Wednesday, December 3, 2008

The New THE BIG 3

THE BIG 3 US auto manufacturers are asking for $34 billion from taxpayers. That’s about $92 for every man, woman, and child in the US. Instead, how about each of us swing by our local GM or Chrysler dealer and give them $92 cash. A family of 4? Give them $368 cash. This so that the unionized UAW workers won’t have to reduce their take home wages from their current $81,000 per year.

First let’s realize that the auto companies are in the positions they are in not because of the slumping economy but because of their own mismanagement. US Manufacturers have been steadily loosing market share to non-US manufacturers for 3 decades and had ceased being profitable long before the economic downturn. The slumping economy only accelerated what was already taking place.

The 3 US manufactures erred in a number of critical ways.

1) They didn’t manage they union labor force effectively. Whether this should be blamed on the unions or the corporate management is difficult to determine. In any case, a union company forced to pay it’s workers $73.26/hr in wages and benefits and forced even to pay them for years on end in job banks for not working cannot compete with a non-union company paying $53.20/hr, still a very good wage, and then only for workers who actually work.

2) They either mistakenly allowed the quality of their vehicles to decline or did so intentionally as a method of using planned obsolescence to generate higher future sales. All of these future sales though went to Toyota, Honda, Volkswagen, and others.

3) They did not produce the vehicles that consumers wanted either in terms of design or quality.

The situation the auto manufacturers find themselves in is of their own making. Note though that Ford has done the best job of the 3 in turning themselves around and will likely make it through without any government assistance.

The 3 US auto manufacturers came begging to the government because banks and other investors won’t lend to them and wouldn’t even before the current economic downturn. Investors don’t consider the 3 as good or viable investments. They do not believe that the 3 auto companies, or at least GM and Chrysler, will be successful even with funding. Why then should we? The auto companies have vigorously fought declaring bankruptcy saying that consumers won’t buy a car from a company in bankruptcy because of fears that the company will not be around for the life of the car. I’m not sure a government bailout will change that very much, especially if the government says that this $25 billion (or $34 billion) will be the last. Perhaps we need a new bankruptcy chapter – government bailout.

If we were going to lend any money, and I don’t’ think that we should, Congress should at a very minimum require that they first; 1) Obtain cash from divesting as many extraneous assets as possible including subsidiary brands such as GM’s Opel, Hummer, Vauxhall, Saab, Saturn, Holden, and Daewoo, and 2) Obtain union contracts that immediately put their labor costs (wages, benefits, work rules, and job banks) on par with or below competitors.

GM’s proposal to Congress indicates it plans to be on labor cost par with Toyota by 2012. Can it really afford it’s current high wages for another 4 years? They’re already deep in the hole and cannot afford to continue going deeper for another 4 years. GM and Chrysler (and Ford) need their labor costs well below Toyota’s for a number of years just to dig out.

Looking at the other side of their businesses, my brother-in-law recently made an interesting observation. In our metro area we have 7 Toyota dealers (including Lexus) and 28 GM dealers. Based on this an average Toyota dealer sells and services about 5 times as many vehicles as the average GM dealer. Which dealer network will be the healthiest and which will be able to provide the best service? Ford touts a cut of 16% in their dealer network and GM a planned reduction of 35%. Perhaps it should be more like 50-75%.

Finally, and more importantly, we need to look at the BIGGER picture. If any of THE BIG 3 US manufacturers fails it will not be the death of the US auto industry. Even if all 3 of them were to fail it wouldn’t be. We can’t forget about the new THE BIG 3 – Tesla, Fisker, and Miles.

The new THE BIG 3 are, by all appearances, well ahead of the old THE BIG 3 when it comes to newer and alternative energy vehicles. The new THE BIG 3 also appear to be far more efficiently run and better managed than the old THE BIG 3. If GM or Chrysler fails the new THE BIG 3 will take up some of the slack on the employment side. Much as the old THE BIG 3 took up slack from the original THE BIG 3 – horseshoe, saddle, and buggy makers. And many of the workers displaced from GM or Chrysler will start other new companies.

Let’s not forget that while the old THE BIG 3 can’t sell their vehicles, both Tesla and Toyota can’t keep up with demand for their electric and hybrid products.

The same investors who rightly fear putting any money in to the old THE BIG 3 are investing in the new THE BIG 3 as well as a number of growing competitors such as Phoenix, Commuter Cars, e-ride, Wrightspeed, Venturi, Lightning, ZAP, Think, AC Propulsion, and others. Half of these companies are on par with the old THE BIG 3 with development of electric and electric/hybrid, and the other half are way ahead!

While very few of us will be going out and buying an all electric vehicle from one of these companies next year, we very well may within the next 3 to 5 years. We’ll still buy a Toyota or Ford as our primary family car but our second may very well be an all electric or electric/hybrid from one of these up and coming companies.

Is it really rational to think that dinosaurs like GM or Chrysler will be able to compete with these companies that are not only already well ahead but also smaller, more nimble, and more efficient? If GM and Chrysler are allowed a natural death we may well find that instead of 3 declining US auto manufacturers who only get further and further behind the rest of the world, we end up with half a dozen who are leading the world. We could very well find ourselves once again at the forefront.

What will congress do? I think they all know that funding the old declining US auto industry is a no-win proposition and, except for those in Michigan and Ohio, will find it politically unpalatable. If any of the 3 fail their opponents will paint them as having wasted billions of taxpayer dollars on a failing industry. Even if all 3 survive, which is extremely unlikely, they will get painted as having bailed out a bunch of union workers who make nearly twice the US average and who, instead of reducing their own wages to save their own jobs and companies, demanded that taxpayers, most of whom make less than they do, bail them out.

Not a pretty picture. The average union worker will loudly tout how they supported the government bailout of the auto unions but will vote in private against those in Congress who took money from them to pay people making much more.

Edit: The auto companies and their supporters throw out a lot of numbers about how many people will loose jobs if any of them go under. We must keep in mind that a chunk of these people will loose their jobs anyway. Even if all 3 companies survive.

Edit 2: Neil Cavuto on Foxnews made an interesting point today that when AMC was in trouble and openly being shopped around before going under that people kept buying cars and Jeeps from them. EG, going through chapter 11 shouldn't stop consumers from buying cars.

2 comments:

joshua said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Sharon

http://www.autoloans101.info

Crusty said...

Sharon, thanks for your comments. It's an enjoyable blog to write. Comments and emails mean a lot!