Los Angeles, CA -- As the Detroit three prepare to head back to Washington D.C. next week to explain their survival plan to skeptical Senators and members of Congress many still question whether the government should open the purse strings and give the auto companies some money to get through the downturn.
Conversations around water coolers (for those who still have jobs), among friends, in print and by pundits of the airwaves have pointed to several reasons not to bail out Detroit – poor quality cars, overpaid workers and the fact that the foreign car companies, who make better cars, have enough capacity in the U.S. now, or could quickly add it, to replace the cars and jobs generated by the domestic industry.
The Detroit trio’s first round in front of the Congressional inquisitors was a flop. They appeared to be ill-prepared and out of touch – exactly the charges that have been leveled at Detroit for years. They couldn’t make the case to Congress, let alone reach out to the American public. It sounded like they were arguing for a “bridge loan to nowhere” instead of money to build the cars that would drive the future.
Their inability to articulate their case left a vacuum that was filled by a chattering chorus fixated on whether the executives from Detroit should have ditched their private jets and flown commercial. Their mode of personal transportation became an inflammatory tangential issue – more about appearance than substance, but it spiked the umbrage meter of the news cycle and diverted attention from the serious economic fallout of postponing a bail out.
The tragic comic opera that unfolded gave credence to critics who tended to dismiss the idea that letting Detroit fail would unleash an economic tsunami devastating the already teetering U.S. economy as millions are put out of work. Some say this would truly be a disaster that could cost $150 billion in lost taxes to the states and the federal government alone. A number that makes $25 or even $50 billion look like a puny request. Especially when you consider that it’s likely to be paid back. Chrysler paid back its 1989 $1.2 billion in bailout money four years later. And our car companies aren’t alone. The French and Korean car companies have turned to their countries for economic support and some believe slow sales will force the Japanese companies to place workers into “job banks” where they will be paid for not working. Exactly what the Detroit companies and unions have been ridiculed for doing.
Some have questioned the legitimacy of the opposition to lending a hand to the automakers that comes from the likes of Senator Richard Shelby (R) of Alabama and Representative Lynn Westmorland (R) of Georgia, whose states are home to plants from Mercedes-Benz, Honda (Shelby) and Kia (Westmorland) – the so-called “transplants.”
Some suspect these Southern legislators and others are rooting for Detroit’s demise in the belief that it will mean more foreign manufacturers, and their suppliers, will build plants in their States. While there might be more plants built because of the convenience and time saved when shipping from local sources, it may also be true that fewer foreign owned factories would be built.
The main reasons these car companies built plants in the U.S. were to counteract any protectionist sentiments and undermine legislation that would have limited their importing vehicles. Building facilities in a large number of Congressional districts in several states gave them clout in Washington. They wanted to have enough friends in Congress to beat back any legislation that would damage their interests. This appears to have succeeded for now. With the American carmakers out of the way, the political need to counteract protectionist legislation would disappear along with the need to build or maintain manufacturing operations in the United States. On the other hand they are also worried about the potential backlash both politically and financially if the Detroit companies go under.
These companies also rely on many of the same suppliers as their Detroit competitors, but the suppliers would go out of business if the domestic car companies fell apart. This could cause the transplants to shutter their auto factories until they found alternative suppliers. Sean MacAlinden, Chief Economist at the Center for Automotive Research (CAR) predicts the closures could last up to a year. It’s not clear that replacement suppliers would come from this country. The new suppliers might come from their overseas facilities that are already building the parts and have relationships with these firms. More jobs and manufacturing capacity would be permanently lost in this country.
Without the countervailing force of the need to appease the American public and Congress by building cars in the United States, pure cost considerations could also trigger shut downs and an exodus of the transplants. There certainly would be a slowdown in their need to add capacity. They have excess capacity throughout the world that could be profitably tapped to supply the North American market. Japanese, Korean, German and any future Chinese manufacturers would weigh whether they should build in a low cost country or put up a plant in the American South. And just like most of the goods on the shelf in WalMart today, our cars would be built in China or some other low wage country. While wages in the transplants are about half what Detroit car companies used to pay (their wages for new hires are now roughly the same – $14 an hour), this is still more than they have to spend in China, Eastern Europe or Mexico where it’s possible to hire an autoworker for as little as $1.50 an hour. That’s less than you pay a baby sitter.
Of course, that worker isn’t going to be able to buy the cars they build, or an iPod, or a house, or pay for a college education for their children. Does the word “sweatshop” sound familiar? Do you really want to buy a car from someone who’s basically an indentured servant or do you want to participate in an economy that pays people a fair wage, provides benefits to its workers, is subject to environmental and safety regulations and invests in its industries in order to insure that they can compete globally?
Many of the Senators and Representatives who are opposed to the government intervening on behalf of the beleaguered domestic car builders live in Right to Work states that have long opposed the ability of workers to organize unions. Actually, some of them represent states that once opposed paying workers at all if they happened to be African Americans. They called them slaves which, it can be argued, isn’t a direct analogy, but there is a tradition of disregard for the rights of workers which has kept the residents of these states at the bottom of the heap when it comes to earning power, education and health.
It seems clear that the Senators and Representatives may also see the death of the Detroit three as the coup de grace for the United Auto Workers (UAW), which would also eliminate a source of campaign financing for rival Democrats and the power of this union to affect public policy. The UAW is the devil incarnate to conservative Republicans who see it as an impediment to the desire to drive down wages and benefits for working people. Ironically, the chief executives of the domestic carmakers are all ardent Republicans who’ve made sure that an inordinate amount of their company’s Political Action Committee funds and personal campaign contributions have gone to Republican candidates. Ironically, this is the party whose members are refusing to extend a lifeline to these teetering firms.
But haven’t the workers really screwed this up? We all are familiar with the anecdotal stories about lazy or disgruntled union workers who can’t or won’t build a decent car and are paid too much. I hate to say this, because I like simplistic answers to problems, and it hurts to think too much, but it’s not really true. It’s a lot more complicated than that. Real wages have been falling and the car companies’ new empoyees are on par with the lower wages of the transplants. Last year the UAW agreed to a two-tier wage structure for new hires, and set up a trust fund to finance future retiree health benefits. The companies would provide the initial money for the trust that the unions would manage. This alone takes off the companies' books the burden that accounted for about half the gap in compensation between unionized workers for the Big Three and non-unionized workers for foreign-owned automakers.
The two-tier wage structure is meaningful for the companies because many of the people in their workforce are nearing retirement. But all of this change was predicated on a timetable that has been upended because of the economy.
GM’s plan was to be out from under UAW retiree health benefits by 2010 and well on the way to seeing 63.5% of their workforce headed for retirement by 2011. Around 30% of Ford and Chrysler’s employees will be eligible for retirement within the same timeframe. Replacement workers will cost a lot less. The expensive Cost of Living Allowance increases (COLA) were capped and other concessions were negotiated which means new hires will earn approximately $20 an hour ($14 per hours plus costs) versus $70 today. This is why they’ve been hoping to squeak by until that period between 2010 to 2012 when a projected turnaround in sales would begin just as their costs come down. GM had paid in excess of their pension liability so this wasn’t a major cash drain. The figures are similar for Ford and Chrysler but better for GM because of the higher percentage of workers slated for retirement and the pension fund payments.
To make the economics even better, GM has eliminated health care for salaried retirees. To insure that costs stayed in line new union hires will receive a choice of a high deductible health plan or flex spending plan and a $1.00 per hour 401K to fund their retiree health benefits.
Analysts predicted that the labor cost gap between the transplants and the US domestics (especially GM) would be eliminated by 2011 due to these factors and, when combined with increased efficiency that is nearly on par with Toyota, will put GM in the black. All in all, GM’s looking at over $5 billion a year in savings from 2007 costs. While the majority of cost savings will kick in sequentially GM saved $300 million on drug benefits in the first year alone.
Of course, national health care would still be a good idea in the interim and a better deal for employees and retirees. But the question is, can this “plan” be accelerated without eviscerating the companies? While some call auto manufacturing unskilled labor, it may be unwise to broom out all of your “legacy” employees and replace them with fresh young faces. Quality could plummet and confusion would reign. Last year as GM started to replace its older workers with new hires it saw its quality drop and it fell out of the J.D. Power rankings of the Top 10. An ongoing and precipitous decline in quality would keep buyers from the showrooms (even if they could get a loan) and doom any sales recovery plan.
At the same time worker’s benefits have been significantly reduced, the overall quality of the cars coming off the lines at U.S. car plants has been steadily improving (except for the dip last year at GM) to where it’s nearly as good as Toyota and Honda in some cases and still getting better. This is what the buyers want. They are fleeing “toward quality,” according to Brett Smith, an analyst with the Center for Automotive Research.
Another major cost factor “productivity” (number of hours to build a car) is also improving dramatically at the domestic factories. On average GM went from 46 hours to 32.4 hours to build a vehicle. Some Chrysler plants are more efficient than industry leader Toyota, which builds a car in about 30 hours and the rest are catching up.
This quest for quality taught the executives a startling fact – poor quality and inefficiency weren’t really the fault of the workers. Management went on a quality binge in the ‘80s bringing in the consultants they’d turned away years before, who after being spurned by the Big 3 went on to help the Japanese develop their high quality vehicles. All was forgiven and promises were made that they’d now listen. But they really didn’t like what they heard. They found out that quality had more to do with design, engineering and plant management than with the skills or attitude of an assembly worker. And lo and behold, building quality vehicles was actually more efficient and cheaper. Thus, the slogan that would soon adorn factory walls, “Quality is Free.” The two were inextricably tied together. But actually believing this was heresy and some of the young executives who began promoting these ideas found their careers stalled. One GM executive was exiled to Brazil where the quality of its cars began to increase. These lessons have finally started to make a difference throughout the Big 3.
Of course, you want the workers to feel like they are part of the system and strive to make what they’ve been told to build as good as it can be. But getting that level of cooperation also had to do with management’s recognition that it needed to listen to them and bring them into the conversation. Nevertheless, the workers have remained the convenient whipping boys – blamed for the quality gap between domestic vehicles and the imports. This helps when you are trying to dissuade employees and communities from supporting unionization or today when some don’t want Congress to lend a hand.
We’ve also heard that our car companies can’t build a fuel-efficient car. Well that’s not true either. They can and they do when sufficiently prodded. GM is hard at work on the Volt, the first commercially available plug-in hybrid that should have a range of 40 miles on pure electric power when it hits the market in 2010. Even without being a hybrid, the Chevrolet Cobalt now turns in a respectable 25 mpg city and 37mpg highway and the gasoline-powered Cruze will deliver 45 mpg. They need to do more and they are. Ford is working on more fuel-efficient engines and transmissions and finally bringing in the fuel sipping vehicles they’ve been producing around the world and GM can do that too. They both build these cars in abundance in Europe, South America and Asia.
They haven’t wanted to or needed to bring these here before and their boards of directors told them to stick to the truck strategy for too long. If you made $4,700 profit on a truck and only $2,400 on a small car, what would you do? Especially if you’re selling all the trucks and SUVs that you can build and you see your foreign competitors opening new plants so they can produce these behemoths too.
The domestics now believe that they will be able to increase the profit on small cars by adding more content and features, and convincing consumers to pay $30,000 for what used to be called an economy car. This will cover their fixed costs, keep the factories humming and stop the financial turmoil. But they will have to retool and weather the economic storm while they transform their product lineup, “right size” their workforce and better balance the amount of factory capacity they have to consumer demand and their decreased market share.
Should they have done all this sooner? Yes. Have they repeatedly fought any legislation that would have forced them to build more efficient cars? Yes. Did they repeatedly overstate their case for their opposition to fuel efficiency standards, environmental and safety legislation saying it would bankrupt them? Yes. Did they create lousy cars? Yes. Is buying a car still a miserable experience for most people? Yes.
On the other hand, did Congress back away from creating a comprehensive energy plan that would have set taxes on gasoline high enough to stimulate consumer demand for more fuel-efficient cars and promote the development of the technology? Yes. Did Congress and local governments ignore the need to create better land use planning that would mean driving fewer miles? Yes. Did Congress fail to create adequate incentives and provide support for meaningful mass transit? Yes.
Are both sides guilty? Yes. But even if the workers were overpaid and negligent, the management was completely out of touch and more interested in being jet setters than running a car company, there are sound economic reasons for propping up this industry.
Some analysts say that letting them fail would trigger the worst economic collapse since 1932. We could turn our current economic downturn – a recession – into a full-fledged depression because of the millions of jobs that are directly tied to the car business. Unemployment would hit record levels, home foreclosures would skyrocket, businesses would close, increased crime, suicides, alcoholism and domestic violence would devastate lives and communities around the country. It would just spiral out of control. About the only people who would benefit would be grief counselors and bankruptcy attorneys.
The companies’ wayward ways have encouraged public support for those who propose punitive measures like forced bankruptcy and reorganization of the automakers. But again, economists have pointed out that, while bankruptcy may work for some companies in normal times, this will not work now. These are huge companies that would require enormous capital to restructure while in bankruptcy. Money is not available for people to get car loans, let alone for reorganizing a car company. There is no market for them to sell off assets. Supporting bankruptcy to allow for reorganization is either posturing or misguided. The auto companies would never reopen.
And while it feels good to vent, the current crisis in the auto industry isn’t all a result of dim-witted management. As political operative James Carville was fond of saying when Clinton ran against Bush #1, “It’s the economy stupid.” It was then and it is now. People can’t buy cars. There is no credit for buying or money for leasing. People are losing their jobs and their homes. They aren’t shopping for cars no matter how fuel-efficient they are. This was reflected in the 35% drop in aggregate sales for this year. The panic buying that sent a spike in the sales figures for small cars has collapsed. That’s why sales are down across the board and still sliding. Even Honda and Toyota are suffering. Honda’s sales are down 25% this year and they build the highest quality and most fuel-efficient cars in the world. While GMs’ stock is worth less than the price of one of Mattel’s toy Hot Wheels, all of the car companies’ share prices have tumbled. Toyota’s stock has dropped 50%.
Auto industry growth is tied to Gross Domestic Product (GDP) and it takes at least 2% growth to move auto sales. This is what caused the sales slide this year that is headed for 13.3 million units. Bad as that may be, it will get worse next year. Experts from Ford and Toyota agree with those who predict that sales will decline to about 12.3 million in 2009.
These same analysts say that the current downturn will actually begin to turn around for the car industry by 2011 because the economy will pick up. There will be more people of driving age and there will be the pent up demand of people who needed a car but couldn’t buy one during the recession. They claim it’s just the nature of this cyclical industry.
Analysts see sales of 13.3 million in 2011 going up to 14.7 million in 2012 and a robust 16 million (approximately what they were in 2007) by 2013. This upswing should continue on a global basis because of population increases and urbanization. Looking at the long-term numbers, this becomes an increasingly profitable business globally.
There are about 6.7 billion people in the world today. By 2050, the world’s population is expected to reach over 9 billion. Today, there are 600 million vehicles worldwide rolling on the planet. By 2050, statistics show there may be up to 2.5 billion vehicles. And where will the growth occur?
Many of those vehicles will be sold to the rising middle classes all over the world – particularly in places such as China and India, where today, there are fewer than 50 vehicles per 1,000 inhabitants compared to 800 vehicles per 1,000 in the United States. The big growth will come in countries where GM and Ford compete successfully today. Of course, we might need 11 planets to sustain this growth, but that’s another set of issues that needs to be tackled. Let’s hope Congressman Waxman is more suited than his predecessor John Dingell was for seeing the big picture and taking on entrenched interests to do what’s right for the American public and the planet.
Even in the United States, the growth in demand for automobiles is expected to also be significant. Economists say the number of cars sold is tied to the number of household formations and there will be 6.1 million new households by 2016 in the United States. People need cars, and even if the number of cars per household falls as predicted to 2.1 per by 2016, this should spell a healthy growth spurt. And when you add in replacement cars for those who are trading up, then you reach the projected 16 million sales. This increase in sales will come with reduced factory capacity of three million vehicles and this will help to drive up prices. Which will help the manufacturers make the transition from very profitable trucks to small cars.
The challenge will be surviving the treacherous period between now and 2011 and having the right new cars that people will want to buy when they go back into the market. That’s where the bridge loan from Congress comes in. Of course, there should be Congressional oversight that insures that the money is being spent productively. We don’t want a repeat of the situation we’ve seen recently with the banks taking a handout from the Treasury and socking it away instead of putting it back to work providing loans to businesses and individuals. This money should be used to let the automakers retool, right size and rebuild. The money should also be used to retrain workers for the good, green jobs of the future. Once again, of course they should have been doing these things all along. If they had, they would be in a better position to ride out the downturn.
While they didn’t do all of the right things, the companies have dramatically pared their workforces, brought wages down, reduced capacity and reduced benefits. Ford and GM have also begun to create fuel efficient vehicles they can sell globally. They just thought they could sell trucks for a few more years while they did all this. That’s what the shortfall is all about. Their truck strategy collapsed and they’re in a world of hurt. Japanese companies are also hurting but they’re sitting on piles of cash right now. Toyota’s gone from a $21 billion profit to a projected $4 billion this year but it can ride out the storm.
The domestic companies need the bridge loan to get them through this period and they will need a coherent energy policy that encourages consumers to buy fuel-efficient vehicles. This will also prompt people to buy the cars that will help us reduce our reliance on imported oil and reduce greenhouse gases. So, we all win.
While it is necessary to save the companies from themselves and from the tanking economy we also must demand that Congress and the next Administration get serious about a long-term energy and transportation plan. We need to look at the impact of rapid population growth in developing markets and in the Unites States will have on the environment, availability of scarce resources, and the ability to move goods to market and act accordingly. Congress told the automakers to come back with a plan but it’s time for Congress to put together a plan that is a roadmap for the future. The auto companies will build whatever it takes.
The public is way ahead of the executives at the car companies and many of our political leaders. The public wants solutions to gridlock, failing infrastructure, pollution, global warming and the reliance on foreign oil.
The clock is ticking and if China catches up to U.S. standards of consumption, the concern over the environment will make the tribulations about an auto bailout look quaint. Most now admit that global warming is real and a majority of Americans, 63.4% say they are “very concerned about climate change [and] global warming,” according to a recent Energy Pulse survey. So it’s clear whatever decisions are made in Washington about the future of the auto companies have to include the realities of the environment, the impact of unlimited growth of auto sales globally and as a country, our dependence on oil. Unlike the financial crisis, which hopefully will come to an end in a foreseeable future, concerns about the environment and our addiction to oil will not end soon. Once this financial crisis is over, the factors that drove oil prices up this summer will likely drive oil prices up again and the focus on fuel emissions and environmental degradation will continue.
Detroit can build decent cars, many of which are fuel-efficient. It isn’t paying people too much and bankruptcy isn’t the answer. But we need Congress and the automakers to work together to provide for our energy and transportation needs and solve the environmental and resources problems associated with a dependence on fossil fuels. This can be highly profitable for the companies and if they can’t do it, they should be moved aside and we should let someone else try.
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