Wednesday, February 01, 2006

Kicking and Screaming

One thing that has been and always will be the case when competition is introduced in an industry is you will hear about how unfair it is. "Our competition is getting unfair subsidies through (insert reason here - government subsidies, tariffs, lowered barriers to entry, fuel hedges, etc) and we can't compete - help us!"
This is not a recent phenomenon. It happened during airline deregulation, when some of the great carriers of the past - Braniff, PanAm, TWA, and Eastern - went out of business as a result of increased competition. It's happened to the textile industry as the Deep South has been ravaged by competition from clothing shops in Indonesia, Pakistan, and Honduras. Now it's happening to the auto industry.
I take that back. It's been happening to the auto industry for a couple of decades. GM's market share is a fraction of what it once was (in Donald Trump's words, "they've been decimated"), and Ford is struggling. Right now Chrysler, which is really a German company (the US arm of DaimlerChrysler), is the only one making some headway.
While I think that he does have some salient points, Pete DeLorenzo also is just making excuses. Here's the money quote:
GM and Ford, by sheer virtue of their size and place as two of America's iconic industrial giants will be the lightning rods that will put all of these issues on the table. Yes, they're responsible for much of the trouble they find themselves in and the reasons are numerous - ingrained bureaucratic complacency, short-term thinking instead of long-term planning, a lack of conviction to do what's right instead of what's politically and financially expedient, woefully underachieving executives who squandered every opportunity to deliver the attractive, high-quality products so desperately needed in the face of challenges from relentlessly-focused import manufacturers - and on and on and on. I've documented Detroit's downward spiral in detail for the last six-and-one-half years of doing this publication.

But Detroit's current predicament isn't all of their doing, either. And without the corresponding serious discussions and actions in Washington, we as a nation will face severe consequences. This country's lawmakers have been cruising along for years while displaying an Alfred E. Neuman-esque, "What, me worry" attitude, and they're just now waking up and realizing that the dire straits facing Detroit are inexorably linked to the overall well being of the country and its manufacturing base. Yes, Detroit has contributed mightily to its problems over the last 25 years, but there's no denying that the playing field is far from level. As a matter of fact, because of this country's dismally naive trade policies, it continues to be luridly skewed in favor of the import competition at almost every turn.

He's absolutely right in the first paragraph. US auto manufacturers in the 80s and early 90s were arrogant. They assumed that because they were GM, Ford, Chrysler, and AMC we'd buy whatever they put on the road, no matter how ugly it was, how bad the gas mileage was, and how likely it was to blow up or catch on fire. Then the Japanese started making good cars. That was certainly unexpected! The Japanese gained ground and pretty soon they were in a dogfight with US manufacturers. US companies started to make reliable cars again and emulate the import look, they merged (AMC with Chrysler, then a decade later, Chrysler with Daimler-Benz), they improved the gas mileage. Nevertheless, the Japanese continued to gain ground. Mr. DeLorenzo assumes that it's because of currency manipulation (everyone's current bugaboo) and health care costs. He's part right. Health care is a massive liability, and it's time to ditch the third party payer system. We're actually moving to do this, contrary to his beliefs. HSAs are the wave of the future, and they are law now. It will move health care back to the consumer. We will decide the cost of our health care and what's worth it to us, and the government won't tax that money. We can also use it for retirement, because at retirement age we can pull money out of our HSA tax free. Very, very nice. In addition, because there are catastrophic circumstances that are beyond our control every so often, there is a catastrophic coverage component through a third party at a highly reduced cost. I won't get too much into How Health Care Ought To Be (that's a topic for another blog), but I did want to address his concern there.
As far as tariffs and currency manipulation are concerned, I don't see the case. The real countries that matter in this arena are Japan and Germany. We don't get cars from anywhere else, so I won't worry about them right now. The yen is currently at 120 yen/1 dollar. That's up from 100 yen/1 dollar of a year ago, but it's down from 150 yen/1 dollar in 1997. That means that Japanese imports have less of a margin than they did less than 10 years ago. In addition, as a reaction against Japanese tariffs against US vehicles, we've slapped a tariff on Japanese imports too. That sounds pretty level to me. Oh wait, the Japanese actually reacted to both of these by opening factories here in the US. That means that those cars are paid dollar for dollar, eliminating currency fluctuations, and they aren't subject to tariffs. So what's really the problem? It can be summed up in one word: unions.
Detroit has been unionized for decades, and management made some boneheaded concessions to the unions back in the 80s. Every time Ford or GM shuts down a plant or cuts back on production, the workers from that factory still get paid their full rate (including benefits). A recent Wall Street Journal article (subscription required) put it best:
Analysts estimate that the JOBS Bank is costing Detroit's auto makers and Delphi Corp., the big former GM unit, more than $1 billion annually -- at $130,000 in wages and benefits per worker per year.

GM has 5,000 to 6,000 workers in its JOBS Bank, analysts estimate. The company hasn't disclosed a figure. Chrysler has about 2,500 union workers in the program, and Ford says it has about 1,100.

The JOBS Bank toll at GM and Ford could rise substantially in the next two years as the auto makers launch restructuring programs designed to cut excess capacity in North America. Auto analysts say the JOBS Bank also hurts the Detroit auto makers by encouraging them to keep building slow-selling products rather than shut down plants and lay off workers who will keep getting paid.

As a result, it doesn't pay to cut production. That leads to more vehicles than the market can bear, which leads to rebates to lower the cost of the cars, which pushes down values, which hurts owners of American cars, which hurts car companies, which starts the cycle over again. The only way to get out of this cycle is to eliminate the jobs bank. Then they can cut production to a reasonable level and save a ton of money on employee costs. That would stabilize American car companies. Then they could turn to their other problem: design.
To some degree they've already done this. Another WSJ article (subscription again)talks about this problem. There are some cars that are making an impact: the Mustang, the Chrysler 300, the Chevy HHR, the Hummer, and Cadillac vehicles are notable in this area. They're distinctive, they're bold, and they're selling (even with high gas prices). On the other hand, dogs like the Chevy Malibu are sitting on lots forever. People will buy cars that look good and can be told apart from the generic Japobubble, it's as simple as that. Innovation is also key - high gas prices have killed Detroit's golden goose, the SUV. They're starting to respond, but it will take a while to get there, while Toyota and Honda moved before the market told them to and they're in a prime position to clean up as a result. I think that US automakers can fix their problems, but it will take some tough steps, including a possible strike, before it actually happens.

Hat tip to Nick for the article that inspired this post!


themickel said...

Wow, an explosion of posts from Sorro, an otherwise sporadic blogger. What is the cause of this sudden prolificness?

Sorro said...

You know, I have no idea. I just started writing things and then I did it again the next day, and now I've actually got an unbroken string of like 10 days in a row that I've blogged. Maybe it's a permanent change, maybe it's using up some energy before the baby comes, or maybe it's just dumb luck. Whatever it is, I would like to have it continue to happen.