EYE ON
AMERICA Cutting through all the auto
smog By Peter Morici
The leaders of General Motors, Ford and
Chrysler recently had their long-awaited summit
with US President George W Bush. Sensitive to
public sentiment, auto-company leaders argued that
they were not looking for special treatment.
Instead, they sought adjustments in public policy
that would benefit both the United States and
their operating environment. A close look at their
problems and actions indicates auto makers are not
willing to
address tough issues and
Washington cannot save them.
Importantly,
the industry is healthy. About as many cars and
trucks will be made in the United States and
Canada in 2010 as were made in 2000. Toyota,
Nissan and other foreign rivals are adding
capacity and paying workers well. The Detroit
Three are shuttering factories because sloppy
management, bloated executive pay and unrealistic
labor contracts raise their cost per vehicle at
least US$2,500 above that of other companies
operating in North America.
The auto
makers spoke with Bush about energy, health care,
foreign exchange, and material costs. In doing so,
they demonstrated the cognitive dissonance of an
alcoholic arguing his high blood pressure is
caused by his wife's cooking.
On energy,
the Detroit Three proposed reducing US dependence
on imported oil by building more flexible-fuel
vehicles and having Washington guarantee the
availability of gasohol and bio-diesel. The corn
(maize) and soybeans necessary to make these fuels
require a lot of oil-based fertilizer and very
large subsidies to be viable on a meaningful
scale. In contrast, hybrid vehicles save
considerable gasoline directly, but Toyota and
Honda have the jump on US auto makers in
perfecting and marketing this technology.
Instead of letting the market decide, the
Detroit Three wrap themselves in the banner of
national energy security, when they are really
pleading for subsidies to compensate for their
slow start in a popular, market-viable,
energy-saving technology.
On health care,
the Detroit Three spend at least $1,000 per
vehicle on gold-plated health benefits for their
workers and blue-collar retirees, and want
Washington to nationalize elements of health care
for everyone. The problem is that additional taxes
would be needed and paid by all businesses, the
benefits would look a lot like the benefits Toyota
and other more prudent companies provide their US
workers, and the United Auto Workers (UAW) would
want the Domestic Three to provide gap coverage
for the differences between national health care
and what their members now receive. The Detroit
Three would remain disadvantaged.
On
trade, the Detroit Three complain that the cars
and parts imported from Japan benefit from a
dollar overvalued against the yen, thanks to
Japanese government intervention in
foreign-exchange markets.
The dollar is
overvalued against the Chinese yuan, Japanese yen
and several other Asian currencies, which affects
all domestic manufacturers competing with imports.
Each year, China sells in currency markets yuan
sufficient to buy more than $200 billion in US
dollars and other hard currencies to keep the yuan
40% undervalued and its exports artificially
cheap. Japan and others cannot appreciably revalue
their currencies until China stops this egregious
violation of free-trade principles, lest they
disadvantage their exports vis-a-vis Chinese
products.
Consistently, GM, Ford and
Chrysler lobby for relief on the yen but are
reticent on the Chinese yuan, because they are
building factories and profiting from protection
in China. They can't have it both ways: a stronger
yen and a weaker yuan, free trade with Japan and
protection in China.
On material costs,
they complain about the price of metals and
plastics, and are lobbying for the removal of
anti-dumping duties on corrosive-resistant steel
from Japan, South Korea, Germany and other
countries. The total cost of this material
composes only about $500 in a product whose price
averages more than $25,000. A small reduction in
that cost would benefit foreign factories in the
United States as much as or more than the Detroit
Three, because of their tight relationships with
suppliers back home.
Moreover, since 1963,
the Detroit Three have enjoyed a 25% tariff on
trucks imported from Japan, South Korea and other
countries outside the North American Free Trade
Area. That provides a margin of protection of more
than $5,000 per vehicle. They have strenuously
defended this tariff through the Tokyo, Uruguay
and Doha Round world trade negotiations, making
their pleadings on steel tariffs awfully
hypocritical.
Toyota's hourly labor costs
at US plants are about $35. At the Detroit Three,
they are about $80, thanks to cumbersome work
rules, excessive sick leave, extra time off, and
other benefits imposed by an arcane UAW contract.
Meanwhile, UAW president Ron Gettelfinger tells
his members national health insurance and
government largesse are the answer.
The
real problem facing the auto companies is the UAW
contract, and GM, Ford and Chrysler managers do
not have the ability or the courage to educate
Gettelfinger, go directly to their workers with
the facts, or both. If they did, then they would
also have to explain why such men as Rick Wagoner,
chairman and chief executive officer of GM, and
Alan Mulally, president and CEO of Ford, are paid
$5 million a year to destroy billions of dollars
in shareholder value.
No amount of
government help short of massive subsidies could
save a domestic industry whose leaders are so
selfish and detached from reality.
Responding to their pleadings, Bush gave
the auto makers a sympathetic ear and a polite
"no". He should have given them what I offer my
adolescent son when he is unreasonable: a
figurative boot in the rear.
Peter
Morici is a professor at the University of
Maryland School of Business and former chief
economist at the US International Trade
Commission.
