Payday Loans

There have been many in the last few weeks who have openly cheered the impending collapse of the Detroit 3 (D3) and have stated that we would all be better off if they simply went away and left us all alone.  One of the more prominent has been an opinion piece in Saturday’s Wall Street Journal, written by David Yermack, a finance professor at New York University.  Among other points, he states, “Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.”  Mr. Yermack’s piece is so full of inaccuracies that it would be difficult to list them all.  But I think it would be helpful to discuss with real facts, what’s going on here.

How did the D3 get into this situation?  The reasons are long and varied, but the talking heads will tell you that bad products and resistance to fuel economy standards.  Let’s talk about each of these.

Products While I will never say that the D3 haven’t made more than their share of bonehead decisions and bad cars, most of that is in the past.  Today, although Chrysler lags, GM’s and Ford’s quality is every bit as good as anybody else’s.  While measuring vehicle quality is much more complicated than it may seem, J.D. Power publishes a report called the “Initial Quality Study” (IQS) each year.  It is widely regarded as the most definitive study of vehicle quality.  So what does JDP say?  While the top 5 spots are indeed occupied by foreign brands, most of the remaining spots rated better than average are American brands.  J.D. Power rates 16 brands better than average – 7 American, 4 European, 4 Japanese and 1 Korean.  But there are so many more American brands, you say, so that means nothing.  OK, what about those worse than average?  There are 20 worse than average – 6 American, 6 European, 7 Japanese and 1 Korean.  54% of the American brands are better than average, compared to 50% of Korean, 40% of European and 36% of Japanese.  Even if you include GM’s and Ford’s foreign brands in their totals, 47% of the American brands are better than average – still better than the Japanese manufacturers.  The same details by manufacturer are in the table below.  As for individual nameplates, Power rated the Chevrolet Malibu the highest-quality midsize sedan.  Both the Malibu and Ford Fusion scored better than the Honda Accord and Toyota Camry.  In the compact car segment, the top 2 cars are Japanese, but so are the bottom 2.  In large pickups, Power rated the Chevy Silverado the highest quality, ahead of the Toyota Tundra.  The Nissan Titan was last.  While there are nuances to all of this, and you can make statistics say whatever you want, this shows that it is absolutely incorrect to say that “foreign” cars are any better than American.

Maybe you don’t know about JD Power, and don’t care what they say.  OK, how about Consumer Reports?  Consumer Reports recently found that “Ford’s reliability is now on par with good Japanese automakers.”  Notice they said “good Japanese automakers.”  That means that it is just as wrong to say that all Japanese cars are good as it is to say that all American cars are bad.  You can get a bad Japanese car or a good one – the same as American cars.

The D3 are also no less efficient in their operations than the foreign makers.  According to the 2008 Harbour Report (again, the most respected study of manufacturing efficiency), the D3 “nearly erased the productivity deficit against their Japan-based competitors, despite declining production and shrinking market share.”  Chrysler’s labor hours per vehicle are equal to Toyota, GM recorded its 15th consecutive improvement, and Ford reduced its labor content per vehicle by 3.7%, despite producing 6% fewer vehicles than in 2006.  Ron Harbour stated, “Improving productivity in the face of lower production is a huge accomplishment, especially with the pressures created by rising gas prices.”  So, apparently, manufacturing efficiency isn’t the issue, either.

OK, but they build only gas-guzzling behemoths, right?  Wrong.  This one will surely surprise you (it surprised me when I looked up the figures).  In nearly every vehicle category, a D3 product has the best fuel economy.  Without boring you with lots of numbers and details, just look at this table:

Source: 2009 Fuel Economy Guide (www.fueleconomy.gov)

Source: 2009 Fuel Economy Guide (www.fueleconomy.gov)

Fuel Economy Standards This topic is tied up with overall government regulation and policy, so I will include those in this discussion.  The Corporate Average Fuel Economy (CAFE) legislation was enacted in the aftermath of the first energy crisis as a way to reduce our dependence on foreign oil.  We imported 35% of our oil in 1974, and this has increased to over 65% today.  The problems with CAFE are numerous, but for purposes of this discussion, I will focus on one.  CAFE takes a laudable goal – reducing our use and import of oil – and places its burden upon the manufacturers, not the consumers.  Auto manufacturers are forced to sell the more economical vehicles in sufficient numbers to offset the sale of the less economical vehicles.  But what if consumers don’t want the more economical vehicles?  Tough.  CAFE says you have to average a certain level of fuel economy regardless of what the consumers want.  Until this past summer, almost nobody wanted the vehicles with higher MPG, because gas has been so cheap – the cheapest in the industrial world.  The home markets of the foreign automakers place heavy taxes on gas to encourage the purchase of fuel-efficient vehicles.  Our government tells the producers what to sell.  Because of this difference, the foreign automakers have a built-in advantage.  They make smaller, more efficient vehicles for their home markets, because that’s what the consumers want there.  They have developed the expertise in small vehicles for many years.  Consumers also want smaller cars there because their home markets have less parking and have tighter roads.  US consumers want a vehicle that is comfortable to drive several hundred miles or more on vacation.  Our society is simply different that those others, and so therefore are our automakers.  Back to gas prices, though.  Do you think it’s a coincidence that sales of small cars went from 16.6% of the US market in 2007 to 23.9% this past spring (May – July)?  Hardly.  Consumers bought the more fuel-efficient vehicles because it made sense for them.  CAFE, by keeping fuel prices low, actually encourages more consumption and therefore defeats the purpose.  If we as a society want to use less fuel, CAFE is the exact opposite way to accomplish it.  The summer of 2008 saw a major and sudden shift to more fuel-efficient vehicles for those needing to buy a new vehicle and a marked reduction in driving for everybody.  This proves that they way to reduce consumption is to raise the price.  This is classic (and simple) supply and demand.  Our government needs to scrap CAFE because it simply doesn’t work.  Such disparate sources as the National Center for Policy Analysis and Popular Mechanics agree. The better and more effective solution is a higher gas tax, either a $/gallon or a floor on prices (which is used in Europe).

The other part of the government’s role in this mess is in trade policy.  The home markets of the foreign makers, especially Japan and Korea, actively support their industries, especially the auto industry.  They do this through trade barriers and the funding of collaborative research.  The trade barriers have a two-pronged effect.  First, there is no real opportunity for foreign makers to penetrate these markets in any significant numbers, regardless of how good the products are.  This results in the second issue.  Their closed home market provides unreasonable profits that they plow back into new and better products, processes and factories.  While I am a strong proponent of free trade, the rest of the world is using us (and our free-market nature) to take advantage of us.  Fair trade is a better policy unless and until the rest of the world joins us on the free trade side.  The US government should immediately change our policy to be reciprocal with all of our trading partners.  We should exactly match any and all trade barriers placed upon our products overseas.  If they relax their barriers, so would we.  It’s time we stopped being the world’s punching bag and started supporting our home industries – of all varieties.

Tax policy is also part of the equation here.  The Tax Code allows a write-off for SUVs that weigh over 6000 lbs.  This is a provision that was intended to allow farmers and other businesses to afford to buy new trucks for their businesses.  Including the 6000-lb. floor was intended to make sure people weren’t buying the vehicles for personal use.  then came the monster luxury SUVs.  People (and their accountants) quickly figured out that they could buy an Excursion or a Hummer and write off the whole thing in the year of purchase, saving them thousands.  Like CAFE, Congress made a law that had good intentions, but had bad side effects.

OK, now what?

So given all that, what should we do now?  Are the talking heads right, would we be better off without the D3?  It depends upon your definition of “better”.  The Center for Automotive Research (CAR) in Ann Arbor, Michigan published a study earlier this month that examines the doomsday scenario that so many would be happy to see.  I wrote about that study a week ago, but here is the summary in a nutshell.  If the D3 were to shut their doors tomorrow, the US economy would lose 3 MILLION jobs in the first year – “only” 240,000 of which are direct employees of the D3.  Why?  The auto industry has one of the largest economic multipliers in the US economy (this means that each automotive job supports more spin-off jobs than those in other industries).  Some of those 3 million lost jobs would be offset eventually by other automakers and some employees finding new work, but it would still be 1.8 million after 3 years.  The total loss of tax revenue for the government would be $156 billion over 3 years.  Doesn’t that sound a little better than the $25 loan that the D3 are requesting?  The auto industry is somewhat a victim of over-regulation and misconception and supports 3 million jobs.  The loan would include significant oversight.  This sounds better than a $700+ billion blank check for a financial services sector that is largely a victim of its own greed?

Lastly, we cannot forget national security in these dangerous times.  Our manufacturing base will be vital in the case of a future war.  Should we depend on foreign companies to supply us with tanks, planes and other needs in the event of war?  Or should we do all we can to keep that kind of expertise here at home?  The Detroit automakers converted their factories to producing war materials in World War II.  Without them, the outcome may have been very different.

The Detroit 3 have made their share of mistakes, but the present situation is not completely of their own doing.  The government should place whatever reasonable restrictions are necessary, but we cannot let our auto industry die.  They’ll take our way of life and our standard of living with them.
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7 Comments »

  1. Right on, Slandy! As always, a very accurate insight.

    I just sent an email link to my friend, Rick, who used to work for Ford. I helped him sell his 2000 Explorer XLT with 87K miles for only $2,500 this weekend. His wife and he went new car shopping all day yesterday. The wife is SO set on buying Japanese. My email to him was on a brand new 2008 Ford Edge SE ($27,240 MSRP) that is being advertised by a local Seattle dealer for $17,851 w/ competitive rebate. Almost $10K off, and he said he will have a hard time convincing his wife to even test-drive it.

    What does this all mean? Regardless of all the facts, the truth is the public THINKS the Big 3 cars are shitty. My wife and I only drive American (2008 F-150, 2008 Mustang, 2008 Grand Caravan, and 2010 Camaro on order) not just because I used to work for Ford, but we know these are damn great values. But the sad truth is, we are a very tiny minority of the population. Just the way many folks in MI think Korean cars are shitty, the vast majority of the population THINK the foreign cars are better than domestic.

    In my humble opinion, the only way to save the Big 3 is to re-structure all labor rates with UAW (to a comparable level to the foreign OEMs’ labor rates in their U.S. factories), then ask for $25B+ loan from the dumbass politicians so that they can get the cash out FAST.

    If this doesn’t happen, I’ll have to sell some naked puts on the DIA & SPY to make some easy money (trust me, I don’t want to) for the next few months. Let’s all hope that our public servants make the right decisions and do what they are paid to do.

    Comment by mkim1 — 18 November 2008 @ 1:21 am

  2. Hey Scott!

    Nice job on this…I have always respected your views on the industry.

    In this case, for whatever reason, we have a government that has ignored all forms of industry for the past 8 years and not just the Auto business. I suspect, for good or ill, industry will get some attention in the next administration.

    I cannot fathom how all of these idiots out there can expect the USA to maintain its standing in the world and our standard of living with everyone working at Starbucks or selling Chinese goods at Walmart. Well, $10Trillion in debt later, perhaps the trade deficit and the fiscal deficit are starting to come home to roost!

    Here’s hoping I don’t end up working at Starbucks next year!

    Paul

    Comment by JPBrearey — 18 November 2008 @ 1:58 pm

  3. I was listening to NPR this morning and heard an interview with Mark Phelan, a columnist with the Detroit Free Press. He wrote a column recently entitled “6 Myths About the Detroit 3”, and as he was talking this morning I was struck by how similar it was to Scott’s article, published the same day no less!
    http://www.freep.com/article/20081117/COL14/811170379/1014/BUSINESS01

    Comment by ric — 19 November 2008 @ 2:08 pm

  4. Just to clarify – my point in the above post was: “great minds think alike” – but Scott gave tremendously more details and facts to back up his arguments on these issues.

    Comment by ric — 19 November 2008 @ 2:33 pm

  5. So if I pay my employees too much, over commit to my retirees, make poor offerings to the consumer, fail to be nimble enough to adjust to changing market conditions, allow my reputation to fall, have mediocre product quality and my company fails, will the government “loan” me gobs of money to reward my failure as a business executive too? I won’t hold my breath. Instead, I’ll do my damnedest to manage my company well and compete in the market without leaving the taxpayer holding the bag or allowing the government to nationalize my company.

    Product quality measured by how many brands are slightly above average versus slightly below average is pretty meaningless. Normalize these stats I think another story would be told. The D3 have too many brands producing too many replicated cars for the “number of brands” based stat to mean anything. I am sure there are a ton of stats on quality that can be spun to show whatever you want to show. The bottom line is what the consumers are buying, what the makers are producing, and what is the health of the company.

    Shouldn’t productivity not be measured by labor hours per vehicle but by labor costs by vehicle. Or better yet, total corporate costs (fixed, variable, overhead etc.) per vehicle. The bottom line is the bottom line – right? Profit is the measure of a successful company. Everything else is fluff and spin. Obviously, profit is something the D3 have forgotten how to produce.

    I agree with you on the stupidity of CAFÉ but right now, the fact that CAFÉ exists is probably why D3’s small car readiness is even near a level where they might be able to compete. The fact that CAFÉ forced the makers to smaller cars is a blessing to the D3 in this market of higher fuel prices. It is not that foreign makers were kicking our asses by producing big gas guzzlers, large trucks and monster SUVs (that is what we are really good at) while we were forced to produce hybrids and such. While I am for dismantling the CAFÉ laws, I am also for allowing companies to produce whatever the market wants.

    Your other point about increasing the already insane fuel taxes is no solution and would probably have been even worse on the economy and therefore would have killed D3’s market and accelerated their demise. Raising taxes as social engineering is morally objectionable and economically foolish for the consumer and for the D3. I doubt Detroit would have been nimble enough to react to a severe hike in the fuel prices. This would have only allowed our foreign competitors to gain more of our market share.

    Fair trade is a fair point. I agree there should be a level playing field. Maybe this should have been the focus of the D3 and UAW lobbies instead of allowing pay, health, benefits, and retirement costs to become the albatross around the D3’s neck.

    Tax right-offs on SUVs and trucks affect both foreign and US makers so there is no disparity there. Japan has introduced large SUVs and Full-sized trucks as of recent years and they were starting to take a bite of that US dominated segment too.

    One large point I don’t see addressed is the D3’s over-commitment over the years to the whims of the unions and their political power – especially within the Democratic members of congress. That is one area where there is a real disparity between the management of the D3 companies and their foreign competitors.

    I think your piece is an attempt to lay blame for failure at the feet of the government in order to justify why special treatment ought to be afforded to these “special” companies. No, I am not convinced.

    I say let the market decide which companies succeed and fail. Allow our already very generous corporate bankruptcy laws to take effect where needed. Some real restructuring of D3’s obligations and a general wake-up call will do more to set the D3 (can’t even say Big 3) straight than subsidizing a failed model. You just have to look to the southern-US-based foreign makers to see successful US-based manufacturing is feasible. The D3 need better leadership, better products, better marketing, and more efficiency. Failing and restructuring is a way they might just be able to rise from these ashes anew.

    Overall the piece was nicely written though. Nice spin. Maybe you should be a car salesman. 

    BTW – I have never owned anything but a GM vehicle (5 total)and am one of the many who are embarrassed and disappointed that the US auto industry is in such dire straits. It is almost as embarrassing as West Point football (let’s hope UofM does not follow D3’s lead). I will continue to route for our D3 to once again be the Big 3 just as I will continue to be a diehard Army football fan. I just can’t see rewarding failure by supporting the people and policies that created it with special loans. Failure is an opportunity. Preventing it artificially is unjust.

    Comment by LTChip — 19 November 2008 @ 9:44 pm

  6. Thanks for the article – I found it very informative and interesting. I am still confused about why the US does not impose the same tariffs that other countries do for our products. When we were in Russia we noticed there were far more Mercedes than US cars. We commented on this to our host, and he informed us that the government charged higher taxes on the US cars than the German cars, which made them much too expensive to purchase in Russia! We were extremely surprised – and yet it is still going on. I am not a scholar, but it seems that those who are much smarter than I am would have fixed this problem a long time ago, and we possibly would not be where we are now. Plus, this complaint has been going on since what, around 1980, when Lee Iacoca took over Chrysler???? (I’m sure it’s been going on longer than that, but since I was only 13 at the time, it is a wonder that I even remember that far back!)
    One thing that bothers me, though, and I am interested in your take on this, how do you feel the unions fit into this equation? I am of the belief that they are antiquated, and should not have quite as much bargaining power as they do. I wonder if they have priced themselves out of the competitive market. Keep in mind that I am an old Wal-Mart girl and am inclined to be anti-union, so help me wrap my head around why they are so necessary in today’s society. Thanks!
    Dawn

    Comment by dawn sticklen — 21 November 2008 @ 12:21 am

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