Bailing out the U.S. auto industry

Now the government is getting ready to bail out General Motors and the rest of the American auto industry. William Katz contemplates the prospect:

Let’s see if I have this right. I, and millions of my fellow citizens, in addition to our other burdens, will now be asked to bail out the American automobile industry, which has fallen on hard times. No less a pair of automotive authorities than Nancy Hot Rod Pelosi and Harry “High Octane” Reid have said so.

Now wait. Did I miss something? I don’t see where Honda, Toyota or Nissan are begging for salvation. Mercedes seems to be in business. BMW is still moving cars. Even Rolls continues to transport the Saudi royals. This seems to involve the American companies only – GM, Ford, and what’s left of Chrysler.

Ah, the comedown. It’s been 55 years since the president of GM, Charles E. Wilson, famously said that what’s good for General Motors is good for the country. In fairness, he also added that what’s good for the country is good for General Motors, but it’s the first part that got the headlines. In the two or three decades following Wilson’s remark, America’s passion for its auto makers continued, rather blindly, with heavy celebrity involvement. . . .

So what happened?

Arrogance is what happened. Mediocrity is what happened. Junk is what happened.

In the 1970s a survey was taken of German and American auto executives. They were asked, “What do you do?” The Americans replied, “We sell cars.” The Germans answered, “We build cars.” It was a difference in corporate culture. The Japanese noticed. They decided to build cars, and they succeeded. Many Americans today, brought up on Pontiacs and Fords, won’t own an American car, unless it’s a car made in Ohio by a foreign company. What a stunning change.

This country was custom-made for the Japanese auto invasion of the late seventies and early eighties. For decades, even as we loved our Detroit-made autos, we knew that many of them weren’t very good. The Mustang might have stolen our hearts, but our wallets were bleeding. (One Olds that I had required two engine changes.)

A University of Chicago professor, who had a background in the labor movement, told me this: When an auto worker ordered a car, that car was tagged, at the start of the production line, “For one of the boys.” The workers made sure the car was made right. Wonderful story. But it makes you think about the thousands of other cars that were coming off that same line. You might have owned a few. . . .

Auto executives then, like many today, came from the finance side of their companies, not the auto side. Alfred P. Sloan, GM’s legendary chairman, once famously said that GM didn’t make cars, it made money. He turned GM into the largest and most profitable industrial company in the world.

But no longer. Now the companies of our dreams, the companies that made Dinah Shore sing and Groucho joke, the firms that turned out the bombers and tanks of World War II, are begging for help. After decades of failing to produce cars with the quality and features Americans want, they ask largesse from the public they often ignored. They will get that help – because there are millions of jobs involved, because Democrats will not let the United Auto Workers down, because the bankruptcy of our auto industry would be a national humiliation, and because…because in a way we still love them.

Notice what this suggests about VOCATION and what can go wrong.

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  • I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.

  • Kirk

    Tied in with the quality, is also the type of cars that these companies built. As a tradition, American companies make big, muscley, gas guzzling monstrosities. That may have been fine ten, or even five years ago, but the average American simply can’t afford to drive one of these any more. Yet American car companies continue to manufacture these cars, bragging about the 19 mpg that these beasts get. The Japanese and the Europeans, who faced high gas prices long before we did, have realized that the future of the automotive industry lies in small, efficient cars. They build them, we buy them, and GM goes on making SUV’s. I feel for the workers, but I have no sympathy for the companies.

  • PT Ben

    With so many cars on car lots and so many used cars on used car lots, would it really be a bad thing for a couple car manufacturers to have to scale back?

    There are enough foreign cars built in the US I dont’ think we’d run out of cars.

    I hope these bailouts that are proposed include restrictions on CEO salaries. I’m not upset these guys make big money but I am upset when 1000’s of people lose their ability to buy groceries and the CEO walks away with millions of dollars in ‘severance’.

  • WebMonk

    PT Ben, you socialist you! How dare you suggest that the government step in and dictate the recompense companies offer to their employees!

    (major joking there)

    I’ve recently had a couple discussions along those lines when I came off as the “liberal” because I didn’t have any objections to government limits on CEO payments for companies that took government money. I’m not used to being a “liberal”. It was an interesting feeling. 😀

  • I personally think that the best thing for GM would be to go Chapter 11, dump their pension obligations, and let the UAW fend for itself. It would also be great if the government would end boondoggles like CAFE and actually let people design cars, not design compliance with federal regulations.

    I’ll know it’s happened when I see a flock of pigs over my house, soaring in the November chill.

    And for what it’s worth, GM hasn’t been the gas guzzler king in a while. Their pickups, minivans, and more are “best in class” for mileage, and quite frankly, having taken two GM vehicles to > 150,000 miles (and watched others take them as far routinely), I’m not persuaded that their quality is half bad, either.

    Now they DO have a problem with the automotive press, which remembers disasters of the 1970s and 1980s quite well, but quite frankly, I don’t view their products as half bad.

  • Bryan Lindemood

    I think this bailout is silly. I know Ford makes some excellent cars that have been very popular in Europe. Why they didn’t bring them home for us to enjoy years ago still boggles my mind – especially the cute little sporty one with 40+ mpg. That the Chevy Volt isn’t already rolling shows that these companies should get what’s coming to them, so that they can start over with a little hard work. I’m still paying for a lemon Ford I owned several years ago before replacing it with a wonderful used Toyota. Me and my classic ’68 Mustang are against this bailout!

  • Nemo

    No wonder the American auto manufactures can’t compete…

  • Don S

    I’m with Bike Bubba @ 7. The problem the U.S. companies have today, and have had for years, is their gutless capitulation to the UAW. As the link in Nemo’s post @ 9 reports, it is very hard for them to cut costs during lean times, because even when they close plants they have to continue to pay the laid-off workers through the so-called “job bank”. Union workers still get “Cadillac” (no pun intended) health plans, having no deductibles and no co-payments. On average, total labor rates (including all benefits and pension) are upwards of $70 per hour. Pension funds are horribly underfunded, and with investments tanking this year, this situation is getting far worse. This bail-out will only worsen the problem, because the Democrats will condition the funds on the continuation of union rules and benefits, as well as larding a host of new “green” rules on the sector. Someone above posted that U.S. manufacturers never adapted to a smaller vehicle mix, to stay competitive with foreign manufacturers. True. The reason is that, because of their incredibly uncompetitive cost structure, they couldn’t possibly make a profit on those low-margin vehicles.

    The best thing for the ongoing viability of the U.S. auto industry is clearly bankruptcy, which will result in forced re-opening of union contracts. The unions need to “get real”, and understand the truly horrific circumstances their employers are in before they completely kill the golden goose. A taxpayer bail-out will simply delay the inevitable, and the taxpayers would not have a prayer of re-couping the bail-out funds.

  • Bruce

    Just as there has been a follow-the-leader lag in American automobile quality–they have slowly gotten more sophisticated and excellent based upon imitation rather than imagination or foresight, it seems–there has also been a lag in unions learning to work cooperatively with Big Auto. Unfortunately, the cooperation often happens too late, as in Janesville, WI, where the GM plant is closing down in spite of efforts by the union to find ways to keep it open.

    I am going to assume that there will be car makers in the US in the future, and the car makers will have union work forces. It would be great if some wisdom broke out, and these two groups continued what they’ve learned, perhaps too late: to look a bit more to the welfare of each other as a means of ensuring the welfare of themselves.

  • I have a hard time believing that those here blaming the unions for this downfall didn’t already have issues with unions. As always, we bring our biases to our solutions.

    After all, the unions have been there for quite some time, and I don’t things like this happening before. It seems clear to me that American automakers simply weren’t very good in past years about meeting Americans’ demands. They seemed to think the era of big, inefficient vehicles would last much longer than any of their Asian counterparts did. I don’t think you can blame the unions for that.

  • Nemo


    I don’t think we’re blaming the unions for the problem so much as complaining that they’re getting in the way of correcting it.

  • Nemo (@13), if that’s so, then I doubt we agree on what the problem is. I think it has to do with American automakers not making the cars Americans want, and especially not figuring out that the SUV/gas-guzzler boom wouldn’t last forever. I don’t see how the unions have much, if anything, to do with that.

  • Joe

    tODD – the reason the US automakers focus on light trucks and trucks is because of their cost structure they can’t turn a profit on small cars (largely due to the competition from foreign companies with lower labor costs). Based on some numbers I got from a UAW lawyer I was up against, the big three actually loose a couple hundred dollars every time they sell a car but they make a profit when it sell a truck. Now that Toyota has a real presence in the truck market the big three are going to face increased price pressure there as well. They could make all small cars all the time – even ones we want to buy – and their financial situation would not get any better. The legacy costs and current costs of labor are just too huge. Now, it maybe that they could make hybrids – people seem to be willing to pay more for these cars; but I have never seen any profit numbers on these cars.

    All of this said, I don’t blame the Union. The companies agreed to these contracts. They could have said no and dealt with a strike, they could have been creative and found a new solution. Granted the UAW was very hard nosed in its negotiations but still the companies are not blameless.

    This is largely why the bail outs won’t work. There needs to be a fundamental change. The kind of change that comes with a restructuring in a bankruptcy proceeding. The time has come.

  • Don S

    tODD @ 12 & 14: Joe said it well @ 15. I don’t blame the unions per se. It’s their job to go out and get the best deal they can for their membership. The companies are supposed to, at the same time, negotiate in good faith with the unions to keep their costs as low as possible and get the best deal they can for their shareholders. The problem is that, beginning in the 1970’s, managagement began taking a very short term outlook in their negotiations, trading short term wages for long term health, pension, and work rule benefits which wouldn’t show up on the bottom line right away. Now they are paying the price for these ultimately uneconomic concessions with an approximate $1500 cost disadvantage for each car they sell relative to foreign automakers. They can’t change their production mix to favor smaller cars because the margin per car is too small and they can’t make money. That is why they stuck with SUV’s and trucks for so long, as Joe indicated above.

    Foreign car makers with plants in the U.S. have located those plants in southern right-to-work states with non-union work forces. They have a tremendous cost advantage because of this.

    At this point, a bail-out is just putting a $25 billion band-aid on the problem. It will make things worse, because the taxpayers will ultimately lose that money, the unions will become even more entrenched because of strings attached to the bail-out by Democratic lawmakers, and the bail-out will also come with terms dictated by environementalists related to implementing green technology which will worsen the margin and cost problems for the industty. Worst of all, management will stay in place.

    The best thing that could happen at this point is to blow up the existing companies and unions through bankruptcy, and start over with a blank slate. Hopefully, then, you could get competent management and union leadership in place to negotiate mutually advantageous “lean and mean” arrangements going forward.

  • Bryan Lindemood

    I agree with you Don, but unfortunately, that won’t happen. I have no hope at all of the most rational direction being pursued by our elected officials.

  • Anon

    The problem is, is that families require larger vehicles. Since congress made the station wagon illegal, Detroit picked up on the minivan from Japan (IIRC) and the Jeep Cherokee/Suburban/Bronco and turned them into replacements for the family station wagon. I find that people who hate these vehicles, call them monstrous, etc., are also opposed to large families and are not open to life.

    PT, but by what authority does the civil government limit CEO salaries and retirement deals? That is private sector and is under the authority of the boards of directors, who answer to the stockholders. I hear you. I’m below the poverty level and have internet just for job hunting (but use it for other things since I have to have it, anyway). But the thing is, it isn’t my money to take, and it isn’t the government’s to take, either. Salaries are a matter of those corporations, no matter how we might feel about it. I don’t know why the stockholders – most of them middle-class – are ok with that, but they seem to be.

    Bike, dumping their pension obligations in order to save money, as opposed to actually going out of business, sounds to my ears like a criminal contract violation. If not ‘criminal’ then surely unethical. You make an agreement with someone about what you are going to pay them for their work, which is what pension is,

    This country’s pollution standards and safety standards are what keep some of those vehicles from these shores. I sure wish we could get those efficient turbodiesels from Europe and run them on biodiesel. But for some reason we can’t yet. I think it is some pollution issue – in a backwards way this time, that our diesel isn’t pure enough for their engines, and until we switch over to purer fuel that we can just mix with the organic oils in the tank or at the pump, we can’t.

    The price increase in gas was probably meant to influence the election – and it did – and now the election is over, the price is back down to pre-Katrina levels. Now families can afford those family vehicles again, and northerners can afford vehicles that have ground clearance for winter.

    I would sum by saying that it is complex with many factors. I don’t know what the solution might be.

  • I was raised riding in a Chevy Vega and later an AMC Eagle. My dad was drawn like steel to a magnet to the late 60’s to late 70’s American cars. I’ll never know why. They were junk. The AMC which he bought new went through five rear ends in a couple years. Before that, the Vega was always breaking down.

    In college when I bought my first new car (a Japanese one) dad was livid that I would “sell out my country like that.” I told him that I couldn’t afford to pay for a car twice, repairing it every few months even before it was paid for. I said that I would be glad to buy American if he would pick up the tab for the repairs. He never brought up the subject again.
    We are a Honda family now. They are the best cars I’ve ever owned. We have two. My inlaws were so impressed with them that they bought three more (new ones)between them.
    I think back to all the stuff I missed out on with my dad when I was a child because he had to fix those pieces of junk all the time.

    I really don’t care whether it was shoddy management or greedy unions, or both. Other than possibly being tempted to buy a pick-up truck , I will never buy an American car.

    Honestly, try this the next time you have had a bad day. Go to a Honda dealership and learn what its like to be the recipient of the fine art of kissing customers backsides. Be careful though, you might end up with a new car.

  • SteveB

    Lot’s of pontification from people obviously not well versed in the auto industry or industry in general.

    For the record, governments in France, Germany, and Japan are actively involved in preserving the health of their auto companies.

    Secondly, Ford Motor Company’s products are moving past even Toyota and Honda in terms of quality. Not considering a domestic vehicle because of a less than pleasant experience in the 70’s is akin to rejecting Sony products because they hung Beta around our necks.

    Thirdly, the fuel economy of GM and Ford products is on par or better than comporable Japanese – look at the fuel labels for Tundras and Titans for instance – dismal!

    Finally, the government has a huge stake in the game, seeing how EPA regulations and federal crash standards restrict the ability of automakers to bring in many of the products manufactured for European and Japanese markets.

    Here’s a tip – do some research, and see how good NA autos are before writing them, and this vital industry, off!

  • Don S

    SteveB @ 20:

    I drive two Fords (actually, Lincolns) currently. I agree with you — they are both outstanding vehicles.

    The issue is competitiveness. Average labor costs for U.S. automakers is $73. Average labor costs for Japanese automakers is in the $40’s. We’re talking fully loaded labor costs (hourly wage, benefits, pension). There is no way that U.S. automakers can compete given that disparity. That’s what most of us have been saying here. If the proposed bailout is simply going to lock in that disparity by locking in current union contracts, as the Democrats are indicating will be the case, then it is worse than bankruptcy, which would give the automakers a chance to start over with a clean slate.