Friday, November 21, 2008

The Problem With Detroit

The U.S. auto mobile industry in an a shambles. Why?

Well, there are several contributing factors, such as higher labor costs, but there is one big reason. U.S. automakers don't make fuel-efficient vehicles that can compete.

Chronically, the automakers have planned on a short time horizon. They didn't invest over the long term, and they're unwilling to change the status quo. Ford, GM and Chrysler have too many inefficient trucks and SUV's, and their manufacturing processes take too long to retool. That's why cars like the Pontiac Grand Prix don't change body styles for 5 years or more, whle Toyota Camry gets a facelift every year or two.

Though the automakers developed hybrids, electric and fuel cell vehicles, they did so primarily as a PR move, with no intention of shipping green machines to the public unless they were absolutely forced to do so. Toyota forced their hand, and now American cars are playing a sad game of catch-up.

This myopic strategy has been ongoing for the last decade. Everyone knew the U.S. car industry was doing it.

What could have changed this? CAFE! Increasing average fleet fuel efficiency standards. The government could have forced the U.S. auto industry to build more fuel-efficent vehicles.

This would not only have made our carmakers greener, it would have made them more competitive over the long term.

Why didn't it happen? Because the Republicans insisted that it was better to let business play their game instead of having government get involved. Oh, and political contributions from the automakers might have had something to do with it, also.

It's really very simple. When you look at an industry, there are limitations in how the marketplace works. Most U.S. corporations don't have a long-term strategy. They're obsessed with short term profits and stock prices. Meanwhile, other governments write articles of legislation that force their industries to plan for the future. Consequently, their corporations are safer, greener, and more citizen friendly, and more competitive.

I'm all for free trade, but if we're going to take down trade barriers, why should the U.S. compete with one hand behind its back?


Wakefield Tolbert said...

Curious, DL.

I know why I would write such a post, but given your main interest in more abstruse things, I'm wondering about your interest in the Big Three's travails :)

Why is force deemed necessary in these kinds of settings?

The automakers are in trouble due in no small part for trying to GET AROUND previous standards. They made a calculation that worked for a while and then it came back to bite them. When standards got tightened regarging sedans and other smaller vehicles, it should be noted that CARE did not come down as hard on TRUCKS. A new synthesis was created by Detroit. The SUV, borrowing from the exotic advertising blubs given the history of the safari landrovers, etc. The SUV blended size and utility with the lackluster CAFE standars (and how COULD the standards be strict, we're talking heavey truck-like vehicles here) and Americans loved them. They still do.

What happened is not so much a failure to read consumter demand, but rather to FOLLOW THROUGH with something Detroit, like many other American industries, has failed to do in the past: Understand that the rest of the planet exists.

Not talking about geography so much as PROUDCTION. Japan now makes the Tundra, which by all accounts is excellent. As far as mileage, though, keep in mind that while Hondas and BMWs and Subarus and all the other competition IS doing well on the sedan front, this is NOT the case with Japan's SUVs and trucks in the upper end market.

I'm not a shill for the Big Three by any stretch. Just pointing out that the reason Detroit is disadvanted here is that other countries automakers don't have our levels of sumptious contracts that virutally assure a loss on every American vehicle sold. Part of this is legacy costs built into, say, every GMC truck. There are 96,000 UAW workers. But in turn the Big Three needs retirement and pension payouts and health insurance tabs on over a MILLION.

I believe in health care and other goodies, but my dear lord, man, you can't run a business as if its a giant retirement home with a side appendage that makes cars once in a while. Some compromise IS in order here, and not a payout for the Democrats to the UAW. Granted, a large part of this is said by some experts to be the difference in the competition's better nationalized health car plans, which might alleviate much of this burden. But then again that comes from our pockets too.

Thus the presecription that standards would force the issue is not quite so simple. That's a fine and noble idea in principle, but depends on the B3's response to consumer demand. But the Big Three and the unions, in addition to fuel efficiency, need to clean house in 2009.

The American people's pocketbooks will largely determine fuel efficiency needs, even in a time when gas prices are coming down. This is still true, even with relatively good times at the pump---as other economic issues will be locking up extra cash in a lackluster economy.

Wakefield Tolbert said...


Meant to say "CAFE", as in CAFE standards. Ah well...

The point I forgot to add was this:

Let them have a structure bankruptcy. Bailouts save workers jobs on the temporary basis. But does nothing to assure greening of the industry.

Detroit should have seen the writing on the wall. But just because something is deemed important is not a call to have government force the issue.

Americans might very well like hybrids and other exotics. But with the economy teetering on the edge of Bailoutistan, and the bottom line of the pocket book being more of a determining factor in the coming months over theoretical constructs about saving cuddly-fuzzy polar bears at the price of 30K green sedans, this pitch better be a damned good one for most of us.

And certainly not at the price to keep the grizzled retirees in the gravy. We have several economic tectonic plates grinding against one another here.

One of them is going to slip.

Doctor Logic said...


American industry has some bad habits. They typically have very short time horizons. Like the next few quarters of SEC filings and what that will do to the stock price.

Consequently, American industry doesn't plan ahead. Inside corporations there are political processes. If a management team pushes a strategy and that results in short term gains, they get promoted. Quite Darwinian, really. The problem is that reason is capable of better performance than Darwinian algorithms. The short terms strategy works (sometimes for years) until, well, it doesn't. And it doesn't matter whether the dead end was foreseen by reasonable people inside the corporation. Those people who reason about the future typically get crushed by those with good records at short term profits and stock values.

The question is, can government do anything about this? You are suggesting that government ought not touch the system. Let the automakers die, and they will be replaced by a better species, e.g., Toyota.

But the reason that the foreign automakers are so good is that their governments realize that there are better strategies than optimizing short term profits. They impose stricter regulations on their automakers, and their automakers produce better products as a result. Why does America have to be the nation that competes with one hand tied behind its back.

Government involvement doesn't imply micromanagement. CAFE is not micromanagement.

In your response you suggest that it was the automakers' attempt to bypass CAFE that caused the problem. I think that's total nonsense. Congress let the automakers bypass it. If I knew CAFE was being bypassed, so did every politician in DC. The Democrats have been trying to strengthen CAFE since the late 90's. It was the Republican ideologues who stymied the effort. The original loophole for SUV's was intended to protect small businesses that rely on heavy trucks. This was a trivial hole to plug had Congress decided to do so. And, again, it's not micromanagement.

Markets are not free when we're going to bail out the losers. And there ARE cases in which we do not tolerate losers for moral reasons. National security is one case. Welfare is another. Medicine is another. Elements of these domains can benefit from free markets, but there are limits. In the case of the automobile market, the U.S. interest is not solely in having cars available to buy, but in safeguarding American cars and jobs.

The auto bailout is not an expense we're just now deciding to take on. The Republicans decided to take on this expense in the 90's when they blocked CAFE. If folks wanted to avoid the bailout expense, they should have been paying attention back in the 80's and 90's.

Wakefield Tolbert said...

I seriously doubt even the most stringent environmental standards, while arguably necessary (and that's not my main point), we'd have avoided the current bailout fever. When I said they were in trouble due to getting AROUND the standards, this was neither advocacy for such NOR a commentary on the expense of such standards, or their avoidance.

EXCEPT in one sense: In doing so, the issue was the long term impact of pushing to SUVs (which Americans DID like for a while) but failing to shore up the issue of quality.

Several things here.

You've assumed that American jobs need protecting. But what if I took to protecting, say, the Candlemakers Union Local 305?
-----from unfair competition from Edison electric?

Carriage Makers Unions Local 48? What if I pitched to have all rural blacksmiths protected from both foreign competition and
mechanized production at some factory imported from Taiwan? Protect those jobs anyhow? This was proposed for US steel as
well. But the fault of the Big Three is not so much legislative action, which many companies engage in, but the end user.
They failed on that front. Think of the phone companies, supposedly regulated to the max on cost but fantastically expensive a
monopoly as one can find in polite society. And yet the service is lousy due to little effective competition even to this day.
They've turned the table on this "oversight" and "regulation" mess and turned it AGAINST the end consumer.

Given the frequent use of pork barrel politics and the silly notions that legislators suddenly lose self-interest and can act like
hard nosed business venture capitalists all the while acting on the public behalf is all the more suspect. That's a nice way of
saying balderdash without its more vulgar variant.

Capitalism is often about creative destruction. Which is why the Commodore 64 is not likely to be what you just typed on in your last missive.
Should we protect the old style computers? Most of those companies either died or innovated or updated. The Big Three
will need to do the same if we're not to have a repeat of the Great Bailout of 08/09.

The US sugar industry and companies like ADM (Archer Daniel Midland) get BILLIONS in protection on the notion that these
offerings are savings jobs and protecting salaries. Obviously there is a grain of truth in this large bucket of context.

The other cost? Sugar from workers in other nations is suppressed on the world market. While this sounds ideal, the fact that
we are now on a world stage is problematic. Protectionism cannot go on forever.

You mention CARE standards as being tight in other lands. But the US consumer did not pick cars solely on fuel efficiency
considerations, but also went for dependability and style. Two areas where the Big Three have floundered. Quality, and staying
away from the shop all the time, certainly come to mind. 100 thousand miles and most American cars are ready for recycling
at prices far more expensive than Hondas and BMW, where you just cut your teeth in, so to speak, at that same mileage.
Supposedly the quality gap has narrowed. But there is debate on that. The issue is only--at most--the CAFE standards.
If GM were truly able to make all this damned money and yet pissed it away all during the years they worked around and
legislatively pitched themselves around the tighter CARE standards, then it tells me they are piss poor money managers
for the effort, and secondly that regardless of long range or short range considerations, not only can they not manage money
but they still can't manage productions costs. We can't pay one million people mostly not on the payroll and make cars
on the side. Its their fault.

Also, as some have observed, if any such segment of the economy is that big that its failing would send ripples to everyone, then by
George, its TOO DAMNED Big. Our economy cannot hinge on favorites, and a wonderful book called Competing Visions details
how so called industrial policies have failed in the end to produce much besides wards of the state. First, the whole "de-industrialization myth" is just that.
The example of Toyota being forced into some Faustian deal with government is misleading, as those standards until recently were not the larger consideration.
Not for Americans like myself who preferred the Honda Prelude's ability to crank on a cold morning and spending less time tinkering with expensive parts.
As I said before, you cannot have ANY business--nothing--operate on the basis of pensions plan payouts with car making on the side.

But sometimes the failure of an industry is just what the doctor ordered. What if I created a mechanized system that didn't need
workers at ALL? Mercedes Benz (speaking of foreign brands) is hard at work on this as we speak, and I can assure you the decisions
we not solely be made on which workers need pension plans and health benefits and payouts to moms with kids in college.

Then WHAT???? Outlaw those procedures and methods??? That actually happened to me when at the phone company and then I got nixed due to automation. Automation that is justifiably far more efficient then paying clerks 25K a year for typing. Outlaw that too?

The examples are numerous.

Business cannot engage in the best planning when extended...well...everything is also on the dole.

Yes, the Big Three didn't always play their cards right. They took gambles, and no free-enterprise scholar has stated there is no such thing as legislativ pitching, nor for that matter can we pretend, like GM did, that the rest of the planet does not exist and there's no need to fret about quality so long as the stock options and Barbados condo are in the black.

But they boned that one up not due to legislative interference one way or another or either of the directives of influences.

They did so due to not planning, as you said. But just for "short term" thinking. Rather, the smug assureness that they never had to
make changes whatsoever, and that mockery of the little Japanese Rice Rockets was damned good enough. What irony.

And of course they never faced down the UAW either. I seriously doubt that the BMW plant in Spartanburg SC, just up the road
from here, pays what the UAW would like to see the workers paid. Yet the cars come on out every day, and like it or not, this does not keep grandmas med costs down.

Life has to have a trade-off.

For the Big Three, for the longest time, the issue has not been so much government dictated standards (although this could be a hindrance at some point), but rather intransigence in doing the same old while the rest of the world moves ahead.

Yes, Japan has tighter CAFE standards. But do they enforce the real issues here--quality?

If that be the case, you'd have a point to make.

There has to be a trade off. We can't do it all. And trying is called "socialism." Barry might like this, but then he's well marinated in Chicago's bullcrap ACORN politics and has never had the reigns of a real job in his life. He's run nothing but his mouth.

If we REALLY did deign to pay all workers "what they are TRULY worth" rather than what the market
dictates, then burger flippers at Mickey D's would make 40K a year in the name of "social justice", cars would cost 100K, and unless you're only paying a teen service for the yard, you couldn't get your yard cut for less than 250 bucks, as the immigrant no doubt also, like you, has a "family to feed." It is laxity in such issues like housing, according to economists like Greg Manikow, that got the ball rolling downhill for the souring economy in the first place.

But we can't do that.

However, let me add one thing in their defense (the Big Three). Just a small note. Often times this shibbeloth about "planning for the long term" can come back to bite you. That's because very often things CHANGE TOO FAST for long term planning to set in.

The Big Three have been overcautious about consumer wants.

Wakefield Tolbert said...


CAFE standards are not micromanagement in themselves.

Agreed on this narrow point.

But more than one advocate of "national industrial policy"
(Barry Bluestone comes to mind, as does Robert Reich) has weighed in on the need to make sure there are select "winners and losers" in industry. And in porkbarrel politics, while not called "micromanaging", it does imply something more involved than just government cash or protection or fuel standards. Even simple edicts can have negative consequences. People who claim this is nothing more sinister than the handy UL tag on electronics or FDA or USDA stamps on meat need to take note about what industrial policy might mean. And we could be heading down that path, as many advocates are arguing yet again this will be the prescription for competing with so-called "Japan Inc."

And keep in mind that Japan is not doing to hot right now either. They've gotten into some nettles over their corporate culture. Like the guys who are only in recent years no longer given life pensions and jobs for life long after their useful days are over in the executive suite--the ones whose contribution was sitting around making paper origami birds for....120k a year.

Ahhh---the Dark Side of sumptious benefits.....

And it is doubtful that the would-be advocates of industrial policy would be happy with merely CAFE standards and money transfuctions at some point, and start to make political/social recommendations and pedantic, and ticky, rules. Often related to PC considerations from Cloud Cuckoo land.

Corporate life in itself is bad enough. I'll never forget the 5 PAGE MEMO highlighted in a sociology text about the increasing absurdity of crossing all Ts in a corporate environemnt.

More so with issues relating from personal issues like dating and alleged name-calling and other real or percieved slights, to the ever expanding lists of "NO"s and DON'TS that plague the cubicle worker's life.

Perhaps by this "aid" to corporations, they mean only massive transfusions of money?

OK. Fair enough, eh?

But that only shields (as you implied before with different words) the "day of reckoning about quality"--

I.E.--it shields the industry from consumer demands, which in a market system IS the planning of MILLIONS of permutations that typically even the most astute eggheads cannot model. And even if so, it does not go inside the consumer's head.