What the hell are we going to do about the idiot auto industry?

General Moters ev1

The American auto industry deserves to die so richly it makes me sputter. It’s pretty well exemplified by Bob Lutz, G.M.’s vice chairman, who’s been infamously quoted as saying, “…global warming is a total crock of shit. … Hybrids like the Prius make no economic sense.” It’s been just like with the housing bubble and the Iraq war, where a chorus of reasonable voices called out for the obvious correct action for years. Except that with the auto industry, we’ve been telling them for decades. Please build us better cars. Please not with the upsized SUVs. Oh, and, who killed the electric car again?

Thomas Friedman was watching TV in September:

They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

So, yeah, this is sure as hell an industry that does not deserve to be encouraged. Steve says let ‘em die. But Friedman is more cautious. He quotes the Wall Street Journal’s Paul Ingrassia, who wrote:

In return for any direct government aid, the board and the management [of GM, and any other U.S. automaker accepting a bailout] should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits.

But you see where this starts to lead. Back to Friedman:

I would add other conditions: Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

Of course others have plenty of more drastic ideas, and those strict minimum-mileage requirements we’ve been talking about for years are just the tip of the iceberg. But you see it’s not as easy as “fix it and then make them run it better.” You can solve problems with banking with more regulation, because “innovation” in the banking industry is generally considered the source of trouble. In the auto industry, innovation is the way out, and you cannot use legislation to force innovation. Just doesn’t work. Might work for a few months or a year, but eventually you’ll be forcing the wrong kind of innovation, and digging yourself a deeper bailout hole for next time. Friedman even acknowledges this — sort of — by jokingly suggesting putting Steve Jobs in charge of GM for a year.

No my friends. The American auto industry has had ample opportunity to fix itself. Instead it has chosen to cruise on easy Lincoln Navigator profits (“take a Ford Expedition, add some sound insulation, raise the price by $10,000, and hold your breath”) and a powerful Michigan legislative delegation. It fought safety standards, it fought milage standards, and it churned out the same crap, clad in differently styled plastic, for decades. The legion of workers it employs are the only plausible argument for saving it, but ultimately you’d be doing them no favors. Bailing out an industry and then regulating it to “improve” really is straight Socialism. And even if Republicans are right that this is the time to throw everything they’ve ever stood for out the window, the problem remains that Socialism does not work. Good money after bad. Delaying the inevitable.

Sorry, but I’m with Steve on this one. These companies have been bailed out before. They’ve been warned. They had plenty of opportunity to fix their shit when they were flying high on those 100% SUV profits. And they staunchly refused. They need to survive on their own or die this time.

Posted: Thursday November 13, 2008 by Alesh Houdek · · Comment feed for this post: RSS, atom

 

Comment

  1. Alex    Nov 13, 03:19 PM #  

    It’s easy to go after Detroit for picking the big profits on trucks and SUVs (and Bob Lutz is a dinosaur) but realistically, how could they not? Their manufacturing costs per car are the highest of any other country, thanks to unionization, the high cost of domestic R&D and the weight of entitlements (The Volt, which is supposed to be GMs car of the future, will lose money at a sales price of 40k. Try to compete in those conditions). Better yet, try to take away the retirement packages of people who worked at some GM subsidiary 20 years ago and you’ll have a perfect shitstorm in your hands. BTW, those countries don’t have anything similar to OSHA regulations either —not that I disagree with those— but compliance it’s a cost. Yes, Toyota and many other manufacturers assemble cars here at the same costs, but they develop the platforms in the home country.

    It’s also unfair to accuse them of not innovating. They have been innovating even in their darkest years, the minivan being exhibit A. That EV1 you have in your post was the first electric car, it had to be subsidized by both GM and the state of California and even then it was an abysmal failure because the cost of ownership simply wasn’t justified. The japanese have done well with hybrid technologies that were first developed here, for locomotive use; and all they have done is adapt them to car platforms they already had. The Germans don’t have a single hybrid car in the market and they aren’t struggling.

    It’s triple unfair to blame them for the fickleness of the American buying public who wants their cars fully featured but also cheap. You want smaller cars, European cars? Rent a rickety, underpowered Renault with no air conditioning and paper thin seats like I just did in Barcelona and then tell me you’ll like to try selling those cars in the US. BTW, it’s not only the Americans. The Australian auto industry is asking for a bailout as well. Toyota just posted a big loss and predicted more. The Europeans aren’t even owned by europeans anymore. The Chinese, flat growth this year. The automotive crisis is pretty much universal.

    And quadruple unfair to say things like “call Steve Jobs”. Steve Jobs innovates for a manufacturer which has a relatively small share of the market and sells to the best consumers. Apple is not Dell and GM can’t be Apple.

    All that being said, let them die. Let all the union workers find themselves without a job, the entitlement packages stop and the dealer networks whither. More importantly, let the old culture die. The US will still be the largest car market in the world and it’ll still be expensive to manufacture abroad and ship. New companies will come up with no baggage.



  2. alesh    Nov 13, 05:33 PM #  

    So they were collecting the outsize SUV profits, and what were they doing with them? You just don’t have to be that smart to know that the auto industry is cyclical. Did the big three sock money away for the hard times? No, because it knew we’d bailed them out before. It’s the epitome of privatizing profits and socializing losses, and it’s bullshit. We need companies that can buffer themselves against the hard times. I understand that the current situation is not something that would have been readily predicted, but we’re just at the beginning of it, and they’re already crying.

    Yes, the auto companies have lots of remaining baggage with retirements, unions, etc. Those who are benefiting from those plans ought to realize that compromise beats having your company go bankrupt and try to work something out. More to the point, someone should have been thinking about those retirements when the contracts were being signed in the 70s and 80s, and putting money away.

    Japan develops their platforms in Japan… I don’t know how much cheaper engineers are over there… much more so? What about Germany? And if Japan developed hybrid technology based on US work, why didn’t our guys do the same? Oh, right, they thought it was a fucking joke.

    (Speaking of jokes, I think that the minivan being “Exhibit A” for American innovation sort of proves my point, no?)

    Germans don’t have hybrids. What they DO have a fleet of small, fuel efficient, and extremely well build cars. There may be some crappy cars in Europe but overall the quality is better then US. And the biggest difference is that they just drive smaller cars. You can blame the American population for not buying smaller cars, but the fact is that until the last few years, they mostly haven’t been available in the US.

    I don’t know. I’ve been driving German cars for more then 10 years (actually now I’m driving nothing). Every time I sit in an American car I’m shocked by the crappy quality of everything around me. Cheap plastic paneling that buckles when you press it, everything exactly the way it was on my ’86 Sunbird, except clad in differently shaped plastic panels, and an overall lack of attention to detail.

    I do think we should insist on a global standard of worker rights, and not import anything from countries that don’t enforce those standards. That ought to be all the “protectionism” US companies need. If it isn’t, well, we’re back in full agreement — let them die.

    (And thanks as always for the thoughtful and provoking comment.)



  3. Alex    Nov 13, 11:43 PM #  

    What did they do with the profits? Partly pay teh high operating costs, partly pay for all those entitlement programs, partly piss them away in buying sprees (Ford bought Volvo, Jaguar, Land Rover and Aston Martin). But they weren’t growing, but defending their territory. I’m not saying everything the Big Three did was right, of course not. Wagoner has said publicly his biggest mistake was killing the EV1 program and not developing hybrids. (How much he believes it is another issue). I’m saying that as American companies with a particular set of rules they weren’t entirely responsible for what has happened or even able to avoid it, and that you can’t just compare GM to Toyota and ask why can’t they be more like them? if you were a shareholder you would have been pushing them for higher profits. If you were GMs president, you would have been under extreme pressure to deliver. Friedman is a fantastic journalist and a great writer, but he has never run a company. Hindsight is twenty twenty. That also goes for the labor problems. Everybody knows unions are their worst enemy in the long term. Everybody knows the current stalemate is going to kill the industry yet nobody wants to compromise, they are just waiting for the other guy to blink first.

    You have been driving BMWs, right? In other words, the epitome of European quality. Volkswagens, not so much. Audis were crap until recently. British cars were crap until recently. Citroens, Renaults, Seats, Opels… pretty much as crappy as any Chevy. I’ve rented them. That Renault Clio I just had in Barcelona was as crappy a little car as I’ve ever seen, the farthest thing from a quality small car like the Audi A3, YET my friends living there were aspiring to be able to buy one. The truth is that most European cars are not that good. We get American-spec models. Car ownership in Europe is expensive, loans have high interest rates, you know about the price of gas, insurance is prohibitive and then you have to park the thing. Of course they have fantastic public transportation to make up for it.

    It is not a fact that small cars had not been available in the US. It’s actually just the opposite. Every car manufacturer has had a small entry car since the Japanese “invasion”. When people were buying Ford Explorers and Suburbans and Ram pickups, they could have bought Ford Contours, Dodge Neons and Chevy Cavaliers. A combination of cheap gas and easily available credit pushed people towards the more aspirational SUVs. What we are seeing now it’s the other side of the cycle. Plus Americans do not like small cars. They just don’t. We see a lot of Minis, but Mini is a niche manufacturer that sells 2,500 cars per month in the US. (Ford sells that many full-size trucks every DAY). Which brings me to the minivan point. Make fun all you want, but the minivan was the first new platform since the war, a whole new segment and a substitute for the american big car. They may be ugly and soccer-mom stigmatized, but ask any car cognoscenti, they are a pretty significant innovation.

    Skilled labor is not the main cost for R&D. Resources are. Innovation is expensive. Labs costs tons of money, materials development costs tons of money, prototyping and testing costs tons of money. Toyota has not recovered the cost of developing the Prius batteries yet. Creating a car platform costs the most, that’s why you see so much global platform sharing -BTW, another American innovation. It’s much cheaper for Toyota to design a new Camry model in Japan and import the machining, stamping and dies to assemble the cars in Kentucky.

    The chances of attaining a global standard of worker’s rights and especially of banning imports are slim and getting slimmer every day. Suppose you want to ban Toyotas. Well, they are assembled right here, in Kentucky and San Antonio. You’ll be putting thousands of US workers out of work.

    It’s a real complicated issue with no simple solutions like “innovate!”. Bankruptcy may be the best way to fix the car companies. But of course they are going to get the bailout.



  4. squathole    Nov 14, 12:25 PM #  

    The Big 3 had to know this day would come, they had to. People have been jumping up and down on the sidelines for decades now, pointing out that the car of the future would need to be more sensibly sized, fuel efficient, safer, etc. It was more profitable to ignore these wet blankets and market BIG CARS and POWER and SEX APPEAL the same way AB pushes Budweiser.

    Toyota got the message. Honda heard it, too. If GM didn’t, it was willful. Lutz may be a dinosaur, but he’s among similar genus and species who agreed it was easier to play politics and pocket the profits.

    A very bad business plan, indeed, and not one I’m happy about paying for.



  5. alesh    Nov 15, 08:06 AM #  

    I haven’t seen Who Killed the Electric Car (it’s on the list!), but my understanding is that when they were killing the EV1, lots of people were screaming at them not to, as our pal Squathole points out. So to later admit that it was a mistake…

    I don’t know what the car manufacturers did to deserve as cogent an apologist as you, but I agree with most of what you’re saying. I just don’t think it fundamentally undermines the notion that they screwed up, and they deserve to pay. Yes it’s not apples and apples with Japanese car makers, but so it goes.

    Here’s the bottom line for me. Take the Ford Focus, one of the things on the short list of Things US Automakers Got Right. What happened? Everybody copied it, Toyota Matrix et al. Why don’t US carmakers copy the successful stuff other companies do? Where’s the US Prius? The US Scion xB? The US Volkswagen Golf (a great car, and a damned popular one in the US, and what’s the closest US equivalent)? And do NOT get me started on the Mini. Maybe it’s a Miami thing, but it seems like every 10th car on the road is one of those things. The US compacts have consistently been the absolute worst of all US vehicles. Ugly, unsafe, and unreliable. Nobody ever bought a Geo Metro over a Honda Civic.

    BTW, I’m sorry if I suggested I was supporting a ban (or tariff, or anything) on imports. I’m not, except to the extent that a foreign worker’s rights requirement could be spun as a ban. And I agree that it’s unlikely. I also agree that it’s not a complicated issue. And I agree that they’re going to get the bailout. Hey, it’s “a loan.” Good for everybody, right?

    My only concern with this socializing is that here we may have a case of an actual slippery slope, not just a rhetorical one.



  6. adam hartung    Nov 16, 05:04 PM #  

    GM needs new leadership that is not committed to old Lock-ins if it is going to ever be a viable competitor. Only someone from outside the industry will be able to implement necessary Disruptions and create White Space that will allow GM (or Ford or Chrysler) to address long-term shortcomings. I don’t know why Jobs would take the job, but someone who is Jobs-like is necessary. Read more at http://www.ThePhoenixPrinciple.com



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