The Auto Bail-out Plan Pt 1

Speaker Nancy Pelosi (C-San Francisco) outlined the Democrat's plan to bail out the ailing auto industry with $25 billion dollars. I’ve heard the number two million to describe the number of jobs that will be effected if all thee of the big three fail. That number tempers my fundamental dislike of government bailouts.

Talk of a bail out for Detroit has been circling the press and Washington for some time, so I figured I’d weigh in… not that my opinion will change anything. I was just going to write my opinion of the current proposal, but I realized that It may be important to cover why we are here in the first place.

Let me first outline the reasons why the US auto companies were hurting in the first place. I’ve worked in the auto industry for over eight years. In those eight years I have driven, worked on, or otherwise worked with an incredible number of cars. I’ve dealt directly with GM and to a much lesser extent several other companies and every kind of dealer you can think of. I make these observations from direct experience. The vast majority of my experience is with Chevrolet and by extension GM; most of my examples will be GM’s issues as a result.

For starters the big three produced a lot of junk from the mid-70s through the mid-90s when they began to improve their products to compete with foreign competition. Foreign manufactures produced more fuel efficient cars with decent 4-bangers that ran seemingly forever. Honda and Toyota for cylinders ran smooth and had decent power for there size. American makers only introduced automatic transmissions with more than four speeds in just the last couple of years while many of the foreign makes have had five and six speeds for a number of years now. They lacked quality control for a number of years while German makers maintained and the Japanese greatly improved. At the very least the perceived quality of American cars was seen as inferior. The lack of quality is often gleamed from the low-rent, cheap interiors in most cars, even up market Cadillacs and Lincolns. Big pieces of cheap, hard, squeaky plastic; really cheap leather; crappy radios; and really poor fit will not help to sell cars.

Bad product decisions and inability to fix reoccurring problems is a major problem. This is an issue with any large, bureaucratic corporation. The GM created the Cimmoron and God killed a 100 baby seals for that abortion of a car. The 4-6-8s and gas-motors-made-diesels of the eighties are examples of good ideas poorly implemented and severely damaged public perception of these technologies. Steering shafts in GM products that had a “slip-stick” condition are a very recent example of GM’s inability, or un-willingness, to fix a major customer complaint. The introduction of a new intermediate steering shaft 9 years after the problem cropped up is a tacit admission that the twenty-some TSBs they produced to solve the problem didn’t and that they were just being cheap at the expense of customer satisfaction. I could spend days listing examples, but I have better things to do with my time. The upshot is: Bean counters run these companies, and it shows. They also have an amazing ability to kill off products once they’ve gotten them right or start to attract customers – see Dodge Neon or the ‘94-’96 Impala SS

The above two issues, coupled with increased competition and the influx cheap cars from Korea means that buyer are less brand loyal than they ever were. Ford and GM were slow to realize that. They were also slow to adapt to new markets such as the sport tuner crowd that introduced younger buyers to Nissan, Honda and Toyota the same way the Mustang and Nova did for them in the 60s. They are today’s buyers and they don’t buy American. The increasing popularity of rear drive luxury and sport sedans from Europe also caught them off guard as Detroit continued producing front drive cars with willowy suspensions for people who’s next big purchase will be casket (think a DeVille or Town Car vs. a BMW 7-series).

General inefficiency doesn’t help. Any large business is going to gave its problems, but for the auto-industry it is systemic and long reaching. As an example Chrysler has two oil filter that fit 90% of Chrysler engines in 90% of applications - I can think of over 10 oil filters for GMs that fit cars made in the last few years.

Bad business decisions haven’t helped. I will say that no one can see the future and it is very easy to play Monday morning quarter back with any move, but I distinctly remember reading in several sources (WSJ, the Economist, et al.) expressing their doubts in both situations. I write, specifically of the Chrysler-Daimler “merger” and Jack Nasser burning through Ford’s capital to buy as many luxury brands as possible. It is important to note that both Ford and Chrysler gleamed tech., expertise, and other benefits from these moves. Jaguar and Aston Martin were saved by Ford, by fixing its glaring quality problems, and Ford gained a great deal by sharing platforms with Mazda and Volvo. Chrysler’s merger with Daimler made the 300/Charger/Challenger cars what they are today. The ultimate result of the failure of Daimler-Chrysler and Fords spending spree has left them in much weaker finical shape than they would other wise been in. GM has been some what more conservative, but has made a few brand misjudgments and some other internal problems that have weakened its ability of efficiently function. The GMAC sale, however, to Cerberus Capitol Management (which also owns Chrysler Corp.) just before the credit crunch looks like pure genius (and great luck?); probably saving GM from burning through its capitol sooner.

C.A.F.E. standards and other regulations that are overly stringent, that prevent innovation, and limit the ability of current technology to mature in a natural way. These standards are one of the reason why I can't buy a 3-series with a diesel and why VW and Mercedes stopped importing there high efficiency diesels. I'm all for buying American, but there is something to be said for a car that gets 40-50 mpg without the over complexity of a hybrid.

Finally and possibly the biggest thing that hurts them are the unions. The UAW has a strangle hold on the American auto industry and has been squeezing the life out of it for some time. The big three’s pension, heath care, and fixed pay-roll costs have been analyzed at length for years and going in to it here would be redundant.

This is not a complete listing or analysis of Detroit’s faults, but it is just to illustrate some of the depth and complexity of the problems facing them. Many of the faults have been corrected as of late, but is may be a case of to little to late and the perception issues will take a generation to erase. I do understand the reasons why they stayed with the 4-pd autos, for example, and some of the other more conservative engineering decisions – they work and if it ain’t broke don’t fix it. Unfortunately they became content with "good enough" and were diluted enough to think that brand loyalty would make consumers continue to buy their products in the face of pressure from Asian and European makers.



The big three were hit (somewhat) un-expectedly by the very sudden rise in gas prices. This put a major damper on the sales of trucks and SUV which have been, at least in Ford and GM’s case, the most profitable segments. This buy it self is not the end of the world since they had been moving to improve small and mid-sized cars and had brought out many new and much improved models and could actually compete with foreign offerings. Then Fanny Mae/Freddy Mac collapsed bringing Wall Street, the credit market and the economy to a grinding halt and as a result auto sales dropped between 30-40% virtually over night. No business can scale production that rapidly, but for GM, Ford and Chrysler the problem is worse because they must sell a minimum number of cars to meet union and pension obligations. They also have massive fixed cost that haven’t gone away and have, in fact, increased.


Next: Part II: the Bail-Out


Update:

I forgot to mention foreign protectionism. Europe isn't an issue since Ford and GM manufacture cars in Europe for Europe and make a decent profit as a result - the issue is Asia. Japan has had protectionist policies for decades that effectively lock every non-Japanese maker out of the market while Japan is able to sell as many cars in the US as they can make. I' all for free trade, but free trade is a two way street and the current arrangement is just wrong. The policy makers in this country need to grow a spine and force this issue. Opening markets to US goods is AN ADMINISTRATION'S DAMN JOB! GM does make a great deal of money in China, however the Chinese government gets a massive chunk of the profits from that. To be perfectly frank, the only reason the Chinese allowed GM to set up an operation the size they have, with the control they have, is to gleam as much mass production knowledge, manufacturing information, and tech as they can get.