The Case for Domestic Automakers

The main argument to maintain domestic-based automakers begins with nearly $20 billion in annual R&D spending that goes towards important objectives such as investing in lithium ion battery technology and other technologically important developments that create and sustain high-tech jobs and research in the United States. Yes, I have seen the way the automakers burn through cash, between Ford (F) and GM (GM) it was about $15 billion in the third quarter. Don't forget that this was going on during the backdrop of the biggest drop in durable goods spending since the early eighties recession and the biggest drop in automobile sales since WWII. (To exacerbate this stark depiction of how fast things went on the fritz, Ford actually turned a profit in the first quarter.

The argument that the Detroit 3 are some of the most 'inefficiently' run companies in America is completely subjective. With the painstaking cost-cutting measures put into action by the UAW contract last year, the cost differentials between union employees and those at foreign automakers with American operations will begin to drastically narrow as the Detroit 3 unload their health care obligations and drastically reduce the pay of new UAW workers (simultaneously as old workers receive buyouts) into 2009. These savings alone will amount to tens of billions of dollars a year. Meanwhile, the domestic manufacturers have been coming out with products that have leveled the quality gap while also preparing for the release of the first commercially available electric-based plug-in hybrid automobile.

During the decades preceding this, Asian automakers were allowed to flood their products into the United States while South Korean and Japanese governments simultaneously closed their markets to our automakers and manipulated their currencies (respectively) to allow their home markets to have an advantage. We also permitted foreign automakers to set up factories in America without having the burden of Detroit's union-related obligations.

The fact that Detroit not only had the ability to last this long with all of these disadvantages, but still had the ability to innovate and restructure significantly, is no small achievement as far as I am concerned. Like I said, it's a subjective argument. The unions have been given a gross amount of latitude for their ineptitude from decades past and management has not been exactly stellar in every minutiae of their operation, I can concede that. But the fact of the matter is that Detroit is restructuring, and like it or not, the current business environment has much more to do with the credit crisis than any other facet of the business that was under their immediate control. Annual sales rates of 11 million domestically are unsustainably low and, like I pointed out, have fallen off a cliff at a level completely unseen in modern times. Another important thing to remember is that two-thirds of GM customers have a credit rating below 700, the minimum required to finance a vehicle through GMAC since credit seized in September.

So why give/loan $25 billion at the 'expense' of taxpayers? Well, if we don't loan these funds, our society is going to have to pay for the collateral damage via lost tax revenues, further exacerbated job losses, and a restricted income multiplier anyways, and chances are it will be a lot more expensive going that route, even if you believe a bailout is a roll of the dice. Second, $25 billion has already been set aside by Congress to re-tool factories to produce more fuel-efficient vehicles. If the Levin proposal doesn't pass, I've got a hunch those funds will be expedited along to the automakers anyways with almost no strings attached. It would then be up to the Obama administration to handle the problem, which it most likely will.

The problem is, the longer we wait to give Detroit the funds they need for a turnaround, the more expensive it is going to be to do so. Lastly, going back to my main point about R&D, we are more than likely to see an abrupt shift in governmental policy to an increased spending in green technologies to counter the perceived threat from fossil fuels (whether it be from 'global warming' or 'oil-rich nations'). If we have a domestic-based R&D spending capacity from domestically-based automakers, there is a conduit to enact upon these objectives with greater efficacy than not having an established industrial facility. Having lawyers, judges, unions and management at each other's necks for two years with nary a shot of emergence from Chapter 11 (in the middle of a severe recession) is probably not the best way to make progress when taking all of this into consideration.

Disclosure: None.

Comments

[from Holland:]

In Europe the markets are open to any, Asian and US, automaker. Still the US cars did not sell well. Why? Because the quality sucks, the technical performance is poor, the design does not appeal. The only good thing I can think of it the price is low. But since we Europeans know that you get what you pay for the low price is more a warning than an attraction.

US automakers face the truth. Your shoddy goods cannot compete in a global market. Succes [relative] in your local market hid that for a while but now anymore. I would put my money in succesfull industries. Not in the dinosaurs (unless you prefer living in the past).

2008 Nov 19 04:42 AM

[Steven Hansen:]

"The argument that the Detroit 3 are some of the most 'inefficiently' run companies in America is completely subjective."

i might point out to this author that his examples are monetary ones such as wages and health care. an inefficiently run company when i speak of the automakers has to do with productivity (the number of hours it takes to assemble a vehicle). when you multiply the overall unit rate labor cost of each automaker times the hours to assemble a vehicle - detroit never had a chance. this production inefficiency is a combination of union work rules combined with company assembly practices.

i will admit the automakers are getting better and are catchin up, but not quick enough to have avoided bankrupcy.

rawstory.com/news/afp/...

2008 Nov 19 04:49 AM

[Jeremy Needham:]

GM and Ford are actually profitable in Europe and make some of the best-selling automobiles on the continent. Besides, Europe as a whole has a much more level playing field in the auto market than the US. It's like comparing apples and oranges.


On Nov 19 04:42 AM from Holland wrote:

> In Europe the markets are open to any, Asian and US, automaker. Still
> the US cars did not sell well. Why? Because the quality sucks, the
> technical performance is poor, the design does not appeal. The only
> good thing I can think of it the price is low. But since we Europeans
> know that you get what you pay for the low price is more a warning
> than an attraction.
>
> US automakers face the truth. Your shoddy goods cannot compete in
> a global market. Succes [relative] in your local market hid that
> for a while but now anymore. I would put my money in succesfull industries.
> Not in the dinosaurs (unless you prefer living in the past).

2008 Nov 19 03:29 PM

[Independent...:]

Detroit is also known as Hockey Town as well as Motor City (Motown). Puck on ice moves from one side to another in lightening speed, and before you know it, Red Wings got another Championship.
So, while your eyes are focused on one player, the other players are ready to score. They have so much going on, and before you know it, they'll score again.
So, what's lining up behind this Washington Tour? Tons of loaded arsenals: potential merger(s), pension, benefits, employee concessions. employee relationships, big changes in structures... you name it.
They know how to use your potential moves and will use what say or do to play a very impressive game. You'll soon find out to your surprise! They got the masters playing great games! With the help of "smart" media people and politicians in Washington and those paper-warmers on Wall Street, wake up and learn some strategies from Ice Hockey.

2008 Nov 20 10:43 PM