American Cars, part II: Laying blame
Earlier this week I talked about American cars ("American cars: What's wrong?") People had some interesting comments, not only talking about their own vehicles, but also what they think is wrong with the way American cars are created. Phil noted this aspect of American car buyers:
" ... A large segment of the car-buying public make their choice based on a non-economic critera. Ford, GM, and Chrysler never had to have better quality control because people didn't use quality as the main decision-making criterion. This creates an inefficient car economy, the result being lower-quality American cars."He also pointed out the use of advanced automated technology in Japan.
These views would suggest that American car makers and consumers are to blame. I certainly don't dispute that people make buying decisions for the wrong reasons -- status, advertising cues, self-perception -- and American carmakers are shirking on quality, but there's some other factors at work, too:
1) GM, Ford and Chrysler are getting hammered on health care costs. Countries with national health care and healthier populations have a competitive advantage, and it forces the American companies to save money in other areas -- getting cheaper parts, or processes to make the cars.
2) The Big Three automakers and the unions have made some ridiculous pacts that waste billions of dollars and lead to lowered productivity.
Case in point: GM and Ford's programs which pay employees not to work. GM's version is called "Jobs Bank", and if the company doesn't need it's workers, it is forced to pay them to do something else -- many volunteer or take classes on GM's dime, but thousands of others sit in rooms reading magazines all day, and they've been doing it for years. GM now has 7500 employees in the program, which will cost it up to $900 million this year, based on current wage levels, according to the Wall Street Journal story, "Detroit's Symbol of Dysfunction: Paying Employees Not to Work," by Jeffrey McCracken, page A1 (sorry, don't have the date, but it's within the past few weeks).
How can American car makers be competitive in an environment like this?
Read this post on the Blogger mirror -- Reader comments often appear there that won't show up on this page. You can leave comments on either page, I'll read 'em all!
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I think practically everyone has heard about the latest auto quality rankings, which put Japanese cars at the top of the list. This is a trend that's been going for decades. The American press, public, and politicians complain, Detroit comes up with new models and ... Read
Bruce Mohl of the Boston Globe breaks a story this morning about Bank Of America raising fees yet again: Read
I'm not exactly sure I understand the arguements here unless the arguement is that capitalism is a failure.
1) GM, Ford and Chrysler are getting hammered on health care costs. Countries with national health care and healthier populations have a competitive advantage, and it forces the American companies to save money in other areas -- getting cheaper parts, or processes to make the cars.
So the arguement here is that in order for GM/Ford to be competetive the US needs to have socialized medicine thereby leveling the playing field to allow GM to compete?
2) The Big Three automakers and the unions have made some ridiculous pacts that waste billions of dollars and lead to lowered productivity.
Again, it was the free market that lead to individual workers deciding it was in their best interest to unionize to unite and bargain for better wages/benefits (capitalism at its best right?) but this arguement suggests that the free competitive market forces that lead to these agreements is a failure.
I honestly don't have an answer for Ford/GM's problems. I've owned American cars most of my life but I'm about ready to switch to Toyota or Honda.
The one thing I am sure of is that once China starts selling their $10,000 SUV's and $15,000 luxury cars in the US a year or two from now, GM and Ford will file for bankruptcy within a year.
FO, you're right on with these two issues. In a globally competitive market, if one company has to spend a huge portion of it's income on health care and another doesn't, it's pretty obvious who's going to come out ahead. Non-US companies have been outsourcing to be competitive for years, but US companies haven't for fear for being anti-patriotic.
It's also not necessiarily privatization vs. socialization, it's more that there's so much more access to healthcare in the US vs. China, India, Mexico. The total cost would be the same, it would just be funneled through the employee and/or government in a different system.
I am not sure the history of how Detroits big 3 got in the mess with the unions they did but the health care issue also relates to the unions as do almost all of their problems.
Most of Japan's big 3 (Honda, Toyota, Nissan) cars are built in the US by US workers. They don't have near the problems of Detroits big 3 because they have not let the unions put the restrictions on them that Detroit did. I am not sure why or how they were able to avoid that union problem but they did and that has led to most of Detroit's problems and I think that the Detroit big 3 will continue shrinking until most of those union workers are either working for a foreign manufactor in the US at lower wages with lower benefits or until they give huge concessions. Detroit cannot compete with the unions arrangements they currently have. Current retires of Detroit who are drawing big pensions and big health care benefits even though they are eligible for medicare are going to need to be trimmed off too. Likely they will just default on their pensions and let the government take it over which will greatly reduce benefits and will result in the rest of us paying for those pensions since the pension guarantee system is already in huge deficit and will only get much worse. It will need to happen. Either voluntarily or through bankruptcy. But the current relationship Detroit has with its employees is cripling and cannot survive. The airline unions are finding out that they had achieved an unsustainable level of power in their arrangements and the auto unions are about to find out the same.
Japan's big 3 got around it by building most of their cars in the South where most areas are usually union agnostic or blatantly anti-union. They actively discourage unions (though not as much as Wal-Mart), but because it's a skilled job (unlike WM), they treat their workers well-enough to prevent unionization.
I think that GM will probably sell their financing arm to one of the financial majors and then either turn their product line around (more Solstices!) or be bought by an Asian up-and-comer like Hyundai. Their stock has a current P/B of 0.75, so the company's a deal for their assets alone. Crisis precipiates change, so they're probably in the best position of the Big 3 to come out strong in the long-term.
Guest -- Did I say anything about advocating socialized medicine? Of course not. I merely pointed out that American carmakers aren't competing on a level playing field when it comes to healthcare costs.
I do agree that Chinese automakers selling cars in the states will put additional pressure on U.S. manufacturers, but I have a feeling that they won't be luxury cars -- I simply don't believe Chinese industry right now can get the quality requirements sorted out. They will probably try competing at the low end of the market, with low-end Japanese and American cars, and Korean cars.
Apex - excellent point about U.S.-made Japanese cars. It would be very interesting to see a per-worker comparison of healthcare costs among unionized employees at the Big Three, vs. non-union employees of the Japanese manufacturers in the South. Retirement health benefits for union employees would have to be excluded, because I doubt the Japanese offer them to their U.S. employees.
You are also right on about the current union/Big three relationship; It simply cannot survive in its current state. Something has to give.
