Why an auto bailout won’t work

by on December 10, 2008 at 10:33 am in Economics | Permalink

The title is mine, not Dave Leonhardt’s, but this passage is his:

[H]ere’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits… the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour – the same as at Honda and Toyota. Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800…. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies….

Leonhardt points out that labor costs account for ten percent of the cost of producing an American car.  Felix Salmon, in a very good post, has a separate point:

Just for starters, think for a minute about the car czar’s responsibility for Opel, and the negotiations which are going to start up between the US and German governments over the European marque’s fate. On the one hand, Opels are clearly the kind of thing which Congress wants GM to make more of. But they want GM to make those cars in America, not in Europe. And GM has already asked the German government for money to keep Opel going.

1 mike December 10, 2008 at 10:58 am

$800 per car is a lot of money. I dunno if it will be enough, but I’m not sure how you can come to the conclusion it wouldn’t help.

2 Sam December 10, 2008 at 11:23 am

Get a car exactly how you want it, fly to Detroit and drive it home.

Why would I want to drive thousands of miles to buy a car? Dell don’t make me show up at their factory to pick up a new PC.

One of the weaknesses that could be a strength is all the options that American cars have. This has contributed to the noise.

I don’t see it. The country is not full of people who were just about to buy a Chevy, but couldn’t decide what kind of upholstery they preferred, so went out and bought a Toyota instead.

People (including me) buy Toyotas and Hyundais because:

1. They just work. They don’t need frequent trips to the shop to fix little niggles – they just go, and keep on going.
2. The companies back this up with 100,000 mile warranties and the like.

If Detroit wants to regain market share, it needs to:

1. Make fuel-efficient family cars
2. Make them fairly cheap
3. Make them reliable
4. Stand behind that reliability with something like a no-small-print 100,000 mile warranty, with free loaner car while yours is being repaired.
5. Provide some kind of convincing guarantee that that warranty is safe, and will remain safe if the company goes bankrupt.

3 Andrew December 10, 2008 at 11:50 am

Sam,

They make all those things, it’s just that Toyonda owns the mindshare.

4 John B. Chilton December 10, 2008 at 11:58 am

Leonhardht writes, “but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies…” Equivalent. In whose perception? GM et al. say their products have caught up in quality to the Japanese brands, but the buyers’ perceptions have not caught up — the bailout/loan in this argument is meant to buy time for these perceptions to adjust. It’s possible. What I’m worried about is if the auto companies fail then the burden of their retirement programs will eventually fall on the American taxpayer anyway.

5 onc December 10, 2008 at 12:55 pm

Consumers Union does an annual car reliability survey (from 1.4 million subscriber responses – paywalled at http://www.consumerreports.org/cro/cars/used-cars/reliability/best-worst-in-car-reliability-1005/how-makes-compare/0407_how-makes-compare.htm). The latest report: out of 34 brands studied, the top 10 were Japanese & Korean. Lincoln comes in at 11, Mercury, Volvo & Ford at 15, 16 & 17. You don’t get a GM car until Buick at 18 – all the GM cars are in the bottom half. ALL of the American makes are “worse than average” on the CU metrics. Chrysler is at 32. The quality gap doesn’t seem to be just a matter of perception (unless you call self-reporting by owners “perception”).

6 Gabe December 10, 2008 at 12:59 pm

I don’t buy from the big three because I prefer the companies in corrupt union states go out of business. The cars made in non-union south are better and less corrupting on the body politic.

7 Yancey Ward December 10, 2008 at 1:06 pm

Here is a good description of the idiocy at work in regards to automobile manufacturers.

8 floccina December 10, 2008 at 1:17 pm

To those who say that GM should have made better gas mileage cars:

IMO if GM had made the Prius far fewer people would have bought it because people do not trust GM to make a good small car with brand new cutting edge technology. Toyota’s reputation for quality small cars gave people confidence in this new type of vehicle (the hybrid). CAFE seems to me to be a stupid way to achieve better mileage cars. IMO people who supported CAFE did not think long enough and hard enough.

9 vincent December 10, 2008 at 1:58 pm

Think of the incentive the government will then have to become even more protectionist. They would want to protect their (our) investment.

10 Leif December 10, 2008 at 4:00 pm

Although most reviews that I’ve seen rank the asian mfrs above the americans, I still think that if detroit caught up in ‘quality’ (including mpg and all that the term encompasses) they would still have a hard time catching up in terms of market share. Perception is a hard thing to change – I think they could continue to sell trucks indefinitely, but in terms of reinventing themselves to cut into the mainstream market, well, it would be like mcdonalds trying to cut into the gourmet market. Even if they served the tenderest filet mignons in the world they would still be mcdonalds.

Its hard to see how you can change the common perception of such an established brand. At the very least it would take years, and thats not something the bail-outers are willing to consider given the the climate.

If I was GM or Ford I would consider taking stock of my established products (trucks and bigger vehicles), trashing the rest, and reorganizing under a subsidiary or sister brand devoted to competing in the mpg market. Unfortunately I think its come to the point where a totally unknown name would fare better than the established brands and their deeply ingrained associations.

11 JoeYap December 10, 2008 at 6:04 pm

Doesn’t it depend on the definition of ‘work’ ? The standing assumption seems to be that it was just a cashflow issue, but keep in mind that Japanese cars were doing much better even before the credit crunch came knocking.

Given the history of auto bailouts in the past, I’d suggest that the bailout isn’t to help the auto industry get on its feet – it’s to keep it on life support. And by that definition, it would ‘work’.

American Auto needs to leapfrog the Japanese and Koreans in terms of small, efficient car technology. Requiring investment in cleaner, more fuel-efficient technology as a condition of the bailout would improve its long-term chances.

12 Paul N December 10, 2008 at 8:13 pm

“equivalent cars” in what sense, the same engine size? passenger volume? How about things people care about: reliability, style, features – in those senses GM is far behind.

13 eric December 10, 2008 at 11:00 pm

I’m disappointed and surprised that almost no one is calling out Leonhardt’s miss on how the $800 adds up. GM has spent $105 billion on retiree benefits in the last 15 years (says their 2007 annual report) – money that Toyota (their closest competitor) hasn’t had to spend. Redoing a big car line costs in the area of $2-5 billion (building a new platform and tooling up a new factory) so even if GM only had half that money available they wouldn’t be in this situation (GM has been pouring huge money into R&D – they were #2 among all public companies in 2006). Ford, OTOH, doesn’t spend and has lousy cars.

re: Consumer Reports. They may rate GM low but JD Power consistently has listed Buick and Cadillac among the best (Buick was #1 at one point).

14 Anonymous December 11, 2008 at 2:10 am

Barron’s estimates the cost of health care and pension benefits at about $2000 per GM car sold. Add in the $800 in higher wages and you’ve got a pretty huge chunk to spend on improving the car. The argument that labor costs are a big part of the big three’s problems seems fairly compelling.

15 Alan Brown December 11, 2008 at 4:35 am

The auto bailout will fail because everything is too obvious

Compared to AIG, which is so poorly understood and murky there’s plenty of ways to funnel money to decision makers (how is anyone ever going to track things over to the secret Swiss accounts).

But the American auto industry problems are obvious. People aren’t buying the cars. They have huge capital investments and huge boat anchor union contracts giving them labor costs that are twice what foreign-owned US factories have to pay.

Way too simple. Any attempt to pump the standard 1% “finder’s fee” to members of Congress will be much harder.

16 eric December 11, 2008 at 7:48 pm

Zamfir, the $800/car cited by Leonhardt *IS* money that Toyota doesn’t pay – that’s the premise of the article. Since Leonhardt doesn’t explain how he got his $800 figure (did he base it on US car sales? 59% of GM sales are offshore) I used the figure GM provided of them spending $105 billion over the last 15 years.

The current spend is NOT a result of them underfunding the pension fund – they’re legally required to always keep it funded so it was not a “loan” as you suggest. This is expenditure that a non-US automaker hasn’t had to pay yet because they simply don’t have a retired US workforce yet. Non-US automakers don’t have to worry about pension/retiree benefits in their home country b/c their gov’ts pick up the tab.

17 MackLambert59 February 14, 2011 at 11:25 am

I hope that the bailout will work. When I bought my car I was in search of a GM model because I was looking to find discount auto parts easier. I guess that if most of us would buy traditional cars, maybe GM would survive.

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