Death Knell For The Detroit Dinosaurs

by Jerry Gordon (Nov. 2008)

AP report noted:

After posting a record loss of $1.7 billion in 1980, Chrysler that same year received $1.5 billion in government loan guarantees, courtesy of the Congress and President Jimmy Carter. Auto makers also found a patron in the Reagan administration. In 1981, President Reagan negotiated export quotas on Japanese cars to the US, freeing the way for Ford and GM to sell older and less efficient cars at higher prices without the burdens of competition. Although a boon for the Big Three, the quotas were very much a burden for American car buyers. The International Trade Commission later estimated that between 1981 and 1985, the four years in which the quotas were in effect, American consumers paid $15.7 billion in higher auto prices.

The AP reported on the House alternative.

Witness these comments from those beseeching Congress to save Detroit:

“For the auto industry to completely collapse would be a disaster in this kind of environment,” Obama said in a “60 Minutes” interview aired Sunday night on CBS. “So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of the stakeholders coming together with a plan — what does a sustainable U.S. auto industry look like?”

The White House demurred:

In her statement Monday, White House press aide Perino said, “The auto industry is an important part of our manufacturing base, and we want the industry to succeed and compete in the global economy.” But she also said that media reports have erroneously depicted the administration as taking too harsh a stand on financial relief.

“We believe this assistance should come from the program created by Congress that was specifically designed to assist the automakers — from the $25 billion Department of Energy loan program,” Perino said.

There is a rising clamor in opposition to the bailout plan across the political spectrum, ranging from New York Times columnist Tom Friedman on the left to Sens. Richard Shelby (R-Alabama)  and Jon Kyl (R.-Arizona)) on the political right.  

MR. TOM FRIEDMAN: I think he can. He may have to, Tom. You know, Carl Levin, what did he say? He said, “You know, just give us this $25 billion and, and we’ll be OK.” Tom, if I thought with $25 billion we could save this industry, I’d be for it, OK? But I see no plan right now, no reason to suggest that these people who have driven this industry into a complete ditch have a plan to get it out in the long term and not come back three months from now, for another $25 billion. Show me that plan.

Remember, what was Detroit’s plan two years ago when they confronted this problem? It was to subsidize gasoline at a $1.99 a gallon if you bought a Hummer or Suburban or a big truck–that was their idea of innovation. So, you know, it was like a crack dealer offering subsidized crack rather than, you know, going to a clinic to get off the drug. And who is the enabler of that? The enablers of that were Sen. Carl Levin,  and all of the Michigan [Congressional ] delegation who didn’t go to these people. The outrage of these people, “Now they say we have to save these jobs!” Where was their outrage two years ago, OK, about getting them to be more innovative, getting them on top of the energy efficiency question? They have been enabling the destruction of this industry. So show me a plan. Show me a plan that says if we give you this $25 billion you’re actually going to change. Absent that–remember, Tom, we’re going to charge this $25 billion on our kids’ Visa cards. This goes on our kids’ Visa cards, and we have a moral obligation to make sure this is spent wisely.


“The financial straits that the Big Three find themselves in is not the product of our current economic downturn, but instead is the legacy of the uncompetitive structure of its manufacturing and labor force. The financial situation facing the Big Three is not a national problem, but their problem. I do not support the use of U.S taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes.”

Fellow Republican
Senator Jon Kyle of Arizona joined Shelby in opposing the bailout plan of Senate Democrats:

“Companies fail everyday and others take their place. I think this is a road we should not go down,” said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee. “They’re not building the right products,” he said. “They’ve got good workers but I don’t believe they’ve got good management. They don’t innovate. They’re a dinosaur in a sense.”

Added Kyl, the Senate’s second-ranking Republican: “Just giving them $25 billion doesn’t change anything. It just puts off for six months or so the day of reckoning.”

Americans evince little support for a bailout of the ‘iron men’ of Detroit. They have no solidarity with an industry that needs to be re-organized because allegedly it can’t make a profit selling fuel efficient cars and has a very rich noncompetitive labor cost structure. This is after the decade long joy ride of gas guzzling SUVs for soccer moms produced a cash hoard estimated at over $100 billion, only to be squandered because Detroit didn’t listen to consumers.  On top of that there is the lush UAW legacy contracts for retirees who outnumber active union workers. The UAW legacy contracts for retiree health and retirement amount to additional cost of $3,500 per vehicle manufactured by the Big Three. To add insult to injury, UAW members are at the top of the blue collar wage scale.  Note
this comparison of average hourly wages paid:

Total Compensation per Hour, 2007-2008 (includes wages and all benefits):
Big Three automakers — $73.08
Toyota (US) — $48.00
All manufacturing workers — $28.48

Did UAW President Gettelfinger offer to curtail wage demands to assist in improving costs for Detroit auto makers caught in the throes of possible bankruptcy? Note this
CNN report:

The prospect of concessions from the union came up during a meeting involving executives of Detroit’s Big Three auto makers and Democratic Congressional lawmakers on Capitol Hill Thursday. But UAW President Ron Gettelfinger made clear that concessions were out of the question, union lobbyist Alan Reuther said in an interview with Dow Jones Newswires Friday.

Nationalizing Detroit would cost us a pretty big penny and would entail putting in a czar to ‘order’ restructuring and cost savings.  Doesn’t work. Look at what the Brits did when they
bought by Volkswagen
A.G. in 1998.

We learned about the arrogance of the ‘iron men’ of Detroit with Chrysler corporation, via their ad agency at the time, Y&R International back in 1978, on the development of the independent buyout by private equity firm Cerberus in 2007, and the recent GM break off of merger discussions with Chrysler, LLC.
Honda, Toyota, Hyundai, Mitsubishi, Nissan, Subaru, BMW and Mercedes Benz who own auto manufacturing facilities in the US aren’t asking for a handout. They are making vehicles that Americans and the world buy. Foreign manufacturers are expanding operations in the US. Witness
a $2.9 billion plant being built by German giant Thyssen Krupp in Mobile, Alabama. This plant will produce cold rolled steel to supply foreign owned auto manufacturing facilities located in the South.

The floundering Big Three are trading on American patriotism by saying we need them to build American cars, when they are building cars globally and even making a profit in the EU and China, where they have to compete or die.  Moreover, components of the Detroit vehicles often come from Canada, Mexico, Asia and the EU.

What to do?  I think an inspired suggestion was made in a Wall Street Journal op Ed by Robert Hahn and Peter Passel,
Since a big fiscal-stimulus package for fighting the recession — some combination of tax cuts, extended unemployment compensation, infrastructure grants and assistance to states — is coming soon, why not stimulate consumers to buy cars? Why not offer eye-popping rebates — say, $3,000 — for a limited time to buyers of cars and light trucks? It would probably make sense to phase out rebates for the most expensive cars, and as a treaty obligation, it wouldn’t do to discriminate against foreign makes. 

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