transit, and high-speed rail linking and running our nation’s more sustainable metropolitan economic engines.
Why doesn’t one each oil company, which is sitting on astronomical amounts of cash right now, merge with a car company?
Not 100% sure on this, but a guy on Morning Edition today said that the initial $25B bailout was contingent on raising CAFE standards, which is why they are asking for more money now. The initial bailout money is for long-term changes, but they need money just to pay their bills.
As much as I don’t want to see people losing their jobs (which, incidentally, won’t be as monumental as people might think–the auto industry in the US isn’t going to just vanish completely), I just can’t help but want to give Detroit two fingers in the air. It’s completely short-sighted to push SUVs when we know oil can’t last forever. If these industries would plan for long-term viability, not just the next financial quarter, they might not be in this predicament.
God. Please quit whining.
Mismanagement of the “big 3” and the UAW are equally responsible for their failure. Please don’t forget that the Government has an equal third share of the blame.
Management accepted the stupid CAFÉ rules and didn’t have the stones to deal with the UAW in an intelligent manner.
The UAW forgot that pigs get fat, but hogs get slaughtered.
And, the Government overreached again and enacted laws that in my belief, are unconstitutional.
It is amazing to me that there are people out there that think it is the Government’s job to tell a company what they can and cannot sell. You couldn’t pay me to drive a little econobox—I love driving my Suburban and I plan to drive one until I leave this earth (I also love my little scooter for cruising around the CWE).
Bailing out the automakers will only postpone the inevitable. Sadly, Chrysler is unsustainable. Ford and GM should go bankrupt, restructure, and deal with the competition without the $1500 per car millstone the UAW tied around their necks.
The idea we will bail out the auto makers without any changes to its agreements, force them to make energy efficient cars, and everything will be allright is wholly ignorant of the situation. Lets look at somethings in black and white
1) SUV’s, Pickups, etc is what consumers wanted and the automakers responded to the market. That included Toyota who not too long ago opened a brand new plant in Texas to make the Tundra. It is good business to make a product at profit that consumers demand.
2) In the same token, the American car companies holding hands with UAW are in a situation where they can’t make a profit on a small car where as Toyota and Honda can even in the United States (Don’t forget that the camry and civic are put together in the US). It is a bad business when the only cars that sell right now are made at a loss and your still committed to pay full labor costs on production for the vehicles that don’t sell.
3) GM currently has more hybrid models then Honda. Please, most hybrid models are sold at a premium and the gas mileage isn’t that better for almost all of the brands offered (Prius was an exception and the sales are not that great in terms of total volume of small cars). The economics don’t work for most consumers. I bought a used Ford Focus recently (It is cheap, reliable, and gets 35 mpg). Why in world would my wife and I buy a prius at twice the price.
4) Toyota dropped their electric car the same time GM did in the 1980’s. We are still a decade away from the battery needed to make things work. The gasoline combustion engine is tough to beat in efficiency and cost.
5) What do we gain by propping up an automaker when someone else can build something comparable, better and still might sell more.
Which gets to my final point. Bankruptcy with implicit guarantee that the gov will provide credit financing as the last resort is reasonable. The courts kept the airline industry afloat after 9/11. The airlines made real changes to their business structures to some new realities. The carmakers problems is not putting out fuel efficient quality cars. Their problem is the market price means they build at a loss.
What I can’t understand is why GM- still continues to produce multiple versions of the same car and attempt to make a profit (Chevy, Pontiac, Buick, Cadillac, Saturn). Only two of GM’s divisions are still semi-profitable: Chevy & Cadillac. Instead of a bailout of their current overproduced system, make them downsize to a reasonable level that has showed some profitability. If in time the market recoups, the other two to three divisions can be brought back to some degree but with changes. Yes this would mean job losses, management cuts and UAW compromises, but would a complete shut down be better? Meet at the crossroads and if you cannot then bankruptcy will still occur.
As far as Chrysler and Ford, look into the only vehicles that are still slightly profitable. Freeze the production lines on all other vehicles until you can restructure your system and its management. If you can’t restructure and survive, then your future has been delt.
The government can only bail out to a degree and is not responsible for corporate decisions that were poor & poorly managed. Companies must step up to the fact that they and others made the poor decisions. The American auto industry needs to study the foreign companies and why they continue to be profitable and produce vehicles Americans want to purchase.
Just like in education when teachers & administrators see that previous methods of teaching do not meet the learning styles of the present students. The industries need to see that the products being produced and the methods of production need to be retooled, revamped and reorganized.
Pare down your current unprofitable production, if not prune. Then begin to build on the current needs and future outlook of what Americans want, need and will acquire.
There are so many points to consider:
Why are the executives paid so highly for poor performance?
Why didn’t they foresee the need for efficient vehicles or did they just ignore it?
Why is the union so greedy?
Why are the union leaders so self-centered?
Why are the workers so self-centered? (especially easy to say let them close when it isn’t your job on the line)
Why has the government assisted in this fiasco by not raising fuel taxes to force conservation? by not raising mpg? by giving workers unemployment for retooling and closed plants (Chrysler workers will get 95% of pay for 48 weeks….where is the motivation to change?)
What happens to the retires who have worked hard only to have the rug pulled out from them (and I’m not talking about the 30 or 40 or 50 year olders, but the 60’s, 70′, and 80 year olds) Its too late to change the game for them.
What about the pension liability? and who will make good on them?
What about all the taxes the cars make for the towns where the plants are, the states/cites where they are sold, the school districts, the employee taxes, etc etc
There is so much at stake for them and for us.
According to Kelley Blue Book, the Civic retains about 55% of its value over five years while a Cobalt retains only 32%. An Expedition retains 19% and a Savanagh 20%. Pontiac, Detroit’s best resale brand, only retains 34% of its value.
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These dinosaurs (transporting people with 7000 lb Suburban, Hummer, Expedition etc.) requires a great misuse and poor allocation of precious resources. If these vehicles were properly and fully taxed for the noise, pollution, risks, extra deaths, and road maintenance required, I doubt few if any would ever consider owning such. We have built a culture around subsidizing abusive behavior. This needs to change, otherwise we will all become dinosaurs.
Shouldn’t the oil industry bail out the U.S. auto industry? Low MPG certainly enriched the oil industry for many decades.
We live in a global economy. Your new “American” (Big 3) vehicle can very easily be assembled in Canada, Mexico or Korea, and your “foreign” vehicle can just as easily be assembled in Ohio, Kentucky, Texas, California or Alabama (to name just a few states). My new, allegedly foreign, Toyota Tacoma was assembled in California at a UAW plant. The fundamental issue facing the Big 3 are the legacy costs (for benefits for both present and retired employees) that they agreed to over many years that the newcomers have managed to avoid, so far. The ONLY long-term solution is either for the UAW to agree to “give-backs”, that bring the costs of their members closer to those of their competition, OR Chapter 11, to allow Big 3 management to unilaterally restrcture their unsustainable labor contracts, in much the same way the legacy airlines have reduced their personnel costs.
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The UAW can choose to either win the battle (no give-backs, keeping their members employed with artificially-high wages for a few more months or years) OR they can choose to win the war. It may not be “fair”, but if the competition’s labor costs are two-third’s yours, there is NO viable future in a competetive marketplace. And while we can argue, with the clarity of 20/20 hindsight about any company’s model mix, it all gets back to the costs of production. Even if you design and produce “better”/”more-competetive”/”more-fuel-efficient” models, if it costs you $2000 more per vehicle, you simply won’t be competetive! Throwing tax dollars at an unsustainable business model just delays the ultimate day of reckoning for a few more months, especially at the rate the Big 3 are burning through their cash reserves . . .
Hello from Sharon McNary of Marketplace, the business show from American Public Media. I’m reaching out to auto industry people with a few questions designed to turn up interesting stories and observers of the auto industry.
As things shake out — bailout or not — in the auto industry, Marketplace is looking for frontline people in the indsutry to act as news sources and tell us what they are seeing from the inside.
For example, if you’re one of the thousands of Ford workers facing a buyout or layoff, if you work at an auto plant in the south, if you work in a town where an auto company bankruptcy would hit you hard — Marketplace wants to hear from you.
Here are our very open-ended questions about what’s going in your industry and how it will affect you:
http://www.tinyurl.com/MarketplaceFallout
Thanks in advance for your help,
Sharon McNary
Public Insight Journalism
Marketplace
American Public Media
smcnary@marketplace.org
Let the “Big 3” bail their own damn selves out. If they go under… so be it. Hopefully it will be a hard lesson learned.
I don’t have the answer for this, but I tend to be on the side of “let the big 3 fail”. I really don’t have a lot of sympathy for companies that fail to understand their market. Yes, some people still want an SUV, but many don’t and this is the market they are failing to capture. I have always owned Toyotas and Hondas because they have an excellent reputation for reliability and they last a long time. I have heard that American cars have improved in these ways, but I haven’t heard it enough to convince me to buy one. If they really are as good as Japanese cars then why haven’t they made more of an effort to improve their image? These companies are failing because they don’t know how to compete and for that they don’t deserve a bailout.
I do feel sympathy for the employees of these companies, however, and if their job loss would create a national problem I would suggest that the federal government put money toward job placement and retraining for those out of work.
I don’t agree with any type of a bailout. For Banks or any industry. In the case of the automotive industery both management and the Unions are to blame. Management made really stupid choices. In fact, they continue to make stupid choices. Witness them flying to bailout hearings in Washington in private jets. In order to beg for money. Also they first wanted money to retool for fuel efficient vehicles. Duh! They didn’t see the need to set aside money over the last 25 years to retool? Idiots! The unions are just too greedy. What other business provides three years pay if you’re laid off? Here’s a thought. Make the UAW buy into the big three until they own about 40% of them. Then we will see if the UAW thinks they right to ridiculous wages and benefits.
Again I say no bailout. The argument that if the big 3 fall it will drag down the economy is worthless. What will we do in 3 years? Pitch more money down their bottomless pit? I’m sure the buggy whip manufactures wanted a bailout also.
After arriving in private jets, the CEOs of the Big 3 CEOs walked into Congress with hats in hand. Their foreign competitors had been lured to S. Carolina, Alabama and other Southern states over the past decade by tax benefits and laws that make it easier to build a largely nonunion work force. The southern plants have more work rule flexibility and the use of temporary workers at lower costs than UAW’s. This allows for layoffs and lower costs when consumer demand shrinks. Advantages but The Harbour Report, a scorecard of auto-plant productivity, estimates the per-vehicle labor cost for the Big 3 in 2007 was no more than $260 above Toyota’s.
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However the legacy costs for the Big 3 are enormous. For each active worker on their payrolls, the Big 3 are paying pensions for as many as three former workers and dependents — costs that foreign car makers are largely free of in the U.S. Past negotiations by management have created a deep hole and the illogical promises may become another expense to taxpayers via the Pension Guarantee Corp.
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The main differences between the Little 3 and their foreign counterparts? Better management means better products, better designs and higher resale values. But these facts have been obvious for over 30 years. Bottom line: the US taxpayer will pay for inferior management either way the decision is made.
In a perfect non political world most of the ideas above are nothing short of realistic and fantastic. However, reality says that politics will dictate what we do here. Our government is going to step in and keep things the way they are, Big 3, UAW, etc… it’s in their best interest.
I personally feel that if the doom and gloom scenario of the the big 3 going down occurred, you would see Honda, Toyota, etc sweeping in to take the infrastructure and the trained work force and likely negotiate a new contract with the UAW or not use them at all. They would get the benefits of a trained workforce at a new lower cost. It’s the beauty of the free market system, let the cream rise to the top.
I agree with what Tim said above in the first reply. I also agree with Greg. Bailouts harm innovation and are the antithesis of free market capitalism. Firms that fail to build and sell products at a profit should disappear. The British auto industry is as strong as it ever was, despite foreign ownership of firms. Quality of British-built cars is higher than ever, with larger volume than ever.
As someone who enjoys Cadillacs, domestic trucks, and domestic sports cars, I will be disappointed, but not as disappointed as I would be if more of my tax money went to bailing out poorly run firms.