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Bailout pile-on

Soooo.

Wednesday, the CEOs of GM, Ford and Chrysler meekly descended on Washington to present their plans to Congress in hopes of mooching a piece of the bailout pie. How did it come to this?

Throughout the endless debating of the reasons for America's automotive misery, one constant question has been bandied about: How have the Japanese auto manufacturers been so far ahead of the curve when it comes to building smaller, more fuel-efficient cars, all the while maintaining fiscal responsibility? While it's easy (and partly justified) to blame poor management policy on the part of "The Big Three" for their seeming lack of business acumen, there's a little more to it than that.

For one, there wasn't exactly a market for smaller, fuel-efficient cars in the US because, well, Americans wanted bigger ones. Just a few years ago, gas was around a buck and a quarter, we wanted safer, more practical SUVs, and we could afford them.. And the Big Three obliged us. Who can argue that the American auto consumer wasn't infatuated with owning a big, beautiful SUV or a hardy 8-cylinder pick-up?

We were all shocked when, seemingly overnight, a gallon of gas went from the price of a pack of gum to that of a pack of cigarettes. As this happened, the strength of the American auto industry vanished. Rows of shiny gas-guzzlers sat idle in their showrooms, inventory backed up, and cash flow broke to a dead stop.

For Japanese car makers, however, this was not a new template to which they needed to adapt. America is not their only market. For the better part of their existence, Japanese manufacturers have been building smaller cars with better gas mileage due to the price of gas in socialist Europe and Japan, where a gallon has been anywhere from $4.00-$6.00 (or more) for years due to stifling taxation and draconian environmental standards.

Not to mention labor..

For every car manufactured by our American companies, it is estimated that $1,400 of each car, whether sold or not, gets put towards the benefits package of a single autoworker. The cost per hour of work for a typical UAW member in the US, benefits included, is between $70 and $76 dollars per hour. The average cost in Japan is $48 per hour. That means a US company pays a US worker roughly $52,160 more per year per employee..

While it is true that Japanese automakers do not have to pay for extortion-type union benefits, they do operate under the highest corporate tax in the world (the U.S. is second). As we all have heard, corporations don't actually pay for these taxes. They are passed directly to the consumer. Combine that with the suffocating income tax the Japanese population has to pay the government, and you can see why operating under the Japanese flag isn't as helpful as one would think.

American automakers need to restructure their business models. That is beyond dispute. But it's going to take some sacrifice from the workers, as well.

Or we may be saying sayonara to the auto industry.


By Shawn Mallow


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Comments (12)

America is not the only mar... (Below threshold)
wolfwalker:

America is not the only market for the Big Three either. They both manufacture and sell cars all over the world. In fact, I recall reading somewhere recently that GM's non-domestic sales & manufacturing are so profitable that they've essentially subsidized the company's domestic operations for years now. What is crippling the Big Three right now is simply that the domestic market is so bad, and has become such an enormous drain, that even the income from their other operations can't keep them afloat anymore.

America is not the... (Below threshold)
jpm100:
America is not the only market for the Big Three either. They both manufacture and sell cars all over the world. In fact, I recall reading somewhere recently that GM's non-domestic sales & manufacturing are so profitable that they've essentially subsidized the company's domestic operations for years now. What is crippling the Big Three right now is simply that the domestic market is so bad, and has become such an enormous drain, that even the income from their other operations can't keep them afloat anymore
This is incorrect. There has a been a back and forth between foreign and domestic operations in terms of profitability.

And with the recent global auto downturn, most of the foreign operations are in just as much trouble.

The cost per hour ... (Below threshold)
jpm100:
The cost per hour of work for a typical UAW member in the US, benefits included, is between $70 and $76 dollars per hour.
This is not quite true. This number comes from the formula

hour rate = (total cost of active + retiree UAW) / (# hours performed by active UAW)

Essentially the cost of retirees is folded into that hourly rate for active employees. The active employee disparity is still large, but roughly half of what the $70 number implies.

Many of the retirees are from an era when the auto companies had many more auto workers. Their marketshare was bigger, they had less automation, and did more in-house. So retiree legacy is disproportionate to their current workforce.

The light at the end of the tunnel for the auto companies is that block of disproportionately sized retiree legacy can't live forever.

The japanese workers in you... (Below threshold)
Tom Huls:

The japanese workers in your stat are Americans working for japanese companies and there are several other mistakes in your post. Please try to get half of your post correct before posting.

"This is not quite true.... (Below threshold)
Tim:

"This is not quite true. This number comes from the formula
hour rate = (total cost of active + retiree UAW) / (# hours performed by active UAW)

Essentially the cost of retirees is folded into that hourly rate for active employees. "

But it's still a cost, and they still have to pay it - and it IS part of the problem here.

Honestly, why should I care if the auto makers go under? All my life, the auto workers' unions have used their political power for changes that benefit them and harm me. They used the same power to dig the hole they're in now; why should I have to foot the bill? Screw them, screw their jobs, and screw the economy. The problem won't get any better if you keep rescuing idiots from themselves.

I'll get by as I always have, in whatever way I need to, and I'm tired of paying for other people's screwups.

"For one, there wasn't ... (Below threshold)
Marc:

"For one, there wasn't exactly a market for smaller, fuel-efficient cars in the US because, well, Americans wanted bigger ones. Just a few years ago, gas was around a buck and a quarter, we wanted safer, more practical SUVs, and we could afford them."

That's only one, the smallest, part of the SUV equation.

When the congressional {lack of]-brainiacs got involved and started the CAFE standards that omitted SUV's and truck sized vehicles that green-lighted Detroit to produce them and America consumers went right along with the subsequent marketing campaign.

Also, Toyota and the other ... (Below threshold)

Also, Toyota and the other Japanese car makers are relatively new on the scene and do not have the huge pension benefit payouts that Ford and GM have.

I deal with pension benefits daily and I see what some of these companies are paying out and I have to wonder how they're going to stay viable for much longer as more and more people retire.

All my life, the a... (Below threshold)
jpm100:
All my life, the auto workers' unions have used their political power for changes that benefit them and harm me.
Who buys what you make? With extremely rare exception, other people in this country. How do they afford what you make? Their wages. The better their wages are, the better yours are. And that's not to mention the price on the labor market, even at one end, helps pull up wages everywhere. The Supply/Demand thing for labor.

So if you only tunnel vision on what you spend, you may see it that way. But somebody needs to pay you and buy what you do.

Or we may be saying sayo... (Below threshold)
drjohn:

Or we may be saying sayonara to the auto industry.

I disagree.

Infrastructure is there.

Labor is there (I'll bet you could find at least some people who will work for what Toyota is paying.)There is a great opportunity for someone to pick up this opportunity and start over the way that Detroit should restart.

So if you only tunnel vi... (Below threshold)
drjohn:

So if you only tunnel vision on what you spend, you may see it that way. But somebody needs to pay you and buy what you do.quote>

You need a little lesson in economics. With your own business you live and die with how you manage your products, your prices and your costs. That's the way it works for small business.
Government subsidizing failure is the worst possible thing for economies.

Toyota pays a hell of a lot... (Below threshold)
hyperbolist:

Toyota pays a hell of a lot. At their plant down the road from my parents' place, they offered my brother (experienced welder) an hourly wage that would have gotten him about $90,000/year including overtime. He declined as they are sometimes forced to work ridiculously long hours--for which they are compensated, but it's nice not to have to work 70 hours in a week if you don't want to.

They don't mind paying high wages, they're just smarter about the other costs. (Building plants in Ontario saves them most healthcare expenses, and we have a lower corporate tax rate here.) They also refuse to cede bargaining control to unions by preempting employee demands, like high wages and good working conditions. (Unions can't get traction where people are paid well and treated fairly.)

"Or we may be sayi... (Below threshold)
jpm100:
"Or we may be saying sayonara to the auto industry."

I disagree.

Infrastructure is there.

Labor is there (I'll bet you could find at least some people who will work for what Toyota is paying.)There is a great opportunity for someone to pick up this opportunity and start over the way that Detroit should restart.


The infrastructure has been there for 30 years. Not just suppliers, but plants, workers, engineers, and managers from 30 years of downsizing have just been sitting there.

Yet there is no 4th auto company. No one sprung up to show them how it was done.

Well, except Delorean.




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