Friday, November 14, 2008

Will An Auto Bailout Work?


I must preface this by saying that I'm not an economist. I'm not an analyst. I haven't followed trends carefully or reviewed the books. But I can tell you that a $25 billion loan to the car companies will not help them in the end because it isn't their indebtedness that's killing them--it's the fact that people cannot and are not buying cars.

So while the car companies beg for help, and while I hear their call and agree something needs to be done, I am skeptical about whether such a bailout, as planned, will work.

Some of this is their own fault

There are a lot of people who blame the auto industry for its own problems. They blame workers and unions for causing a lot of those problems. I'm not that type of person. Frankly, I'd rather buy a car from a company that uses well-paid and well-trained workers because they're less likely to mess my car up on the assembly line, amongst other things.

There are two major things that have been killing the American car manufacturer. The first is a top-heavy structure that was built in the days when cars were made out of metal and not plastic. The perks that once came with having a successful company in the 1950s are still being given away like candy to executives today. Sure the stability is not as great, but who wouldn't want a job where they can perform little and gain a lot? Instead of holding executives responsible for the mess they've created, the people at the top have had a hell of a journey making the American consumer hate themselves for being the American worker. You hear about health care costs all the time--especially retiree health care costs. But has anyone ever stopped to wonder why these weren't such a big deal until now? The answer isn't that there are more retirees (though there are), but rather the accounting rules that were put into place in the late 1980s and early 1990s--namely SFAS 106--which requires companies to account for not only the current cost of health care on their books, but the future costs. Almost overnight the weight of retiree health care went from bearable to excruciating. And instead of looking for other ways in which to cut costs, the executives went on a stealth campaign to blame the average line worker for bargaining for better wages, hours and benefits. Meanwhile the top dogs get private jets, unheard of salaries and all kinds of perks that cost the companies billions of dollars and the little guy living in a three bedroom house in Hazel Park is the one to take the blame.

This top down mentality has made it stifling to be creative. When the name of the game is "status quo" there is no sense of urgency to make things more efficient on a regular and ongoing basis. Instead, they make tweaks here and there to promote themselves as individuals and let the system go on, broken as it may be. This isn't unique to the automakers, but it has plagued them more than most because of the next thing...

The American auto company has become stagnant in innovation. The most creative minds in the world are hired by these companies to produce the same things as last year. Sedans get the same gas milleage they got decades ago. Sure we've had some new things like anti-lock breaks and airbags and such, but those are inventions that would have come along without much thought after awhile. They take design, but not true innovation.

The American automaker has found itself in trouble because it has given into the theory that people will continue to buy cars bigger and bulkier than before no matter what it costs to fuel them up. And for awhile, they profitted from that mentality. But instead of preparing for the future and creating new power technologies, the auto companies basked in the glory of record-setting SUV and truck sales and let bygones be bygones while letting their chances of coming out ahead go by.

Many people thought that by 2008 we'd have flying cars and transportation that we so new and innovative we wouldn't recognize it. To be blunt, if someone that died in 1977 woke up today they wouldn't be that shocked to see the cars out there. There's nothing inherently new about the cars and the American automakers are losing an entire generation of consumers by failing to innovate. This is true of all automakers in general, as I haven't seen anything from any foreign auto maker that really shakes me to the core either, but it's even truer of our domestic companies.

Some of this is our fault

Though the auto companies have a lot of blame in their own demise, it's also true that we have an equally deadly part in this endgame. Instead of demanding fuel-efficient cars, we have demanded bigger ones. Instead of demanding innovation, we've settled for bells and whistles. All of this has led to stagnation.

Meanwhile, we've never stopped buying foreign cars or made a statement that we'll only buy American cars. Frankly, the money is going to be the only thing to stop them, but all we've done is turn Ford and GM into competitors against Toyota et al with no real results. Toyota has one innovative car, the Prius, but no real lasting difference. Yet we continue to show preference to the status quo no matter what nation our car's manufacturer came from.

More than that, we've let them ship jobs overseas, which, in the end, has caused a great strain on our economy and on the auto makers bottom lines. What used to truly drive the auto industry, was that there were workers in every plant who were loyal to the brand and who could afford to get a new car every few years. With those jobs gone overseas, presumably never to come back, those workers have taken on service jobs elsewhere and are unable to purchase a new car at all. In the end, though the automakers might have made a few bucks, they've lost sales and loyalty--one you can get back, but one you might never see again.

Why a bailout won't work

So you ask why a bailout won't work? Here's why--because the problems faced by the domestic automaker are bigger than any bailout Washington can provide. The $25 billion is a drop in the bucket and will only serve to allow the automakers to continue on their self-destructive paths a little longer. They'll make payroll for awhile and their stocks will go up, but no shake ups will happen. You won't see Rick Waggonner's head roll for this debacle, because no one wants to challenge the status quo. There will be no greater innovation. But most importantly, they won't win any market share back--and for companies this big, the only thing that can save them is future sales. And future sales have left the building.

Perhaps what the automakers truly need is for one of them to fail. I hate to say it because it'd be devastating to this area, but it's true. The only thing to truly shake them up is to see a fellow bretheren fall to the wayside. I'd like to think this crisis will make them live up to their promise, but once the bailout is over they will continue to sink.

I'm not dogging the American auto industry. I think it has the potential to be the best and most innovative industry in the world. It built states like Michigan and cities like Detroit. It has the ability to make technology that will change our lives forever. But unless something truly new happens, a bailout will be nothing more than an excuse to take the easy way out.

More importantly though, in terms of bailouts, we have seen how they just don't work. Executives continue to screw the rest of us and our tax dollars are going to save institutions who probably should be forced to file bankrupcy like the rest of us. Instead of protecting our assets, it has made them more vulnerable. And an auto bailout that is structured on these faulty premises cannot last. More than that, we have a lame duck president who is willing to place bets on the failure of one of our most important industries. The recipie is ripe for disaster.

So what do I suggest?

Three things:

  • A bailout that is premised on promises from the automakers to reduce executive compensation while increasing American manufacturing. This includes parts and labor--no more shipping transmissions to Mexico and putting them in a car in Flat Rock and calling the car American.
  • A requirement that the automakers, in order to get the bail out funds, agree to keep a certain percentage of their workforce in the country and that for every percentage point lower than the set goal they will pay back a certain portion of the bailout within 6 months.
  • An enforceable promise that the government will only help the automakers if they invest in alternative fuel sources by a set date--that the combustible engine will be a relic or at least only used in large commercial vehicles within twenty years. The deadline will stimulate the creativity that I know is there and will require more jobs. In turn, the automakers will achieve higher sales because everyone and their brother is looking for a more fuel efficient car.
The American car company can only go so far as the American public is willing to let them go. But I think, in this case, America isn't ready to get rid of the mantle of being the automotive capital of the world just yet. And for those of us in Detroit, that's a damn good thing.

1 Comment:

Authentic Connecticut Republican said...

It looks like the folks in DC are hell-bent to give the stimulus package another try seeing as the first one didn't have any real effect.

This time it's the car industry.

While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let's target unemployment, create AMERICAN jobs and pump up the economy all at one time.


Consider the following:

Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that's not all direct but due to suppliers. GM alone has over 1300 suppliers. (That's a lot of jobs!)

1 in 10 Americans makes all or part of their income due to the automobile industry.

Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers.
(This isn't magic, it's simply how the economy works.)

Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.

Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov't. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.

Make no mistake; it’s no surprise that once again government has been a major part of the problem.

Here's the solution.

Instead of either shipping cases of cash off to car makers; or sending us all another check:

Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that's domestic. (Civic = 70% Ford Explorer=80%)

Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.

This would bail out the car industry without giving them a dime directly
Further it would reduce the overall age of the nation’s cars which would in turn;
increase overall fuel economy
& decrease pollution.

Strengthen the dollar!

Since vehicles with a higher domestic content would be moving better this would reduce our imports, strengthening our dollar which would in turn further reduce what we pay for anything imported ...like gas!


Jobs

Instead of simply bailing out a few big companies, this would cause such a run that it would create employment throughout the industry affecting over 1300 suppliers and their workers.
That would give the economy good swift kick right where it needs one!

Pays for itself!

Since money turns over 5 times, and the vouchers are only good for the domestic content of the vehicle, every dime would be spent in the United States creating taxable income.
What is the income tax on 65,000 anyway?
(Remember? 20K manufacturing cost = $13,500 W-2 income x 5 = $65,000)


Another Stimulus Package?

I'm sure you'll agree that this makes more sense than simply sending out checks; many of which will be used to buy new flat screen TV's usually made in Malaysia or some such place.

 

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