Sunday, November 09, 2008

Whither the Big Three? And the Prius?

As US automakers seek $50 billion from Uncle Sugar and, because two of them are also European auto makers, a similar pile of Euros from the EU, we consider why they're in a pickle when everyone's car sales are down, including the Japanese, Korean and European manufacturers who don't seem to need a handout.

Many journalists will parrot the party line that Japanese and other manufacturers got ahead of their US competition in the manufacture of fuel-efficient cars. We think the problem lies elsewhere.

First, there's the matter of what the Big Three owe present, future and former employees thanks to two generations of labor contracts negotiated with the UAW. They're on the hook for pensions and health insurance for retirees, aside from current employees' wages and benefits. Labor costs for the Big Three are substantially higher than for Japanese, Korean and European manufacturers who operate stateside.

Second, there's the matter of CAFE standards. These require that the Big Three divide their entire "fleet" of manufactured cars into two groups, domestic and foreign. Their domestic fleet must then meet certain overall standards for fuel efficiency. With their high domestic labor costs, the Big Three can only make money on big, expensive cars if they're made in the US. But they have to make and sell small, cheap cars at a loss to be allowed to sell the ones that are profitable and meet CAFE standards. Worse, if they import cheap, efficient cars from their overseas plants, they don't count against CAFE standards for the domestic fleet. That last bit, by the way, was the demand of the UAW: it has no effect whatsoever on actual, overall fuel efficiency.

We think that the Big Three have made some dumb business decisions along the way also. They have that in common with other businesses. Ford, for instance, built unreliable cars and then muddled their marketing on top of it. But one can easily misunderestimate the degree to which the government from which the Big Three now seek a bailout is responsible for the mess that they're in.

But given the exchange of political parties just completed over the last two years, we expect that whatever proceeds to become an expensive compounding of existing problems. CAFE will get more strict. Discussion will focus on saving "well-paying" jobs, which is to say jobs on terms acceptable to the UAW, whether economically viable or not. CAFE will get stricter. All this will be rhetorically supported with talk about the failure of the Republicans to regulate properly, the Golden Age of American Manufacturing when everyone who worked belonged to an AFL-CIO affiliated union plus the Teamsters and the gap between rich and poor was narrower, and how the executives and their massive salaries and bonuses are the true bad guys.

The question is how long folks will believe that story.

There may be another tale developing that will be revealing. More or less simultaneously, the tax credit for buying a Toyota Prius and other Toyota and Lexus hybrids has run out. It will soon run out on Honda's hybrid too. Meanwhile, gasoline is below $2. The economic incentive for buying such vehicles has officially evaporated and will perhaps leave both manufacturers with a lot of unwanted cars to sell and a lot of manufacturing capacity that needs to be retooled. Such things happen in freer markets. But in more regulated markets, they happen with greater frequency and severity.


Christine said...

My husband is a journalist and he wants to know when the government is going to bail out the magazine industry. Print journalism is in even more trouble than the auto industry after all.

JB in CA said...

Gas is below $2 a gallon? Not where I live. I just filled up yesterday at $2.75 per, and that was the lowest I could find.

Anonymous said...

anony in OH says.... yes gas is cheap now but regardless, I'm sure the60,000th call rule as part of The Energy Policy Act of 2005 will continue with the new administration and where ther's a credit there's a buyer.

The japanese not only got ahead in manufacture of fuel-effecient cars but also in production line technology/methodolgy. The big three are still not very nimble compared to their flexsible manufacturing counterparts and quick adaption is the name of the game. Legacy labor costs are easily solved by filing bakruptcy and dumping the pension to the US Guaranty Trust (in due time my due time......)