ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Wednesday, November 12, 2008

US Auto Industry, the UAW, and Washington

The US Auto Industry provides a simple demonstration of exactly what happens when major corporations, socialist labor leaders, and regulators (in the form of D.C.) get in bed together.

The socialist labor leaders lobby for (and get) uncompetitive wages.
Washington imposes regulations on fuel standards, but limit the companies' ability to meet them with cars already produced overseas.

The companies accept these "short-term" impositions because

  1. they understand that regulation in reality shields them from other small-fry competitors that may try to unseat them; and
  2. they think that the increased and uncompetitive labor costs won't impact them in the short term and, by the time they do snowball, the company will be so profitable that it won't have any impact
This excellent OpEd in the Wall Street Journal explains why Obama may run into difficulty before he's even sworn in.
Obama's Car Puzzle

You have in GM's Volt a perfect car of the Age of Obama -- or at least the Honeymoon of Obama, before the reality principle kicks in.

Even as GM teeters toward bankruptcy and wheedles for billions in public aid, its forthcoming plug-in hybrid continues to absorb a big chunk of the company's product development budget. This is a car that, by GM's own admission, won't make money. It's a car that can't possibly provide a buyer with value commensurate with the resources and labor needed to build it. It's a car that will be unsalable without multiple handouts from government.

The first subsidy has already been written into law, with a $7,500 tax handout for every buyer. Another subsidy is in the works, in the form of a mileage rating of 100 mpg -- allowing GM to make and sell that many more low-mileage SUVs under the cockamamie "fleet average" mileage rules.

Even so, the Volt will still lose money for GM, which expects to price the car at up to $40,000.

We're talking about a headache of a car that will have to be recharged for six hours to give 40 miles of gasoline-free driving. What if you park on the street or in a public garage? Tough luck. The Volt also will have a small gas engine onboard to recharge the battery for trips of more than 40 miles. Don't believe press blather that it will get 50 mpg in this mode. Submarines and locomotives have operated on the same principle for a century. If it were so efficient in cars, they'd clog the roads by now. (That GM allows the 50 mpg myth to persist in the press, and even abets it, only testifies to the company's desperation.)


The media have been terrible in explaining how the homegrown car companies landed in their present fix, when other U.S. manufacturers (Boeing, GE, Caterpillar) manage to survive and thrive in global competition. Critics beat up Detroit for building SUVs and pickups (which earn profits) and scrimping on fuel-sippers (which don't). They call for management's head (fine -- but irrelevant).


Barack Obama and Nancy Pelosi now want to bail out Detroit once more, while mandating that the Big Three build "green" cars. If consumers really wanted green cars, no mandate would be necessary. Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future.

The Detroit Three will not bounce back until they're free to buy labor in a competitive marketplace as their rivals do. In the meantime, private money, even in bankruptcy, almost certainly will not be available to refloat GM and colleagues. Nationalization, with or without a Chapter 11 filing, is probably inevitable -- but still won't make them competitive.


[Obama] ran a brilliant campaign, but his programmatic prescriptions amounted to handwaving designed to capture the presidency rather than tell voters what really to expect. This may have been a virtue in campaigning but it becomes a handicap in governing. The public now has no idea what to expect -- except miracles, reconciling all opposites, turning all hard choices into gauzy win-wins. Thanks to Detroit, his honeymoon is about to end before it begins.

That the MSM has allowed Obama to offer unicorns, change, and hope without getting him to lay out any specific details - at least details which are realistic - is a shame.

We've had several posts how the US auto industry has been crippled by big labor and its own incompetence, from labor's demands to continue the use of Rubber Rooms to the faux strikes that it holds to keep its workers in line to the lack of innovation (scroll down).

This chart from Carpe Diem blog is illustrates how it is impossible for our auto manufacturers to be competitive in this global economy. (This chart does not include management personnel for the Big Three or Toyota.)

Tom Friedman weighs in on the subject in today's New York Times. He lays the blame primarily on the automaker management (for everything from lack of innovation (agree) and caving in to union demands (agree, but where's the blame for the unions?).

Anyway, his analysis is good, until we get to an idiotic recommendation (originated by a reporter for the Wall Street Journal) on how to fix the mess:
O.K., now that I have all that off my chest, what do we do? I am as terrified as anyone of the domino effect on industry and workers if G.M. were to collapse. But if we are going to use taxpayer money to rescue Detroit, then it should be done along the lines proposed in The Wall Street Journal on Monday by Paul Ingrassia, a former Detroit bureau chief for that paper.

“In return for any direct government aid,” he wrote, “the board and the management [of G.M.] should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp G.M. with a viable business plan and return it to a private operation as soon as possible. That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others and downsizing the company ... Giving G.M. a blank check — which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant — would be an enormous mistake.”

First, I should note that any "government-appointed receiver" will, by definition, be political.

And perhaps these people do not understand capitalism, but the whole point is that if you do not manage costs and provide sufficient innovation to address your customers' needs, you'll go out of business.

The truly free market response to the failure of GM, Chrysler, Ford to abide by free market principles (albeit with their hands tied behind their backs by the Feds and unions) is for those companies to cease to exist.

Instead of a government-appointed (and politicized) receiver taking over GM, it should be allowed to fail and then private industry could pick up the pieces and make the very difficult decisions which Friedman calls for with the goal of meeting consumer demand. Whether that's an entrepreneur in the US or in China, Japan, etc. is not something that the government can determine. It's for the American entrepreneur to determine.

And, let's assume that the government does assign a receiver with broad powers over decisions involving GM. Who in the hell do you think will be at his door every single day, attempting to influence this "non-political" receiver? Union bosses, shareholders, and government regulators... All will seek to influence any decision of this apparatchik.

Your Co-Conspirator,
ARC: St Wendeler

Comments (3)
Michael G. said...

While I agree that there is blame enough for everyone involved, including the American consumer, letting these companies fail and then hire cheap labor overseas is not the answer. There is no such thing as "free" trade. Japan and other countries give tax breaks and incentives for every export. What do our manufacturers get? When foreign companies do build an assembly facility here, they are given massive amounts of subsidies.

What about ownership? Is an American allowed to own controlling interest in a Japanese, Chinese, etc company? If not, why is the reverse allowed?

Is there one Toyota automobile assembled in the US that is exported? If not, which jobs do you think Toyota will get rid of first, US or Japanese?

It is tiring to continue to hear how GM, Ford, and Chrysler don't build what we want. We wanted SUVs and trucks, so they built SUVs and trucks. The other misnomer is about quality. I have an F150 with over 212,000 miles on it and an expedition with over 150,000.

I have many problems with the way that the unions, management, and the government have behaved. However, we the American consumers are to blame as well. The "cheapest" price "wins" regardless of the real cost in terms of jobs, manufacturing ability, environment, and tax base.

Without manufacturing capability, we will not be able to build the tools necessary to defend ourselves. I don't like the idea of any of the bailouts. I would prefer that we fix our trade system to enable a fair playing field. BTW, I like the site.

St Wendeler said...

Michael - great comments.

In response, I would say that cheapest doesn't always win. Buying an American car has been much cheaper than anything from Japan for some time, yet the japanese automakers still outshine the US.

With regard to SUVs - people didn't want SUVs.... people wanted to haul around kids & their junk. Used to be that a station wagon was the way to do that. Then the Congress passed CAFE and said that station wagons had to have a certain MPG, but in their wisdom exempted Trucks... so, people flocked to SUVs.

With regard to quality, I do agree that some models can have very high quality. However, if you walk up to two cars blindfolded and open/close the doors, it wouldn't be tough to tell which is which.

The UAW made and got ridiculous requests, from Rubber Rooms (search this site for a story on that) to making GM a Viagra distribution company that just so happens to make cars on the side. Similarly, the dealer network of the 1950s and 1960s lives on into the 21st century, protected by law from ever facing reality - until now.

Management made idiotic decisions in regards to all of these issues, but I would submit that most of the management came out of the Detroit mentality and couldn't conceive of changing anything from how it was when they grew up.

Heck, GM kept the performance Pontiac line around, but continued to destroy the brand with minivans. This isn't smart business and any undergrad business major could point that fact out.

As someone who is a fan of Dodge, I wish that the situation of American companies were stronger - but I recognize that we are our own worst enemy.

At least I hope the Jeep brand can be salvaged...

Anna Ashmore said...

Nice Reading. Thanks.
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