Imagining the auto industry without GM and Chrysler.

Comments

[justcorbly]

It's very telling that the Big 3 are geared up to produce millions more cars than we seem ready to buy these days. I suspect that's of more fundamental importance than the claim that they've been making the wrong kinds of cars. If they've been making the wrong kinds of cars, how come I see so many many vans, SUV's and F-150's out there populated only by a driver and no cargo?

When someone rants against SUV's, etc., the right waves the free market flag and chants about sacred consumer choice. Now, when the Big 3 are in trouble, the right waves the free market flag and chants about stupid automakers who built the wrong kind of cars. So... SUV's are good because people buy them but they're bad because other people make them.

The logical thing to do is to float enough credit to keep the Big 3 alive, but with enough strings and incentives and watchdogs to force them to change as they shrink. If Republicans get the blame for successfully opposing this, they can wait a few more decades before they carry Michigan, Ohio, etc.

[jc]

They haven't made the wrong kind of car. They have the made the kind of car(SUV) that would produce the highest profits. And they did a damn good job of it. Unfortunately, higher oil prices and tight credit markets will make selling them very difficult in the future.

The Big 3 can't compete on quality or price against the most popular midsize cars like Accords or Camrys. With high union labor costs and healthcare for life strangling it, the Big 3 will die a slow death. The bailout only delays the inevitable. Let the vultures like Wilbur Ross come in for the choice remains and re-make it into something profitable and viable for the future.

[Doug H]

If the Big 3 were to file bankruptcy, I suspect they would come out of it with some kind of corporate identity, and that they'd continue manufacture vehicles with their brands connected to it.

In other words, they probably wouldn't go away completely. They'd restructure (as much smaller companies, I'd guess) and retool.

[Ed Cone]

Doug: there are arguments that bankruptcy would be Chapter 7 liquidation, not Chapter 11 restructuring; the nameplates and assets worth saving would be bought by foreign makers.

JC, the funny thing about the healthcare costs with which the US automakers are saddled is that their competitors in Japan and Germany don't have such worries, because their workers have long had national healthcare. A huge cost has been socialized for the foreign automakers, who then eat our automakers' lunch. So now we'll just dump all those unemployed workers on the government anyway, while losing our domestic auto industry...

[jc]

Ed, if healthcare cost were taken out of the picture, I still believe that Big 3 labor and overhead is still much more expensive than the foreign competitors.

Lets just pretend all cost were equal. Lets now focus on quality. Quality sells very well when you make an auto purchase. Big 3 has been playing catch up for a long time in this area. The inferior quality image that many us have of a Big 3 car might impede many of us from buying their cars.

Ed, do you own an Big 3 car? If not, why not?

[justcorbly]

jc, there is no "wrong kind" of car. SUV's and trucks wouldn't have produced a cent of profit if people hadn't bought them. We -- the market -- are just as complicit in this turn of affairs as anyone else. It's more than a bit perverse to castigate auto executives for ramping up production of their best-selling vehicles.

And, Ed is obviously right about the national healthcare thing. Employer-subsidized health care raises prices throughout the economy, not just in the auto industry.

[Ed Cone]

I agree that there's more to the problem than healthcare, JC. But healthcare costs are a part of the problem, which is why you raised them in the first place.

Quality also is an issue. Maybe a US industry that put as much effort into engineering and quality control as it has into marketing and finance would be more competitive.

Part of the blame has to go to the American consumer, who for years chose to buy the needlessly huge vehicles Detroit kept making. Some of us have thought this odd for a while.

[Roch101]

"They haven't made the wrong kind of car. They have the made the kind of car(SUV) that would produce the highest profits. And they did a damn good job of it. Unfortunately, higher oil prices and tight credit markets will make selling them very difficult in the future." -- JC

Say whaaa? If they made the kind of car that would produce the highest profit, why are they broke? The "future" is here JC.

[Roger Greene]

"Quality also is an issue. Maybe a US industry that put as much effort into engineering and quality control as it has into marketing and finance would be more competitive. "

You can engineer them all you wish, but if the worker on the assembly knows that no matter how lousy a job he does the union will protect his job, quality won't happen. Otherwise you can't explain 2 people buying the same make and model of car and one having nothing but problems while the other keeps it for years trouble free.

[Ed Cone]

Yet BMW builds fine cars with a heavily unionized workforce, so the problem would not seem to be with unionization itself.

[Roch101]

Yeah, that doesn't even make sense, Roger. Quality problems come from engineering and materials, things beyond an assembly line worker's control, rarely because someone didn't screw a bolt on tight enough. It's not like the workers are saying, "I think I'll build this engine block from thin aluminum because I don't care and I know the union will protect my job." Geez.

[Mick]

I heard on the radio and teevee this AM that UAW workers are paid almost twice the rate of others? Seems a rather large amount plus legacy costs of retirees is unbelievable. Health care is a big piece but $75/hr vs $35-45/hr is too.

[jc]

"Say whaaa? If they made the kind of car that would produce the highest profit, why are they broke? The "future" is here JC. "

Oil prices soaring last year put the hiatus on their most profitable lines. The credit crisis and recession were just nails in the coffin.

Roch, Big 3 dominated the big truck and SUV market. Most profitable lines by far. There was not that much competition form foreign companies either. They could not and cannot compete on smaller lines because of too much competition w/ much less over head and better quality. Hence, much smaller profit margins.

Easy to say the "future is here" but much harder to come up with something viable and profitable to replace the highly profitable big trucks and SUV's when you have the overhead that Big 3 has, the legacy costs, and the competition they face with better quality and lower overhead. Just giving them money is only going to prolong the inevitable.

[Ed Cone]

One thing that made the SUV/light truck business so good for US cos was tax policy. It created a safe place for them to market an unsustainable, yet profitable-for-a-time, series of products.

[justcorbly]

>>Just giving them money is only going to prolong the inevitable.

Giving them money that's contingent upon shrinking to a profitable size and marketing cars that are a better match for the 21st century seems a much better alternative than simply writing off the jobs and lives of millions of more Americans.

Why would anyone value taking ideological revenge on a tiny handful of auto executives more than the welfare of their fellows? (Unless you are really arguing that the U.S. is now incapable of sustaining an auto industry.)

[jc]

"Unless you are really arguing that the U.S. is now incapable of sustaining an auto industry.)"

In present form, with their cost structure and legacy costs and the foreign competition what it is, that is precisely what many are arguing.

The steel industry here in the US faced many of the same issues that automotive is facing. Many of them failed and rightfully so because due to their cost structures, legacy costs, and foreign competiton. Vulture capitalist Wilbur Ross swooped in and bought up the assets for pennies on the dollar, cobbled them together to form ISG, pawned off the pensions to Uncle Sam, renegotiated the labor union contracts, and invested in modern steel making technology. Of course, he sold ISG a couple of years later to foreign steel makers for billions in profit.

Not sure it would happen again but I dont see the Big 3 changing just because they get a bailout.

[justcorbly]

... Many of them failed and rightfully so...

Why "rightfully?" Aren't you casting things in an ideological light?

... I dont see the Big 3 changing just because they get a bailout.

Even if the terms of the loan force change on them? Successful auto industries exist in Western Europe, where costs are, if anything, higher than here.

[(the other) JC]

I had a nice conversation back in 2004 with an exec of Chrysler about their Pacifica. I actually liked the car, and was considering one for my wife. The exec told me to wait a few months, the new model would have a HEMI. I told him that didnt make good sense; the Pacifica would be squarely in the market against the Tahoe and the Expidition not to mention the imports. I suggested if Chrysler really wanted to sell more of these cars, they would make a Hybrid model. He looked at me like I was crazy.

Pretty sure that HEMI never came to market. Dont think the Hybrid did either.

[Roch101]

"Health care is a big piece but $75/hr vs $35-45/hr is too." -- Mick

Are you comparing wages and benefits (including health care) to wages?

[jc]

" Why "rightfully?" Aren't you casting things in an ideological light? "

Not my intent to cast this in ideological terms.
I'll leave that to you.

"Even if the terms of the loan force change on them?"

Anything is possible but they have to get their costs in line. I dont see that happening unless union labor takes a huge paycut and legacy healthcare costs are terminated. The chances are slim and none. Even then, they still have to compete against very stiff foreign competition and overcome the negative quality image that many of us have of American made cars.

I think they will get their bailout dollars sooner or later and hope they can turn it around but call me a skeptic. It will be very, very, difficult for the Big 3 to find anything to replace the profits that trucks/SUV's brought in. It also takes many years in advance to bring a new car to market. Time is not on their side.

[Roger Greene]

"Yeah, that doesn't even make sense, Roger. Quality problems come from engineering and materials, things beyond an assembly line worker's control, rarely because someone didn't screw a bolt on tight enough. It's not like the workers are saying, "I think I'll build this engine block from thin aluminum because I don't care and I know the union will protect my job." Geez."

You know Roch one of these days you're going to actually know what you're talking about. I bought a GM vehicle a few years ago. By the time it had 7,000 miles on it I had a third engine in it, all replaced under warranty. The culprit I found was that the original and first replacement were bored during the manufacturing process and metal filings were left in them. This is what the GM dealer service people told me. The third one, without the metal filings was still working well when I sold it 10 years later. Now, explain how that was a design problem rather than someone not doing their job.

[Billy The Blogging Poet]

Most of you seem to be forgetting the biggest chunk of the big 3 automakers profits come NOT from building and selling cars but from loans and insurance. These "automakers" got caught up in the same kinds of bad loan senarios as did the housing industry with the biggest difference being they loaned money for cars instead of houses.

A loan company that offers financing at 0 down and 0% interest can't do anything BUT go bankrupt.

[Dave Ribar]

Billy:

You are forgetting about the First Citywide Change Bank model.

All the time our customers ask us, "How do you making money doing this?"

The answer is simple, "volume."

[Doug H]

Question regarding Chapter 7 vs Chapter 11: Why would one of the "Big 3" use Chapter 7 over Chapter 11? Wouldn't a company of that size want to reorganize and stay in business, instead of quitting?

If they threaten Chapter 7, maybe they hope that will get them some taxpayer bailout money, whereas if they restructure, then maybe they take a hit in their own pocketbooks.

It is interesting how Congress made it harder for individuals to declare bankruptcy a while back. Now I wish they'd done the same for corporations.

[Beelzebubba]

Since 1215, courts and the wisest judges tried to discover and practice Natural Law. For the last hundred years, scientists have marvelled at natural selection. Now, with the help of voters and a system which places 90% incumbents, government has sanctioned the temporary suspension of both. Do we have the best wizards ever, or what?

[RBM]

@justcorbly

Even if the terms of the loan force change on them ?

Any chance you could link to a bailout precedent with which terms to force change have been made?

Well, let's lower the bar - any term - never mind the forced changes.

I now of examples of the opposite.

[justcorbly]

Roger, I suspect it's luck of the draw. I'm currently driving a Saturn. It's a boring and routine car that's been almost perfectly reliable through 80,000 miles. It replaced a VW that made it to 180,000 miles, but was in for regular repairs very early in its life. Best repair: the wiring harness shorted out and fried everything electrical. It also made the car come to a screeching halt in heavy toll road traffic just outside D.C. Teutonic engineering does not guarantee complete lack of flaws.

Before that I had a mix of U.S. and imported cars. The lesson I learned is this: Never buy a car during its first two model years, regardless of where it's made.

[justcorbly]

RBM:

No, I can't link to anything and don't want to go looking for one. But, it's not relevant for me. I support a rescue plan that includes mandatory reshaping of the auto industry. I don't support a plan that merely provides a bailout. Even if jc is correct and it is too late to save the industry, the political costs of not trying are onerous.

jc: If we finally get something akin to universal health care, the legacy costs of that medical coverage could shrink considerably.

[Roch101]

Thanks for the anecdote, Roger.

[Roger Greene]

Look, I know management has an abysmal record and Billy hit a good point about them being in the finance business up to their ears. My point is that unions too often get a free pass on the quality issue when workmanship and quality are what have caused a number of the auto company problems.

Justcorbly, I have 2 Saturns now and they're ok, much better than the other GM Chevy I mentioned. Early on when Saturn was alone in Spring Hill their cars were stodgy and boring, but were reliable as heck. Then their resale values rivaled the imports. GM backed away from that model and went to making them all over their footprint. In Spring Hill a worker could stop the whole assembly anytime for a quality issue.

[Beelzebubba]

Business and government are two hidden ends in a Gordian knot. We worship the knot and regard our affluence as something that has been bestowed by the knot. Our understanding is inverted. It was not industry or technology that caused the improvement. The cause was our awareness of the laws of nature and our capcity to create. Applying human understanding improved our well being by the creation of the technology. Now we are taught to believe that our affluence was caused by the technology we created. When natural law is circumvented and unnatural selection is practiced, it is not difficult to get caught behind the looking glass where causality is inverted, encroachment can bring peace and debt can be cured by spending.

[Roger Greene]

You know Beelz, that actually made sense to me. Scary. Did I really understand it or did I just come under your spell?

[Beelzebubba]

Roger: You have always possessed the sense and the understanding. You were probably just distracted by some very well organized conflict. It is easy for us to discern that the emperor has no clothes. But to realize that the empire is buttnekkid places the burden of clothing ourselves upon us. Statism does not prepare us for that.

[RBM]

@justcorbly

I support a rescue plan that includes mandatory reshaping of the auto industry.

I would support that version rescue plan myself !

I'm not aware of one like that either, and no one else has posted one. So I'm guessing it doesn't exist.

How relevant is our support then, really :(

[scharrison]

"The culprit I found was that the original and first replacement were bored during the manufacturing process and metal filings were left in them."

That comes from a fault in process controls/production design, Roger, not from uncaring employees. Issues like that generally are the result of short-sighted attempts at efficiency and/or poor floor space utilization. Some managers are overzealous in their attempts to incorporate "lean" techniques into an already existing assembly line, by reducing the "footprint" of an operation. Which means, cramming machines and assembly stations closer together, to free up more floorspace for other operations or temporary storage of materials.