Page 1 of 3 US auto rescue - a society health check
By Julian Delasantellis
During the summer, a local car dealer, eschewing the standard offers by his ilk
of "free balloons for the kiddies, and all the franks you can eat", offered
those taking a test drive in one of the dealership's new cars shares of stock
in either Ford or General Motors, as the ad put it, in "America's great car
companies".
I wasn't looking at a car back then, and even if I had been, I think I would
have gone to the dealers offering the barbecued hot dogs instead of the stock
shares. Now, it doesn't really matter. Both the franks of summer and the stock
shares currently share a similar fate, in that they have degenerated from being
items of at least some value to now being absolute excreta.
Recently, on their second trip in three weeks to Washington DC
to beg the US Congress for US$34 billion in immediate largesse necessary to
save their enterprises from near-term vaporization, the head of America's three
great storied and legendary automobile companies, Alan Mulalley of Ford, Robert
Nardelli of Chrysler and General Motors' Rick Waggoner, along with United Auto
Workers' president Ronald Gettlefinger, met substantial resistance to their
requests to access government aid.
As the auto industry executives must have realized in late November as they
flew into Washington on the wings of their private jets and then were
subsequently ridden out of town by rail, now is a particularly inopportune time
to seek coinage from the public purse.
Americans, a nation of people that worships private enterprise but despises the
banking and finance industry that allows it to exist, looked on impotently as a
$700 billion financial system bailout that they hate, the TARP (Troubled Assets
Relief Program), was passed into law in early October. They are thus now even
more hostile to having even more of their taxes going to "corporate bigshots".
Many Republicans, still seeing stars from their election drubbing of November
4, have, after being forced to gulp down a year of massive government
financial-system bailouts from their nominal party leader President George W
Bush and his Treasury Secretary Henry Paulson, have come to the conclusion that
the party must return to its ideological roots as a limited, small-government
political force.
The fact that its Congressional defeats in both 2006 and 2008 have left the
Republican Party as an organization with a significant part of its core
membership (and almost all of its leadership) in the Deep South, where
Mercedes, Toyota, Honda, Nissan, Subaru and Kia have in recent years opened
highly profitable non-union manufacturing plants that are now very successfully
competing with Detroit, is not enamoring the arguments of the US flag carmakers
with the minority party either.
The Democrats do not have the same ideological opposition to government
intervention in the private markets, but after years of having their policy
concerns, on issues such as energy conservation and global warming, dismissed
by Detroit's power elite with utter back-of-the-hand contempt - such as GM vice
chairman Robert Lutz famously opining that "global warming is a total crock of
[excrement]" - they're swallowing hard when being called on by their party
leadership to support auto-industry aid.
Add the fact that, at every office water cooler or holiday party in the
country, the bailout is being decried by all those Americans who bought a US
nameplate car over the past 30 years or so "and I'll never buy one of those
hunks of junk or step into one of those den of thieves dealerships again" means
that, just at the point of greatest need, the US auto industry has a long way
to go before it can confidently expect a substantial government rescue.
That is unfortunate. Although many arguments can be made that Detroit's
travails are all of Detroit's own making, not all are, and, even if that was
not so, the present state of the American economy makes standing on principle
in opposing a bailout about as sensible as demonstrating proper methods in gun
cleaning by blowing one's heads off.
In one sense, the plight of the auto industry is a fairly common American
problem, as it has been allowed to fester and worsen right up until the
situation has become the most dire crisis possible. This is the common way in
which public policy concerns are addressed in modern-day America; one should
not expect much of a consensus on what to do regarding global warming to
develop prior to most of the Great Plains being burnt to a crisp.
I recollect seeing in the early 1980s a TV news crew sticking a microphone in
front of a just laid-off US autoworker. His response was far from surprising:
"I lost my job to the Germans and the Japanese. I thought we beat those two
countries."
The person being interviewed was too young to have even been alive during World
War ll, let alone to have fought Germany and Japan, but his sentiments were far
from uncommon. Much of America felt the same way about the new economic
competition from its previously vanquished foes; to judge by the way they did
their job, that included most of the management of US auto companies.
As described by David Halberstam in The Reckoning, his massive 1986 book
on the decline of Ford and the rise of Nissan, the generation that came to
occupy the highest levels of management in the US auto industry in the 1970s
and early 1980s cut their teeth in the business as young executives in the
1950s, certainly, the fields of Elysium for US automakers.
Their main pre-war competitors, Germany, France, Britain, and to some extent
Japan, had been either bombed or bankrupted out of the market, leaving Detroit
alone to satisfy the needs of the huge and car-voracious domestic market. Most
of the US automakers were about equal in terms of the quality of their product
output, but that factor wasn't even all that relevant, since cars then were far
less complicated machines than they are today, and prosperous America of that
time made car purchase decisions far more on the basis of sleek lines and added
chrome than anything else.
The Germans and Japanese were making tentative inroads into the market by the
mid-1960s, but their initial products, Volkswagen Beetles and Toyota Crowns,
with their small (less than one liter) engines, were more seen by Detroit as
objects of derision, said to be probably driven by pinko liberal arts
professors and beatniks, rather than serious competition. In Detroit, they were
still very happily pumping out all those full-throated rubber burning V-8s .
Thus, in corporate, just like in animal, evolution, it was the slow, fat and
the dull that were the first, easy prey for the lean, hungry and lithe
predators.
The clock starts ticking
The first tick on the clock for Detroit was the 1973 Arab oil embargo and
subsequent oil price shock. American car owners soon realized that all those
little "foreign jobs" they so derided were now breezing past the gas stations
where those with gas guzzlers were spending hours in line. Also, something else
was noted - the foreign cars didn't seem to be so prone to breakdown as the
American cars.
Very few mechanics were at first competent in working on foreign cars, so the
foreign manufactures realized that to sell their product in America, they had
to be exceptionally well made. If there were no mechanics, the cars would be
built so as not to need them.
American W Edwards Deming, a veritable prophet without honor in his homeland,
became a much revered and respected figure in Japanese industrial circles;
yearly, the Japanese Union of Scientists and Engineers awards the Deming Prize
for those who advance the concept of quality in manufacturing.
Seeing their sales plummet following 1973, the auto industry realized that they
had to give at least the appearance of respecting market demand and build
smaller cars. This was an absolute disaster. Like a large woman who tries to
look more svelte by pouring herself into a smaller dress or shoe, Detroit's
initial idea of a viable small car was a vehicle with pretty much the same big
engine bolted under the hood, with not a millimeter of clearance to spare, into
a smaller frame.
This period, from the 1970s to the early 1990s, saw Detroit producing some of
the worst cars ever made - the AMC Pacer and Gremlin; the Ford Pinto and
Escort; the Chrysler "K" Cars, the Aries, the Lebaron, and the (not very much
at all ) Reliant. Finally, GM's X Cars, such as the Chevrolet Citation, and its
1982 J car line, featuring the Chevrolet Cavalier and the Cadillac Cimarron.
This last was essentially a Cavalier, which since it featured cheap fake wood
appliques glued across the interior and an imitation leather wrapped steering
wheel, GM felt was justified having a sticker price twice that of the Cavalier.
The quality issue, its presence in foreign nameplates and the perceived lack of
such in the American domestic product, had a predictable impact - American
manufacturers began steadily to lose market share to the foreign companies.
Still, the situation was, at first, not all that bleak. Up until very recently,
the domestic manufacturers still captured 60% of more of the US auto market.
This was due to brand loyalty, family purchase history, and, to a large extent,
the patriotic feelings of US auto consumers. Toyota could trumpet the high
quality of their vehicles, but there was just no way that they could say that
their cars were as innate to the American way of life as "baseball, hot dogs,
apple pie and Chevrolet".
American auto consumers were willing to pay for an inferior quality product,
but they weren't that willing to pay a premium price for that inferior quality.
American nameplates realized that they had to price their products at or below
the price points of similar products sold by the Japanese quality leaders,
Toyota and Honda. Thus, the second nail was entered into Detroit's coffin. For
all the trouble they had in competing with the foreign brands on quality, they
had just as much competing on cost. Without being able to charge a price
premium to the Japanese, Detroit was sealing its fate as the place that, while
it could sell cars to Americans, it just couldn't make that much money doing
so.
Economics teachers usually start the lecture on international trade with the
theory of competitive advantage. This states that nations should not try to be
completely economically independent and produce all their needs domestically
(in economic lingo, an "autarky"), but should produce lots of what they're good
at, what they can produce cheaper than anyone else, and trade what they don't
use domestically to other countries who can most efficiently produce what the
home country can't.
For instance, I suppose that if Saudi Arabia really thought that it was
important to be self sufficient in lobsters, they could do so. They could
excavate millions of desert hectares, fill the space with sea water, and then
make sure the water was kept cold enough for the crustaceans' liking.
Obviously, however, it's far cheaper to buy the lobsters off the docks in New
England then sell the Americans what they can't produce cheaply - crude oil.
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