As the domestic auto companies appear to be circling the drain, there’s been debate about the extent of the impact of their failure on their supplier base, the impact on the industrial manufacturing base of the United States, even possible negative implications for Toyota and Honda. One party in all this that has rarely been mentioned are the consumers. While a few automotive analysts, pundits and bloggers have touched on how an implosion of the Detroit based car companies will affect consumers, almost all of the discussion has centered on whether or not people will buy a car from a bankrupt manufacturer, and the related issue of how product warrantees will be covered if their manufacturers go belly-up. A more basic consumer issue: how the loss of GM, Ford and Chrysler from the US auto market would affect the prices, features and technology of new cars.
While some critics of the domestics would have us believe that nobody is interested in cars built by the domestics, the fact remains that The Big 2.8 still sell millions of new cars a year in the North American market. October was a sales disaster for the domestics, with GM’s year to year sales falling 45 percent, Ford 33 percent and Chrysler seeing a decline of 37 percent. Foreign brands also saw declining sales but the decline was not as steep. With consumer confidence at the lowest level since just after the 9/11 attacks by Al-Qaeda, sales will not likely pick up anytime soon. The overall industry is on pace for a 10.6 million unit year, down from 16 million in 2007, and down over 40 percent from the record year of 2000. Still, between them the domestics sold just about 400k cars in October, good for 55 percent of the total US car & light truck market.
It’s a simple fact of business that competition puts downward pressure on prices. Critics of any bailout for the domestics like to say how their customers won’t go away; they’ll just buy Toyotas, Hondas, Nissans and Hyundais. What they don’t say is how much more expensive Toyondisssandais will be without competition from GM, Ford & Chrysler. You simply cannot remove competitors with a 55 percent share of a market without seeing the remaining vendors raise prices. Without competition from domestic competitors, the foreign brands have much less of an incentive to keep their prices down. Also, the structural costs of the domestics (at least until the cost reductions due to renegotiated UAW contracts kick in in 2010) create a price ceiling foreign brands can undercut. Take away that ceiling and watch Toyota raise its prices.
Conversely, take away that structural cost disadvantage for the domestics and you’d see lower prices right now on all brands, foreign and domestic, because of real price competition. Look at India. That market is very price sensitive. Just about all the global manufacturers are active in India, but the growing indigenous Indian auto industry led by Tata and Mahindra creates price competition for the transplants. Since Tata announced the sub $3000 Nano, Renault-Nissan, which already produces the low cost Dacia Logan, has announced a joint venture with Bajaj, maker of scooters and three-wheelers, to compete with the Nano at the new entry level price point.
A Detroit meltdown would affect more than just new car pricing. Say what you will about the domestics, but their presence in the market forces the other manufacturers to compete on features and technology as well as price. I’m not saying that a disappearance of The Big 2.8 would return the days of “radio and heater optional,” but there’d be less incentive for remaining companies to keep content level high. The Honda Accord’s initial market success in the late 1970s was partly attributable to a higher level of standard equipment than the domestics offered.
Regarding technology, the list of innovations introduced to the market by the domestics and their suppliers is almost endless: electric starters, seat belts, catalytic converters, modern refrigerants, car audio, defoggers (forced hot air and electrically heated), turbochargers, magnetically controlled dampers/shocks, and on and on. Without the billions the domestics spend on R&D ($15.6b for Ford & GM in 2007, not counting Chrysler which is privately held and doesn’t publish proprietary data or the moneys spent on R&D by domestic auto suppliers) the pace of technological improvements will slow significantly.
The domestic car companies’ disregard of their foreign competitors in the 1970s and their poor quality in the 1980s have so alienated consumers (and their now adult children) that it’s easy to see why so many people either don’t care if the domestics disappear or actively wish for their demise. If they think, however, that such a disappearance will be good for consumers, in terms of price, features and technology, they’re sadly mistaken.
I don’t see raised prices as a problem, as the real problem of the american car market has been that prices has been too low. In fact, lower than the need to sustain long term profitability. And that’s one of the reasons that the domestics are in such a bad shape. In fact, what has been going on for several decades, is that the other markets around the world has been subsidizing american cars with higher prices. A Higher price in america would only restore the true value of cars to a more normal level.
It would be interesting to put together a list of overseas innovations that belatedly made their way to North American built cars from the Big 3.
Volkswagen switched from dual carbs to electronic fuel injection on their 1968 Type III.
Why aren’t all North American cars with automatic transmission to include Hyundai and Toyota a five speed instead of a four speed. I clearly remember five years ago driving a Chrysler rental that was a three speed automatic.
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What the domestics bring to the table is a white collar work force that still must design an overall package and provide production management expertise. The exception being the off shoring of such work to Daewoo or Ford in Europe. Furthermore, while diminishing in number, there are all the blue collar jobs that traditionally pay way more than service industry jobs.
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The structural problem with the domestic brands is a business model that is still overly-weighted towards Post WWII America versus I hate to say it niche players in a very large North American market.
Taking two to three years to bring the next announced product to product to market isn’t going to fly anymore, especially when Honda was able to switch production from SUV/Minivans to cars at one of their North American plants in less than a year.
For the sake of “Joe the Autoworker” – there needs to be an emphasis towards innovative, – yet, affordable and reliable products – that hit the retail floor running in short order. It will still be a tough uphill sell during a multi-year period of restricted credit and high unemployment.
I don’t have a problem paying higher prices for a car built by Japanese manufacturers. They last two to three times as long as their American based counterparts. So I only need to buy a new vehicle once a decade or so, despite putting on 25K miles each year. As reliable as Japanese cars are, it’s money well spent. Not so with cars built by the American based auto manufacturers.
Besides, there will be plenty of competition from Korean expansion as well as China’s entry into the market in coming years. That should provided enough competition on price.
By now, another 25 billion is small change. Robert Mugabe has had no trouble at all printing money to support various government interventions and initiatives, why not throw some more money into the fire – nothing like eroding substance.
How much is 25 billion dollars?
Well, let’s say you wanted to count to 25 billion, and let’s say you’re a motor-mouth, and can count off each number in one (1) second. (Which, reason tells us, is pretty hard. What about “fourteenbillion-ninehundredandeightysevenmillion-twohundredandthirtyfourthousand-threehundredandeight.” That’s more than a second? :-)
But let’s keep it simple, and pretend that each number could be counted off in one second.
You’d spend 792 years counting off 25 billion, one number/second.
How can I better spend that money, I wonder, compared to giving it to Rick Wagoner?
I think your main argument falls flat, because you’re assuming that the “Big” 3 just vanish as soon as they run out of money.
Bankruptcy has not to be then end of it though. Actually, that was the entire point of the Death Watch series.
But let’s assume you’re right for a second:
I don’t think that competition would go away, even if the Detroit boys should vanish. Before the credit crisis, it was only the Americans that had to use large scale incentives in order to move their metal. The Asians didn’t even feel the pressure.
And if you think that Hyundai lets Toyota get away with price increases, then you’re mistaken. And if Hyundai doesn’t do it, then the Chinese will.
In an open market, there’s always competition, because as soon as one player raises his prices, others will sneak in and undercut him.
Having said that, I do believe that prices will slightly increase, but not because of a Big 3 bankruptcy, but because currently there are simply too many cars on the American market. If Detroit gets bailed out, then they still have to downsize and decrease their output in order to balance out supply and demand. So the prices will go up, no matter what…but even in that case it would only affect the prices of vehicles from GM, Ford and Chrysler. The Asians already are profitable, it’s the Americans who have to sell their product at a loss.
Hundreds of businesses presently delivering to Lutz’ and Wagoner’s vanity projects would retool and deliver to the future of automotion – engineers don’t go away, they just redefine their products.
Citigroup is letting 40.000 people go – 10% of their workforce. (What the hell are they all doing?) GM could lose a major portion of the crew in management and not notice.
There are several flaws in this argument. First of all, most of the imports/transplants already cost more than their “comparable” domestic competition. I put comparable in quotes because I will freely admit to rare, if ever in my lifetime seriously shopping for a domestic car.
The only thing I have ever bought from Detroit are trucks. Why? Their cars are utter crap. Through the late 80s and 90s I used to travel a LOT on business and drove thousands of rental cars, nearly all of them domestics. I consciously picked different models and makes each time I rented – mostly due to the horrific previous drives in truly awful cars. From the spontaneously combusting Ford Escort (seriously it burst into flames at a light!) to the Mustang whose door handle came off in my hand. From the Caprice with the faulty wheel bearing (at <10k miles!) to the Cavalier that handled like a fat girl slathered in butter. Ironically the best of the domestics WRT cars seemed to be Chrysler, but even they produced a lot of PT Cruisersturkeys.
If Detroit seriously has some miraculous turnaround within their grasp, then they DO NOT NEED our money. However, from where I sit I see 30+ years of mismanagement and failure, with everyone telling them that the result of their behaviors will be death… and Detroit ignoring them, all the while continuing on the same path. If you think bailing them out will change their behavior now, I feel you are sadly mistaken.
–chuck
Selling cars at lower prices is part of what got the D3 into this mess. Since they steadfastly refused to build competitive vehicles, they have been forced to sell on price. To make matters worse, GM’s various divisions compete with themselves, further driving the price lower.
In order to make any money selling uncompetitive vehicles, the D3 squeezed their suppliers so badly that most of them are near bankruptcy. This has resulted in ongoing quality and reliability issues that further damage their reputation.
This is completely unsustainable. In fact, I wonder if the parts suppliers would actually be better off without the D3. There would be a painful period of adjustment initially, but then they can concentrate on supplying parts to companies that value quality and are willing to pay a fair price for it.
“I don’t have a problem paying higher prices for a car built by Japanese manufacturers. They last two to three times as long as their American based counterparts. So I only need to buy a new vehicle once a decade or so, despite putting on 25K miles each year. As reliable as Japanese cars are, it’s money well spent. Not so with cars built by the American based auto manufacturers.”
Okay, this is the type of myth propagating that serves no intelligent purpose. In the auction business, the overwhelming majority of vehicles owned and driven by us auctioneers are domestics. Most are mid to full sized cars which will last well north of 200k. But there is plenty of variability between the SUV’s, trucks, and perish the thought… Cadillacs.
Detroit has always been very good overall at offering the ‘economic proposition’ until the last few years when there pension and medical costs went insanely out of control. Their historical problems during the 2000’s have originated in five areas.
1) Overall refinement and interior quality (I believe this would be non-existent if the cost differentials for domestic manufacturers weren’t so strong.)
2) Recalls (the Japanese and Europeans are almost always bad or even worse in this area. However the ones from Detroit are almost always more widely reported by the media. Personally, I have yet to see any automaker ‘willfully’ take care of consumer issues until lawsuits compelled them to do so).
3) Legal system (Virtually all the rules that have been put in place for working with dealers and union labor were established at a time when high levels of expansion and production were critical. We have been in a consolidation phase for well over a decade now and this will have to change if they’re to survive the current shakeout.)
4) Technology (Historically, upper management tends to prioritize innovations from a marketing standpoint instead of a technical one. That’s why you end up with XM/Sirius radios and Sync instead of seven-speed transmissions.)
5) Upper Management: The CYA mentality and obliviousness of the Detroit culture to reality is simply amazing. At least in my neck of the woods, it’s the domestic remarketers and their franchise who often encourage special benefits for their brethren while the importers have their constituents make due with what’s already out there. The ‘Chrysler Suite’ at one of the sales, equipped with a bar, big screen TV and concierge, is a good example of how being catered to seems all too important in the current Big 3 culture.
A fine article.
Any country will bail out their auto industry if it gets in too much trouble. You can argue Japan already has in the past for Nissan and Mitsubishi. If the downturn goes on, which it will, they all will stick their hand out.
Detroit has had to compete against countries with nationalized health care, and against countries which artificially fix their currencies to maintain exports. Detroit has legacy costs which their competition does not YET have, but probably will someday.
The three will be bailed out, the question is how well it is done.
Personally, I am ready to go buy a V6 Mustang with stick, and trade in my Toyota Tacoma. Might as well have some fun, and they get about the same mileage.
Detroit has had to compete against countries with nationalized health care, and against countries which artificially fix their currencies to maintain exports.
A couple of myths there. First of all, nationalized health care makes labor more expensive. Look at the labor costs in Japan or Germany, they’re higher than in the US. The difference is, that with nationalized health care and pensions, the companies pay their monthly fee for each worker and can’t dip into health care/pension funds if they need quick cash. Had GM put the same amount of money on the side that Europeans or Japanese companies have to pay, then they wouldn’t have a problem there.
Secondly, there’s that urben legend about fixed currency exchange rate. This is simply not true. Look at the development over the last decades: Compared to the Deutschmark and later the Euro, the Dollar has roughly lost half it’s value since 1985 and DM/€ have doubled respectively. Similarly, in 1985, one Dollar got you 250 Yen, while today it’s only about 100, so the Yen has even more than doubled.
So if anyone is benefiting from exchange rates, it’s the US.
tom:
excellent point at the beginning of your post, but you should have expanded upon it.
filing for bankruptcy is ‘essentially a bailout of sorts’ because if bankruptcy wasn’t an option and 50 billion didn’t suddenly appear, then the law of the jungle would occur and the creditors would liquidate the company…
No need to turn 50 billion good dollars into 50 billion bad dollars…
let the go through bankruptcy… – at the other end, maybe their market share goes from 55% to 40%… – big deal – yes, but they’ll (at least gm and ford) will be there to offer competition…
“I don’t have a problem paying higher prices for a car built by Japanese manufacturers. They last two to three times as long as their American based counterparts. So I only need to buy a new vehicle once a decade or so, despite putting on 25K miles each year. As reliable as Japanese cars are, it’s money well spent. Not so with cars built by the American based auto manufacturers.”
I am not in the business and don’t have the experience that Steve has so when he calls the above statement a myth so I have less credibility when I disagree with him.
However I keep cars until the wheels fall off and for the most part they fall off the Detroit products sooner than others. I am not sure that cars coming off lease at 3 years represents a good sample of quality. Evaluating a car at 7y/100,000m is IMO a better standard.
I will say that probably owners who are “picky” when purchasing the car are also “picky” concerning routine maintenance and that may account for some of the longevity seen in imports. My 1985 Volvo however receives only fluid and filter changes and at 300,000 miles mechanically is still strong (Drivetrain, steering and suspension).
I am of the strong opinion that keeping a car 10-15 years the cost/year is significantly less for Toyondas. Now that is based on Toyondas vs Detroit designed and built from the late 80’s and into the 90’s. That may have changed recently but from my perspective I won’t know that for another 10 years.
And therein lies the crux of the problem. Unless you are able to take the Hyundai model (100,000 mile bumper to bumper combined with aggressive pricing) and are able to stand behind that promise you will need 10-20 years to get your reputation back.
Steve’s points 3, 4 and 5 simply strengthen the case for bankruptcy since that is the shortest path to clearing up those issues.
Cars will be built and purchased. I just hope that perverse government incentive (my tax dollars) does not encourage continued production of inferior or overpriced products.
As is the case with all of the other pro-bailout op-ed pieces I’ve read, this is based upon a flawed presumption: that a bailout would succeed.
The losses that these companies have incurred are not due to a lack of money. Giving them money does not necessarily fix their problems.
Ford may be able to pull through, but GM and Chrysler will almost certainly be back begging for even more cash within a year or so. It will make things worse over the long run because they will have been taught to expect Uncle Sugar to support them whenever they want it, and the taxpayer will pay, on the hook into perpetuity.
The claim that the domestics provide products that people want is largely false. We know this because the domestics have needed to consistently pack their cars with incentives, cut-rate financing and generally lower prices in order to sell them. Those price discounts destroy their margins, to such a severe degree that no amount of cost cutting or cash infusion can help.
If GM and Chrysler were to fail, you can expect that competitors will jump in to take their place. If anything, you could see a renaissance in American car retailing as foreign companies try to fill the void.
The US has the largest car market in the world and you can bet that motivated, hungry operators — not the lazy, uninspired beggars in Detroit, but others located elsewhere — will want a piece of it if they can get it. This is a recipe for maintaining relatively low prices, as the end of Detroit welfare should heat up competition, not cool it down.
The federal government would be making a far better choice if it worked to give these companies to other operators that would invest their own cash and make it work. Allowing losers with proven track records of failure to take our money is a fool’s errand, and I would like to think that I’m not a fool.
Jerry said:
They last two to three times as long as their American based counterparts
Show me stats and data on that. I see plenty of old 80’s GM /Buicks on the road in northern states with harsh weather. As a matter of fact, I see more old mid-90’s Saturns on the road than anything.
@Matt51 Japan allowed Renault to acquire a controlling interest in Nissan and Ford acquired a controlling interest in Mazda. Neither case was business as usual, cuts were made, jobs were lost, management was ejected.
GM and Chrysler are sick businesses. Whether or not there is a “bailout” jobs will be lost and factories will close. America is supposed to be about merit, about hard work rewarded. A bailout will reward failure and penalise success.
Ford has made a serious effort to sort itself out. It sold subsidiaries and mortgaged to the hilt to raise the cash it needed to survive. GM spent the last several years rearranging deckchairs, it is still a sprawling business that seems to treat the product as 2nd or 3rd priority. If GM has assets to sell and IP to mortgage why should it get the federal cheese? Why should Corvette or the US Pickup/SUV business not be sold?
If you must spend taxpayers money give it to the states and cities to invest in infrastructure and retraining that can help people find new jobs, start new businesses and attract new industries.
At least that way some of the cash will be spent in the communities affected by the layoffs.
Tom-
No. You are spreading myths. The recent G8 meeting was fixated on reducing the value of the yen which has strengthened recently. Just because the value of the yen has strengthened against the dollar does not mean it has strengthened enough. From my economics classes, currencies should adjust until trade deficits are eliminated, and this has not occurred between the US and Japan in over four decades. So clearly there is currency fixing going on here. It is allowed to adjust, but never enough to balance exports and imports.
Secondly, having taxpayers pay for health care benefits the auto companies who do not have to pay for health care. True of all countries making cars outside the US.
Third, Japan rebates VAT taxes to companies who export, which is a direct subsidy.
Hal,
Look in detail at the bad loans to Nissan which were written off, and other subsidies Japan provided Renault. Look carefully at how Mitsubishi has stayed in business after Daimler ejected them. I understand Renault closed factories at Nissan, which had been bankrupt for years, but was carried by the Japanese banks acting with approval from the Japanese goverment.
The big three have also been closing factories and laying off people. Each country which has an auto industry will take steps to save the industry, when it is in trouble.
Matt:
There’s more to trade deficits than currency exchange rate. One big factor for exampe are saving rates. Usually, people save about 10% of their earnings. In the US, people have had negative (!) saving rates for years [meaning that the average American spent more money than he earned]…which is one important reason for the deficit as well as for the credit crunch.
I can’t talk for Japan, but in Germany, the taxpayer doesn’t pay for health care (only for the unemployed). Health care costs are added to the wages.
The premise of this article seems to be that bailing out Detroit would be a good thing because the consumer benefits from increased competition and the resulting lower prices.
But it’s not sustainable for a competitor to continually sell product at a loss. The consumer might benefit from the lower prices in the short term, but eventually that competitor will have to raise prices, increase efficiency, or go out of business. If prevailing circumstances prevent either of the first two, then there’s only one choice left.
And in a bailout scenario, the cost of the bailout to the consumer/taxpayer must be figured into the effective cost of the product to the consumer. So, suddenly the consumer isn’t benefiting as much anymore, or perhaps not at all.
Finally, there is no shortage of competitors who would like to play in the US market, or increase their existing presence. A void left in the market by a failed domestic could very well be filled by one or more new competitors (including the new owners of the failed company’s assets).
So, the existence of players who compete on price provides a long-term benefit to consumers only if those competitors are able to do so sustainably.
Matt51:
Exchange rates do not necessarily eliminate trade deficits. Shortfalls (or surpluses) in the current account (exports – imports) are, by an identity of the national income equations, equal to the capital account (domestic savings – domestic investment; i.e. the amount of capital flowing into the country from abroad). Simply noting that a country does not have a balanced trade account tells you nothing about whether their currency is over- or under-valued.
Also, the majority of countries in the world operate under some kind of manipulated exchange rate regime. There are innumerable variables that go into determining exchange rates, and it is distracting to focus on that as the source of all the (domestic) auto industry’s woes.
Re. the editorial:
I will not dispute any of Schreiber’s specific points about the impact of the failure of “Detroit” writ large on car prices and technology (which is not to say that these points are not disputable). However, the author’s framework is missing a key element; the dynamism of market activity.
Even if these companies vanished completely tomorrow (which is not what happens under bankruptcy) I argue that the impact would be minimal. There is not some fixed amount of market activity which is preordained to take place in the auto market, and by removing GM/Ford/Chrysler the pie shrinks. The incentive to produce new cars and improved technology will remain, and other actors will step in to provide it.
All of the technological improvements mentioned are not credit due to these car companies per se; they are due to the market providing the incentives and resources to innovate; one particular company at one particular moment in time being the inventor of one particular technology is incidental. Allowing the companies to fail does not cause the market as a whole to fail, and so long as the market remains, progress remains.
Stein X Leikanger wrote:
You’d spend 792 years counting off 25 billion, one number/second.
How can I better spend that money, I wonder, compared to giving it to Rick Wagoner?
On the other hand, it only takes about 10 weeks to dump another $25 billion into the rat-hole that is the Iraq occupation.
Or, just for sake of comparison, $25 billion is about one-sixth of the tax break for bank acquisitions that the Bush Crime Family snuck into the banking system bailout.
http://tinyurl.com/5u4qgq
I’m not saying that dumping $25 billion into the Big 2.7653 is necessarily a good idea. But arguing that “$25 billion is a lot of money” is silly in the context of the sums under discussion.
Arguing that Japan doesn’t manipulate the yen is silly. They admit to it. The IMF knows it. The G7 knows it. Do a google search on yen manipulation. Geez…as reported in Bloomberg in 2006:
“Japan is on the alert for rapid currency market moves that may hurt businesses,” Finance Minister Sadakazu Tanigaki said, a day after other finance officials indicated they’re willing to act in foreign exchange markets. “We will keep a close watch on the currency market and will take appropriate action on foreign exchange rates if needed,’’ Vice Finance Minister Koichi Hosokawa said yesterday. (Bloomberg, 5/12/06)
$25 billion is a lot of money. Spending ridiculous amounts of money elsewhere doesn’t make it any less so.
Arrgh
It all comes down to product!! Making a product that people want, and are able, to buy. Currency/ health care / work rules. Sure they play a part. I still have no guarantee that if corrections are needed and were made that the quality of the product would improve. Trabants and Volgas had lots of government support. Is that what we want?
When I bought my first car in 1969 it was a BMW 2002 ($2300 USD OTD). After looking at the competition and having driven the car for a few months I remember commenting to a friend that the best way for Detroit to survive would be for the UAW to join forces with the Longshoreman’s Union and sabotage the imports as they came off the boat.
Detroit has had 40 years to get their act together and don’t seem to have made much progress. A bailout will just enable their dysfunction.
I have been impressed with the all the comments for this article, polite and intelligent.
Clearly Europe and Japan have been automotive innovators. No one wants to harm their industry or eliminate competition. Saving Detroit will not harm them.
When we talk about quality of product, Detroit is paying for past sins. I think the design, quality, reliability and value is there now.
On the other hand, I know a lady at work who just bought a battleship gray hybrid Camry for over $40K. What a gawd awful ugly car. It reminds me of GM and the Aztec.
Even the mighty can screw up.
Pch101 :
November 16th, 2008 at 11:06 am
As is the case with all of the other pro-bailout op-ed pieces I’ve read, this is based upon a flawed presumption: that a bailout would succeed.
The headline is the editor’s not mine. I took no stance, pro or con, on the bailout. As a free marketeer, I’m ambivalent about bailing out Detroit. I’m leaning towards Ch 11 reorganization, but I don’ think people will buy a car from a bankrupt manufacturer. A car is not an airplane ticket that will be used in a few days.
In any case, the article is not based on a presumption that a bailout will succeed. On the contrary, the premise is that a collapse of the domestics will have implications for consumers, some of them negative.
I was simply looking at the competitive implications of the domestics going out of business.
I may live near Detroit so I suppose that means I’m stupid, lazy and on crack, but I’m pretty sure that the law of supply and demand still holds and that the effect of competitive pressure or the reduction thereof on markets remains the same as it always has been.
I thought competition was good for the consumer. The introduction of foreign competition to the domestics has been good for US automotive consumers.
I realize that a lot of people are pissed off at the domestics. It’s an emotional issue. Just as those dependent on the domestics don’t want to see their own livelihoods disappear.
I suspect, however, that if the shoe were on the other foot, that Toyota and Honda were on the cusp of disaster, we’d be seeing comments about the domestics itching to raise prices.
NoneMoreBlack :
November 16th, 2008 at 12:49 pm
However, the author’s framework is missing a key element; the dynamism of market activity.
Even if these companies vanished completely tomorrow (which is not what happens under bankruptcy) I argue that the impact would be minimal. There is not some fixed amount of market activity which is preordained to take place in the auto market, and by removing GM/Ford/Chrysler the pie shrinks. The incentive to produce new cars and improved technology will remain, and other actors will step in to provide it.
Of course there is no fixed level of market activity, but Toyondissandai doesn’t have the capacity, near term, to meet the demand of today’s 10.6 million unit market, let alone 16 or 17 million. The pie doesn’t shrink, the remaining bakers may not have enough dough and apples to fill the pie pan, or bake another pie.
Technology will still be improved, as Toyondissandai compete with each other. What I said was that with fewer competitors, the pace of that improvement will slow.
Allowing the companies to fail does not cause the market as a whole to fail, and so long as the market remains, progress remains.
I worked for DuPont for a long time and in the 1990s they cut spending on basic research. The buzzphrase from on high in Wilmington was “process not product”. DuPont, famous for technological innovation, game changers, like Nylon & Teflon, hasn’t hit a home run since. Have others stepped in? Perhaps, but it still makes sense that the more competitors there are doing r&d, the greater likelihood of technological advance.
Ronnie Schreiber
Volvo,
The example of a 240 or 740 series Volvo as a durable car is a case of using an exceptional item to prove a point. Those are among the most durable cars ever manufactured. I loved my 760 Turbo, but it eventually dropped a valve at 225K.
Even Volvos, though, have their problems. 1980s vintage ‘bricks’ had engine bay wiring harnesses that self destructed, and faulty Bosch air motors in the fuel injection / emissions system. Also, if you cranked too long, the FI system would flood the crankcase with fuel.
Bozoer Rebbe : DuPont, famous for technological innovation, game changers, like Nylon & Teflon, hasn’t hit a home run since. Have others stepped in? Perhaps, but it still makes sense that the more competitors there are doing r&d, the greater likelihood of technological advance.
The recent winners in commodity polymers have been the polyolefins players. Dupont got out of that business a long time ago (i.e. alathon). Instead they choose to spend considerable sums on “green” polymers (derived from agricultural feed stocks) which seem to have been unable to produce a profitable product line for them.
As to your larger point about the more players the better for innovation: history tells us this is generally true (with a few exceptions like AT&T Bell Labs, a monopoly that produced stunning innovations decade after decade for the better part of a century.)
But the blame has to fall on Detroit’s executives. They didn’t know enough about their own business to build better cars than the foreigners did, and they were unprepared for a change that was sure to come, sooner or later. – Jerry Flint, Forbes
Blame the MBA-ization of North American business. Together with the M.Ed education degree the MBA will be our downfall. Both superficially represent themselves as teaching learners “how to” instead of instilling the basic knowledge required to successfully navigate endeavors. K-12 math teachers who know no mathematics are commonplace. We are overrun with industry managers without vision, particularly of foreign competitors. Excepting a single year in the early 90s, GM has never had a CEO with engineering, design, research and development, or manufacturing experience. They have all been bean counters. GM is losing $1 billion a month with bankruptcy weeks away. It bean counted itself to death. Many domestic corporations are speeding toward the same dead-end.
The MBA; The six sigma Quality Mafia of green belts and black belts; and PowerPoint – alone have enough destructive power to kill the US.
(with a few exceptions like AT&T Bell Labs, a monopoly that produced stunning innovations decade after decade for the better part of a century.)
I don’t think it was the fact of their monopoly that made Bell Labs what it was. They had a culture of innovation and rock solid reliability.
The loss of Bell Labs due to the breakup of AT&T was a national tragedy. Penzias & Wilson won a Nobel prize for their work there concerning background radiation from the Big Bang.
I mentioned DuPont cutting its budget for basic, as opposed to applied, research. We sometimes forget the great scientific contributions made by private sector researchers. Xerox’ PARC in Menlo Park is a great example.
The recent winners in commodity polymers have been the polyolefins players. Dupont got out of that business a long time ago (i.e. alathon). Instead they choose to spend considerable sums on “green” polymers (derived from agricultural feed stocks) which seem to have been unable to produce a profitable product line for them.
I think the idea was that the polyolefins market was “mature” and too much of a commodity thing. DuPont likes having a market all to itself. They got out of pigments, I believe, but retained their titanium dioxide business because of their dominance. I remember when the DEA busted a shipment of TiPure from South America. Some of the containers contained a pure white powder, but it wasn’t TiO2. Also, the agricultural angle may be due to DuPont’s heavy involvement in that industry, selling a lot of agricultural chemicals and owning (still, I think) Pioneer seeds.
And therein lies the crux of the problem. Unless you are able to take the Hyundai model (100,000 mile bumper to bumper combined with aggressive pricing) and are able to stand behind that promise you will need 10-20 years to get your reputation back.
Hyundai was able to buy back customers with its warranty and establish a decent name for quality, in part because their cars were only crappy for a few years and didn’t sell the number of units the domestics did back when they were pissing people off with poor quality.
It’s sort of an axiom that unhappy customers will do more damage to your company than happy customers will benefit you. I think the data is that unhappy customers will tell 10 people about their experience with a product compared to happy customers sharing their experience with one or two people.
Because of the entrenched perceptions of American cars as crap, it almost doesn’t matter what the quality and value of the domestic product is today. If they make a very competitive car like the Malibu, someone will say, well let’s see how it is in five or ten years or point to a lesser car like the Aveo. Look at the Cobalt and how it gets slagged online for the sin of not being a Honda Civic. Is the Cobalt a great car? No, but it’s a decent car and an ok value that will satisfy most of the folks who buy one. Is it a horrid car? Well, it ain’t no Ford Aspire. Now that was a horrid little shitbox.
At this point, with 25-40% of US consumers, they simply won’t consider a US made product.
Bozoer Rebbe:
I did not say prices of cars would not rise in the short run. However, I maintain that in the long run, the failure of GM et al will have no significant impact on technological progress and the development of the market. Those high prices will simply provide an even higher incentive to enter the market. Simply because we cannot see today how the market will look tomorrow does not tell us that we should provide an enormous subsidy in order to increase the chance of tomorrow resembling today. That is, after all, the very opposite of progress.
The MBA; The six sigma Quality Mafia of green belts and black belts; and PowerPoint – alone have enough destructive power to kill the US.
The process not product crew. Six Sigma is all about individuals’ careers, not improving quality. The “black belts” can pretty much move to any company that uses Six Sigma. I feel the same way about SAP experts.
Big businesses do crazy things. When I was in IT at DuPont, the senior VP who theoretically in charge of IT was in charge of something like 8 different business functions in the company. There’s no way to do that without delegating most of the work to others. They did the work, she got the credit. DuPont, in the 1990s, had one of the best corporate IT departments in the world. Everything worked, and we had some very sharp technical IT folks who kept it all working well. Then she (her name escapes me) decided that we could save turn fixed costs into variable costs by contracting for support from CSC and Accenture and moving most of our IT personnel to those companies. On paper it saved a lot of money and she was the fair haired girl of the hour, but it didn’t improve the quality of IT support. To the contrary.
She once got an award from Working Mother magazine. Easy to be a working mother when you have a full time personal staff and a nanny at home. The secretaries and female bench techs and engineers were not pleased with her award.
Six Sigma sounds like the name of a terrorist organization.
I won’t pay extra for supposedly “better” Japanese “quality”
I wonder if the ultimate fate of the US auto industry will be like the US consumer electronics industry. Expensive and exclusive. You can buy American made hi-fi equipment, for thousands of dollars for one piece. It’s bought by less than .1% of the consumers and the other 99.9% buys Chinese, Korean and Japanese products.
Ingvar might be correct, maybe the price of cars needs to be higher in order to let the companies make a profit without paying their people slave wages.
A lot of good commentary. A lot of extreme examples to justify extreme opinions. Not that yours truly hasn’t been guilty both in the last 24 hours. Here’s a personal story set in the good old days of the 1990’s,
I remember my first big meeting as a financial analyst. We were going to be taking a company public, and yours truly would be one of three people assigned to market the company. It was an amazing thrill for a very naive 23 year old… for about five minutes.
That first meeting we had with management wasn’t about how to market the company’s equity to private placement firms or financial institutions.
It wasn’t about what new areas of business the company would expand into once a recent acquisition had been integrated with the firm’s activities.
It wasn’t even about the due diligence we would have to do, day and night, to make the company marketable.
Nope, not even close. The first meeting was about how to make money off the company’s employees. This was an aviation security company that quite literally did a mirror test to hire people. If they fogged the mirror, they got the job. No background check. No real training. No problem. In fact later on the company would be fined a million dollars by the Feds for billing the airlines and the government on fictitious employees at a Philadelphia airport.
Getting back to the meeting, the powers that be wanted to make the employees pay for the uniforms (most of whom earned $5 to $8 an hour and were NEVER given overtime), pay $10 for dry cleaning, charge $50 if they wanted the check that week instead of the regular two week cycle, and at least six or seven other items that were designed to separate the subservient from their money. I crunched the numbers and it projected to a $3 million profit. Just about equal to what the CEO was going to earn in options if the IPO was successful.
Would you believe that nearly half of these managers either worked for the big three at one time, or consulted for them at some point in their careers? Yep, these folks were true vets. I wouldn’t have trusted them with my dog.
I wonder if the ultimate fate of the US auto industry will be like the US consumer electronics industry. Expensive and exclusive. You can buy American made hi-fi equipment, for thousands of dollars for one piece. It’s bought by less than .1% of the consumers and the other 99.9% buys Chinese, Korean and Japanese products.
Some of the high end gear is designed here and produced in Taiwan (HK and Taiwan have plenty of audiophiles). I’m pretty sure that my DAC from MSB Technologies was produced that way.
One irony is that because of improved performance of ICs, a lot of the really cheap junk actually sounds pretty good. A friend and I have both used the same $16 Sylvania (I’ve seen the same model sold with a Craig brand) portable cd player as the source for our systems and agree that it sounds pretty decent. As good as my dvd player/DAC setup? No, but pretty damn good for less than $20.
I was always a Sam Telig best bang for the buck kind of guy. Too bad Stereophile decided politics was more important than music or I might still subscribe. It’s their right to politicize their magazine with snarky political comments in equipment reviews or publish album reviews of artists with a particular point of view that always happens to slant in one particular direction. It’s my right not to buy their magazine. If I want to read politics, I can read The New Republic or National Review. Besides, as expensive as Stereophile and TAS are, I’d rather buy music.
“If they think, however, that such a disappearance will be good for consumers, in terms of price, features and technology, they’re sadly mistaken.”
So, a bailout will save the D3 so they can produce price competitive, content rich cars at the right price?
Okie dokie.
phew! good to see the b&b didn’t fall for this pathetic red herring …
Ford stays; the other two die in a fire. Ford, at least, tries to make cars that don’t betray an absolute seething hatred of the very souls of small car drivers.
Worst case scenario, IMHO, is that one of the Detroit 3 disappears (and probably not completely-with little parts of it surviving), not all three. Also, it’s quite likely additional competitors will enter the US car market in the future. Now, best case scenario is that a new, lean&mean, domestic based car maker is formed, although more realistically, the new players will be European, Chinese, or Indian (looks like India’s Mahindra will be the first of this batch). But the overall amount of competition in the US vehicle market will always be fairly high.
I meant to bring some magazines that I bought from an antiques store, to give some good relevant details re: Detroit Inc. They’re on the table at home.
Some of those magazines are from 1981-1982, and the stories are very interesting since – if you are old enough to remember/lived through it – 1981-1982 was a mini-depression (full blown depression in Michigan), gas prices had spiked recently shocking the industry, there were rumblings about keeping out the furrin (foreign) cars to “help Detroit”, and in fact there was a “gentlemen’s agreement” limiting the number of imports (mostly from Japan) which back-fired on Detroit – BADLY. Because Japan Inc simply started sending higher priced, larger cars to the US, limiting sales of smaller economy cars (thus making them more difficult to get/keeping their values new and used at higher levels), and then started manufacturing cars in America, too…
So interestingly enough, the more things change, the more they stay the same. Likewise the story lines in the 1990 magazines “Best Cars To Buy To Get Through The Gas Shocks” etc.
I also have to say that one of the car writers in the 1982 Road & Track “Annual” issue used the B-word re: Detroit inc. He opined that unless Detroit learned to build better cars (learning from both the Europeans and Japanese), they’d all end up bankrupt.
I’d say having the US brands go from some 75% of the US market to less than 50% in a couple of decades could be described as effectively going bankrupt.
Looking at the balance sheets of the Detroit 3, when available, I’d have to say they should be declaring actual Chapter 11 any time now, if they’re smart. Otherwise, it’ll be chapter 7, total closure.
I see a bailout as an exercise in kicking the can. If we do it, all that happens is the day of reckoning is postponed another year or so.
But, assuming arguendo that Mr. Schrieber is correct, is there not a silver lining here, too? After all, higher prices on new cars = higher prices on used cars as well, right? And since most of us own a car now, at least some of the additional cost of new cars will be returned to us in the form of higher prices for our used cars when we sell them.
I just see the whole “higher prices” thing as ultimately coming out as a wash for most consumers.
Ronnie Schreiber I want to help you. I want to come to your house and take $300 out of your wallet.
I will spend it on what I believe is best for you. You will be soooo much better off. You will thank me for this in the long run.
Send me your home address.
Tommy Jefferson :
November 17th, 2008 at 2:32 pm
Ronnie Schreiber I want to help you. I want to come to your house and take $300 out of your wallet.
You must be a “progressive”, then. Besides, I’m a Michigan resident, we’ve sent billions and billions more to Washington than it’s spent here, so they’ve already raided our wallets.
Once again, I’m agnostic and ambivalent about any bailout. The editorial takes no stance either way, just lays out some possible negative implications for consumers if the Detroit 3 fold.
You see, it’s possible to look at both sides of an issue, whether or not one endorses one position or the other. Paper, plastic or reusable cotton grocery bags? Well, they all have their benefits and they all have some environmental impact.
I heard Krugman say that if one of the companies declares chapt 11, there won’t be credit available to allow restructuring and they will be forced into chapt 7. Any truth to this?
Bozoer Rebbe :
…I’m a Michigan resident, we’ve sent billions and billions more to Washington than it’s spent here, so they’ve already raided our wallets.
How does one find this information? I’m not being mean or anything, but I’d really like to know if this statement is factual; and the only way to do it is to find out the real numbers, in and out, yes?
On second thought, I think EVERY single state has sent more money to Washington than what came back. Why? Because government is by its very nature…inefficient; wasteful even!
About 15 years ago, the figure was that on average, each dollar sent to Washington would only result in 28 cents being passed on to the people in the form of program/benefit.
There’s little evidence to me that this has changed in the last decande and a half.
How does one find this information? I’m not being mean or anything, but I’d really like to know if this statement is factual; and the only way to do it is to find out the real numbers, in and out, yes?
Here’s the data for 1981-2005
http://www.taxfoundation.org/research/show/22685.html
Michigan averaged $0.81 cents for every dollar it sent to Washington, about $200 billion over that period. Most of the net flow was to the south, southwest and the D.C. suburbs in Virginia and Maryland. The southwest got water projects and infrastructure, the south got defense bases and plants, and Virginia and Maryland got all those GS-11s and above who mostly sit on their asses working for the Federal government. Meanwhile they closed two Air Force bases here in Michigan and consolidated tank production, taking it out of Michigan.
Maryland averaged $1.25 in Federal spending for every $1.00 in taxes paid to Washington. Their net gain was only slightly smaller, $190 billion, than Michigan’s net loss. Mississippi is over a buck and a half. Just about all the southern and sunbelt states are over a dollar. Louisiana averaged $1.14 and now we’re spending $200-$300 billion rebuilding New Orleans.
I don’t begrudge the people of New Orleans. They experienced a natural disaster and need assistance, but the magnitude of the damage and suffering was mostly due to a lot of bad mistakes by people, starting with locating a city under sea level and proceeding to poor levee design & maintenance, inadequate emergency preparedness and response, incompetence on the part of Mayor Nagin (and a big chunk of his police force) and Gov. Blanco (remember those flooded parking lots full of school buses), slow action by FEMA and, no doubt, some level of corruption in the rebuilding process.
You can point to mistakes made by Detroit if you want, but they aren’t the only ones who have made bad decisions.