Simon Smelt

Government Subsidies Can Make Matters Worse for Auto Industry

Dear redven02
I made no comment on the quality of U.S. autos. Indeed the decision to postpone purchase I discussed assumes buyers will return as the market stabilises at a lower level - it just takes time.

The government funding for the auto makers will be cumbersome, with lots of conditions and small print. As such it is liable to get entangled with the upswing in demand for autos that will probably occur at the end of this year. Of course, the politicians will then take the credit for the upswing that would have occurred anyway. A few grand for buyers won't shift decisions until the time that buyers think the subsidy is about to be withdrawn.

I can see an argument for a brief bridging loan to the big 3 (and to other manufacturers of durables) to help them through the period of market adjustment I describe. But that is far too simple for the lobbyists and politicos. So, the tax $$$ to "rescue" the big 3 will be spent ineffectively. They might conceivably save a few jobs on the shop floor (don't count on it) but will cost jobs elsewhere as money is sucked from those with a lower profile.

On Feb 16 11:32 PM redven02 wrote:

> Unfortunately, there are seems to be so much negative spin put on
> the US auto industry that the industry really doesn't need now. The
> people who make these pronouncements need to do their homework. Spend
> some time in a plant in Detroit, look at consumer reports and ratings
> and see how Ford and GM are doing outside the U.S. I've worked on
> several R&D projects for the Big 3 and other automakers and here
> are some facts:
>
> Myth 1:
> US made cars are inferior in engineering and reliability.
>
> Fact:
> While they aren't at the top of the list in many categories they
> are generally above average (with Toyota and Honda usually ahead).
> However, the J. D. Power dependability rating ratings for 2008 had
> 4 US models in the top 5.
>
> (www.jdpower.com/autos/...)
>
>
> The US auto companies have engineers as good as any in the world.
> The problem really is that management has given in to the short-term
> mentality of analysts. The industry built gas-guzzling SUVs because
> they were selling and Wall Street would have chewed them out for
> wasting money on fuel-efficient vehicles. In spite of this, they
> were working on a hybrids in the mid-90s and hydrogen vehicles in
> the early 2000s. However, the advanced engineering teams could never
> get management commitment for these programs, unlike Toyota which
> made a loss for many years on the Prius before it caught on after
> the gas-price insanity last year.
>
> Myth 2:
> They don't make cars that people want.
>
> Fact:
> Ford and GM have been doing quite well outside of the US. In Europe,
> American cars do better than their Asian counterparts and the US
> automakers are making money in Asia and Latin America. They also
> still do have significant market share in the US.
>
> The biggest problem that the Big 3 has is their relatively high labor
> cost. But again, in terms of actual wages, the union workers are
> paid close to their non-union counterparts who work for the foreign
> manufacturers. The inflated $65/hr costs that one reads about include
> legacy pension and health benefits. Honestly, I don't see a big problem
> in paying a person a good wage for making a product that does the
> job, giving him/her excellent health care and a comfortable retirement.
> The rest of the nation should be trying to emulate this instead of
> eliminating good compensation in search of blind profit with obscene
> compensation to a few. To be sure, it's a MUCH better expenditure
> of money than giving outrageous salaries to the idiots in the financial
> world who couldn't come up with a better idea for using Greenspan's
> cheap money than inflating real estate and gambling it on CDSs.
> If they weren't carrying these costs, US manufacturers would be just
> fine - this is proven by the fact that they do quite well in countries
> where the government pays for health care and retirement.
>
> Mr. Smelt, I could turn the argument around to say that the government
> subsidies would smooth the volatility by inducing the 1/3 that would
> postpone their purchase to go ahead (your knowledge of their buying
> situation and psychology is no better than mine) and the loans to
> the auto industry would enable them to maintain production facilities
> rather than having to drastically shutdown - only to be blindsided
> by excess demand in the future. I might be wrong, but it doesn't
> sound like you've really analyzed the costs of shutting down vs idling
> vs restarting a manufacturing facility. Even mighty Toyota, the flag-bearer
> for all who trash the US auto industry, is feeling the hit and will
> no doubt get assistance from the Japanese govt. as have the European
> manufacturers from their governments. This "free (except-when-the-finan...
> have-to-be-socialized) "-market, profit-gouging nonsense has gone
> on long enough. Articles, with headlines such as this one and with
> hardly any concrete basis make an already difficult situation for
> millions in the US auto industry even harder.