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The US car industry plight, updated There is a good article by Bloomberg columnist Mark Gilbert on why just transferring billions of taxpayers’ money to America’s embattled automakers is a bad idea, and he has thoughts who might be better equipped to run these firms.
As he says, long before the credit crisis hit, some, if not all of the carmakers were suffering from problems. There is a glut of cars on the world market and the spike in oil prices – admittedly now in reverse – has made a number of such vehicles uneconomic.
Talking of oil, the black stuff is now below $50 a barrel, down by about $100 from its peak. Wow.
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The plight of the US car industry is nothing to do with the credit cruch (though its probably not helping). It is almost entirely the fault of those that are running it and they should be left to live with the consequences of their bad managment.
Much the same could be said of the banks however…
Why is this article linked to here? It is really poor, written by someone who obviously lacks any kind of understanding of anything except what is on the front page of the New York Times. Really stupid suggestion to throw even more money away on alternate energy scams.
Wall Street Journal had a much better editorial recently recommending bankruptcy as the best approach to cutting the Gordian Knot of unsupportable union contracts, pension obligations, and dealership issues.
If pension obligations can bring down once mighty GM, then what will Social Security obligations do to the once mighty US Federal Government?
Any talk of the US auto industry should take into account the CAFE standards, which forced automakers to build cars that Amercans don’t want. Even the politicians who supported CAFE don’t want them.
A for banks, its the same story. You need to take CRA into account. Many of the bad decisions weren’t from the bankers.
On the west side of the pond we remember fondly the product of a nationally owned automobile manufacturer, the Austin America.
Dom wrote:
‘Any talk of the US auto industry should take into account the CAFE standards, which forced automakers to build cars that Amercans don’t want.’
But this is not the whole story. Americans do want to buy high-mileage, smaller vehicles and have for decades – that’s why Honda and Toyota and Mazda and Nissan have done so well in the US.
The worm in the apple of CAFE standards, as I described in a previous post, is not so much the standards themselves, but the carefully-lobbied-for provisions that force US makers to produce these vehicles in US plants with US union labour – or lose the ability to sell the wide range of autos that US customers want.
The foreign makers were, until very recently, quite heavily weighted towards the small-car segment of the market, and so the issue of CAFE never really touched them. And they carefully weighted their large-vehicle offerings at the premium end of the market, which has much-higher margins, so they could still turn a profit selling fewer units and stay on the right side of the CAFE ledger. Lexus and Infiniti, not Buick and Oldsmobile.
The provisions of CAFE were aboslutely tailor-made to create the largest-possible advantage for makers who focussed on smaller cars. They were lobbied for by (inter alia) the UAW, who saw it as a way to ensure jobs for their members even if the market took a strong turn towards the small-car segment.
So the statement should actually read
‘Any talk of the US auto industry should take into account the CAFE standards, which forced full-line domestic automakers to produce the small cars US consumers want at a serious price disadvantage versus their competition which deliberately limited its market offerings.’
It was estimated in the WSJ yesterday that this price disadvantage is as high as $3000 per unit. It’s no wonder that buyers prefer a Toyota or a Honda when a comparably-equipped and -performing Ford or Chevy costs $3K more.
The only reason – The Only Reason – that I bought the Chevrolet that I drive now is that it is the only vehicle in the market segment that I’m looking in that has the towing capacity I need. Were it not for that, I could have bought a comparable US-built vehicle from a Japanese maker for a couple of grand less, or a more–highly-equipped vehicle for the same price. And that’s taking into account that I have GM purchase privileges that get me a lower price.
GM can’t win that war. They most-certainly can make the cars that US customers want, including small cars with great gas mileage. But their expenses are just too great. And no amount of money poured in is going to fix that long-term. They have to reduce their outgoings, or die trying.
llater,
llamas
Let the fuckers go bust. However I cannot say I am unhappy to see the opposite and of course Il Duce, sorry, Obama (I’d be calling that jackanape McCain the same if he had won) will pour out more money gathered from the money tree for all his corporatist buddies… the worse the better as far as I am concerned.
What is truly risible about the whole bailout fiasco is that the sum of $25 billion is being bruited about, yet the combined market cap of the Big Three is around $7 billion. Their burn rate on capital is about $2 billion a month, so $25 billion would be exhausted in a year. That is why that foul gasbag Barney Frank (who in a rational world would be in jail, and in a just one slowly decomposing in a gibbet) is talking about $75 billion or even $100 billion in the long run. Such a titanic misallocation of resources in the teeth of what is likely to be a deep and lengthy slump is nothing short of catastrophic.
llamas: You’re right, of course. You went into much more detail than I could. My point, however, is that with the auto crisis, as with the banking crisis, very few people realize the role that government played.
“Talking of oil, the black stuff is now below $50 a barrel, down by about $100 from its peak. Wow.”
Here in New Jersey, I just tanked up at $1.72 / gallon. Wow is right.
An early memory of mine is my father telling me the story of a country overseas printing money to try and get themselves out of financial trouble and people ending up taking their wages home in a wheelbarrow. It’s almost heartwarming that my children will be able to tell their children the same story first hand.
The good news: We’ll all be millionaires before long.
It puts Obama’s promise to only raise taxes on those earning over $250,000 into a new light though when soon all that will buy you a toaster pocket and a glass of weak lemonade.
Some of you are thinking rationally and not politically. The UAW is critical for Democratic Party machine politics. They get money from the union directly, but more importantly the union provides people to staff phones for call centers and to knock on doors for get-out-the-vote efforts. These people are literally foot soldiers for the Democrats.
So the auto companies will not be allowed into bankruptcy, because that would allow them to renegotiate their union contracts. I guarantee you what will happen in the end is money will flow from my wallet to Uncle Sam, then to GM in the form of this-really-is-the-last-time-honest loans and subsidies, then to the UAW as union dues, then to the Democratic Party. That flow is not going to stop as long as the Democrats are in power.
US Automakers, with their narrow-minded, short-sighted outlook, have bought into the American nonsense of “bigger-is-better”. The ridiculous gaudy crassness of US auto mobiles is painfully outdated compared to the simple elegance of superior Japanese and European cars.
But, silly me, its apparently all the fault of their employees, who apparently should be forced to work for slave wages. Given how most of these corporations employ cheap labour abroad I doubt this is a factor.
Hmmm, maybe if the CEOs did not fly around in private planes, their might be more money for the actual work of designing and building cars.
Wesker wrote:
‘US Automakers, with their narrow-minded, short-sighted outlook, have bought into the American nonsense of “bigger-is-better”. The ridiculous gaudy crassness of US auto mobiles is painfully outdated compared to the simple elegance of superior Japanese and European cars.
But, silly me, its apparently all the fault of their employees, who apparently should be forced to work for slave wages. Given how most of these corporations employ cheap labour abroad I doubt this is a factor.
Hmmm, maybe if the CEOs did not fly around in private planes, their might be more money for the actual work of designing and building cars.’
Stereotype much?
Put aside your uninformed prejudices for a moment, and go look up the actual data for US auto sales. You will find that the vast majority of US auto sales consist of boring, conventional grocery-getters, from both US and foreign makers.
Of course, you don’t know this – it’s much easier, and so much more satisfying, to pontificate about ‘the simple elegance of superior Japanese and European cars.’ Funny how those European and Japanese makers fall all over themselves to design autos specifically for the US market. I wish you’d share with us all just what makes Japanese and European car design so ‘superior’ and ‘elegant’.
Opinions vary about the exact causes of the problems that the big 3 US automakers face, but virtually all agree that the vast labour cost disadvantages (both direct and legacy) that they face are a key part of the problem. No-one’s forcing UAW workers to work for slave wages – the problem is the vast number of UAW workers who draw above-market wages for their work – or for doing absolutely nothing. Don’t know what I’m talking about? Of course you don’t. Hint – Google ‘Jobs Bank’ to learn more’.
Your comment about ‘cheap labour abroad’ shows that you simply have not grasped the concept of 2-fleet CAFE standards, which I have now explained in copious detail – twice.
But of course, always ready with the ‘CEO’s and their private jets’ jibes. Yeah, make ’em walk. That’ll solve all the problems!
GM is not bleeding $2-billion-odd a month because its CEO rides around in a Gulfstream. It’s bleeding that money because its 100,000-odd current hourly employees and its 500,000+ retirees are drawing wages and benefits that cannot be sustained by the income generated by the cars they sell. It’s Just That Simple.
Tchah!
llater,
llamas
Wesker:
1) What llamas said.
2) The union-wide average total hourly compensation for UAW members is $78/hour. This is for unskilled and semi-skilled labor requiring very little specialized training. That’s roughly three times what I make, which is coincidentally right about the median wage and compensation in my state. $26-30/hour total compensation is also the going rate here for jobs which require substantially more training than auto assembly.
So, how the hell is GM supposed to carry tens of thousands of people at a wage that’s at least triple what the same people with the same education and training would get anywhere else?
To add to what Sunfish wrote – the comparable hourly rate (wages plus benefits) in the non-union auto assembly plants in the US has been published as $44 per hour. The ‘benefits’ part of that may be higher than it is for many other trades, because working on the assembly line is not without its dangers and is generally bad for your health. The actuaries will not be denied. By the same token, the benefit portion may be higher for the Big 3, because their workforce tends to be a lot older than the non-union plants- due to UAW seniority rules.
But the real problem is that for every UAW worker on the line at GM, turning out good cars at high productivity (the better GM plants make just as many cars-per-worker as Honda and Toyota do), there’s 5 or 6 retirees drawing generous pensions and similar benefits, plus an unknown number of laid-off workers being paid 95% of their full rate plus full benefits to do nothing at all. (Finding out how many workers are in the Jobs Bank at any one time is like finding out launch codes. Go ahead. Try it.)
As another person has observed, GM has become a pensions-and-benefits provider that happens to build cars on the side.
llater,
llamas
“As another person has observed, GM has become a pensions-and-benefits provider that happens to build cars on the side.”
Which brings us back to a major importance of the unfortunate situation in which GM finds itself — it is a harbinger of the doom (long predicted by actuaries everywhere) awaiting the US Federal Government, and most of the European governments too. What is government in the west these days if not a ‘pensions-and-benefits provider’ that happens to run the courts & the military on the side?
Will we have the courage to sit up & take notice & maybe even take action on the Ponzi scheme of Social Security while there still is time? Of course not! But what happens when the Feds in their turn go GM?
The $70+/hr. figure isn’t quite right, because it includes pension obligations as wages.
Explanation here
You still have to pay the pensions Joshua – so it does not matter what you call the money going out the door (pensions, health care, wages) it is still money going out the door.
That is what makes all this “we need good managers” talk bullshit.
The big three are unionized (thanks to government actions long ago) and the U.A.W. plays them off against each other (no “anti trust” regulations cover unions like the U.A.W. – they are monopoly suppliers of labour to unionized companies).
So one ends up paying 70 or 80 Dollars an hour – when a person is Alabama Japanese owned car plant is getting 40 Dollars an hour (pay and benefits). And the Southern plants are more flexible (being nonunion) so the more work is getting done for 40 Dollars an hour than for the 80 Dollars an hour in the unionized plants.
On top of this both plants (union and nonunion) have to pay taxes for government pensions (Social Security) and for Medicare (and so on and so on).
Overall taxation makes if very hard for any manufacturing business to prosper – but it it is unionized under the U.A.W. you can forget about it.
“Good managers” do not alter the above.
You still have to pay the pensions Joshua – so it does not matter what you call the money going out the door (pensions, health care, wages) it is still money going out the door.
That is what makes all this “we need good managers” talk bullshit.
The big three are unionized (thanks to government actions long ago) and the U.A.W. plays them off against each other (no “anti trust” regulations cover unions like the U.A.W. – they are monopoly suppliers of labour to unionized companies).
So one ends up paying 70 or 80 Dollars an hour – when a person is Alabama Japanese owned car plant is getting 40 Dollars an hour (pay and benefits). And the Southern plants are more flexible (being nonunion) so the more work is getting done for 40 Dollars an hour than for the 80 Dollars an hour in the unionized plants.
On top of this both plants (union and nonunion) have to pay taxes for government pensions (Social Security) and for Medicare (and so on and so on).
Overall taxation makes if very hard for any manufacturing business to prosper – but it it is unionized under the U.A.W. you can forget about it.
“Good managers” do not alter the above.
Llamas, even the “small” cars built by US manufacturers are vastly inferior to their non-US equivalents. I have no idea why, but they are.
In the UK I had a number of Fords, I liked them. Reasonably efficient, cheap to fix, responsive, nice to drive etc…
My old Mondeo, similar to a Taurus, was a nice car. The Taurus’s (Tauri?) I’ve driven as rentals in the US are junk. Bad steering, bad powertrain, bad suspension.
Likewise the Ford Focus sold in Europe is a nice piece of kit, nippy, efficient and fun to drive. The US version is complete junk.
My car was totaled last week, somebody else didn’t realise that a STOP sign means STOP. I’m in the fortunate position of having a large cheque to go car shopping with.
I’m going to get a small SUV, I could get an amazing deal from Ford, GM or Chevy.
I’m going to get a Honda. It’s just a better made and handling vehicle.