Posts Tagged ‘auto industry’

Obama’s Misguided Fuel Efficiency Policy

May 19, 2009

Today, President Obama announced his goal to increase fuel efficiency standards in our cars to an average of 35.5 gallons by 2016.  What he didn’t say is that he is going to keep using the horrible and unfair CAFE fuel efficiency standards and how this is going to absolutely kill the American automakers.  His policies are straight out of a “Politics 101” textbook.  They are so naive and idealistic and he does not realize that there are unintended consequences of his policies.

I’m not an expert on fuel efficiency and the auto industry, but a quick search on wikipedia for “CAFE Fuel Standards” was all I needed.  A little research showed me how the rules and regulations are broken.  Instead of addressing the root of the problem with our auto industry and efficiency standards, our President just reaches for pie in the sky goals with no regard for the blowback of his actions.

As I wrote before, the problem with the Corporate Average Fuel Efficiency (CAFE) standards is that they measure the harmonic mean of all the cars sold domestically by automakers.  Since the domestic automakers sell mostly trucks, they then have to sell – not just produce – an equal amount of crappy, fuel efficient cars that no one wants to buy in order to meet the standard.  They end up having to sell these at huge discounts or even at a loss to rental car agencies.  The Big Three lose money on every compact car they make because of labor and union costs, but make money on every truck and SUV they sell.  The importers from Asia and Europe sell mostly compact cars, so they are at an advantage.  They build these cars using the same US labor, but they are not burdened with the labor costs the US automakers are strapped with.   They can meet the fuel standards and be profitable at the same time.

On a side note, we know that US labor costs are not going to go down either.   The United Auto Workers are now majority owners in Chrysler, and will probably come out the same with GM.  With a partnership of labor and the government running the company, how can we expect labor costs to decrease?  Instead, they will continue to increase, and the taxpayers will keep giving them more money to prop them up.

But back to fuel efficiency.  I believe that we need more efficient cars, and we are already on our way there.  Hybrids are all the rage, and the automakers can’t keep up with the demand.  But are hybrids really green?  Massive amounts of energy go into producing the electric batteries they use.  I won’t get into that debate here, but the consumer demand for more efficient cars is very, very strong.

Why not just let the consumer and the market dictate fuel efficiency?  Why do we need laws created by bureaucrats to overregulate the industry?  Look at how competitive and innovative trucks have become in the last year or so.  As gas prices skyrocketed, consumers wanted fuel efficiency.  Toyota came out marketing their Tundra aggressively, and Ford, Chevy and Dodge responded.  All of the commercials touting features and miles per gallon were a testament that the market works and if consumers demand something, the automakers will listen.  It was capitalism and the free markets at their finest!

But why punish our auto industry for making the best trucks?  Even if they get a truck that can average 30 MPG by 2016, they will have sell an equal amount of compact cars that average 40 MPG to meet the tougher standard.  Or, if they can only get 25 MPG out of the truck, they will have to sell even more 40 MPG compacts.  The smaller cars are money losers for the US auto makers, so we are forcing them to make an unprofitable product.  What kind of business can succeed with that kind of regulation placed on them?

If we were to measure anything, we should measure how much progress is being made by a manufacturer for that particular make and model.  If the auto makers make a truck 250% more efficient than last year’s model, they should be rewarded.  If they can’t make money producing small compact cars, don’t force them to make them.  Let the imports fill that market and let the US automakers focus on making their breadwinners, the trucks and SUVs better.

The bottom line is that consumers are already demanding more efficient vehicles.  Let that demand drive what is produced and sold in the US.  Don’t regulate for the sake of regulating and sign the death sentence for the US auto industry.  We need real changes in the policies of our country, not more well intentioned but horribly executed Politics 101, pipe-dream nonsense from our leaders in Washington.

Problem with the Big Three Bailout

December 14, 2008

There was one huge problem with the Big Three Bailout from the start:  They didn’t ask for enough.

Look at the TARP, the 700+ billion dollar bailout of the fiancial system.  They had the balls to come to the table asking for almost a trillion dollars.

Everyone was so scared, “Jeez, they need $700 billion!  It must be serious!”  Paulson kept saying words like “abyss” and “crisis” and Bush eloquently said “this sucker could go down.”  They duped Congress and the Senate by asking for a number so astronomical, they couldn’t say no.

If the Big Three had come in and asked for $200 billion from the start and talked about falling into an abyss, I bet they would have had a bailout already!

Big Three Bailout is Doomed

December 9, 2008

After many false starts, the White House and Democrats have come to a deal on the Bailout of the Big Three.  Among the provisions is the creation of a “Car Czar” to monitor how and where the automakers spend their bailout bucks and requirements for the companies and the UAW to come up with a plan for profitability by March.

On the surface, it sounds good, but this plan is doomed from the start, and will be a huge waste of fifteen billion taxpayer dollars.  The reason is simple:  The plan does not address any of the issues that got the automakers in trouble in the first place.

Making cars is not a very profitable business.  Toyota makes about $2,000 for each car they sell.  GM loses a couple hundred dollars, and Ford loses close to $2,000.  Those numbers are from a few years ago, but as you can see, even the most profitable company only makes a $2,000 per car.  When you multiply the profit over millions of cars sold, you get a huge number, but if you add costs anywhere along the line, it could wipe out a huge chunk of the company’s profits.

One cost that hurts the automakers is their cost of labor.  Total labor compensation for GM is around $78 per hour, while Toyota’s is around $48.  A big reason for this is funding the pensions and healthcare costs of retired UAW workers.  Also, negotiated programs like the “jobs bank” hurt the automakers.  The jobs bank requires that when a plant is not producing vehicles due to lack of demand, the workers still get paid up to 90% of their salaries.  GM spend about $1,500 per vehicle on these costs.  That’s almost the gap between them and Toyota.

While this bailout may call for talks between the Big Three and the UAW, it doesn’t look at the big picture, one that does not include a union at all.  Maybe that has to be part of the equation.  Do they really need to be unionized?  Toyota’s workforce is not unionized, and while there are some complaints, most workers seem to be content.  Of course, this option will never come up, but if we were really serious about fixing the automakers, this would have to at least be discussed.

The “Car Czar” is supposed to oversee how the companies will operate and approve almost all spending of the bailout dollars to make sure it is being spent domestically.  If you really wanted the Big Three to emerge as a profitable company, you should allow them to explore all options.  If they can find a cheaper way to produce vehicles or parts in Mexico, they should be able to.  There is an advantage to assembling cars with the skilled workers of the United States, why else would Toyota, Honda, Nissan and BMW do this?  So allowing them to explore all options will not kill U.S. jobs.  This is another reason why this bailout will not solve anything.

Also, part of the bailout is that the automakers have to show they will put the money towards more fuel efficient compact cars.  The Big Three makes their money selling trucks and SUVs.  They lose money building compact cars that can’t compete with the market niche the Japanes cars have.  Why can’t they develop more efficient trucks?  They might not be 50 mile a gallon Smart Cars, but they would do just as much to end our dependence on oil.  Again, if this really was about reforming the business of the automakers, we wouldn’t place ridiculous requirements on them.

Finally, the government needs to look at itself as part of the problem.  You would think that fuel efficiency would be easy to regulate, right?  Read this article on the Corporate Average Fuel Economy from Wikipedia.  Could this more convulted?  What the heck is a “harmonic mean?”  Can anyone in Congress actually figure this out?  This is an antiquated piece of legislation from the days of the oil embargos of the 1970’s that is still in place.  Before Congress puts any requirements on automakers, they need to repeal this stupid law.

The fact that the entire fleet of cars sold has to meet some requirement is absolutely ludicrous.  If Ford sells a million trucks, they then must sell millions of crappy, poorly designed, cheap compact cars to reach their fuel efficiency requirements?  The goal should be to increase the efficiency of that one model of truck.  Instead, they could make the truck less efficient and make the crappy car more efficient.  Overall, the “harmonic mean” stays the same.  The CAFE standards are completely ineffective, do not do what they were intended to do, and force the Big Three to sell cars that aren’t profitable.

Overall, the Big Three Bailout will only lead to more of the same and even more taxpayer dollars wasted.  They need to think outside the box and look at the bigger picture.  Instead, there will be small reforms that will be billed as big ones and in a few months, they’ll be back for more money.  If we really want Ford, GM and Chrysler to survive, we need to allow them to operate as free enterprises and not companies with their hands tied behind their backs.  Until we really look at the problems, any help for the Big Three is doomed before it even starts.

The Auto Industry – What are the Problems?

November 17, 2008

I’ve read many articles over the past few days regarding the impending auto industry bailout, and I have not read one that really discusses the problems with the industry itself.  Obviously, something is inherently wrong when the Big Three are always teetering on the brink of bankruptcy.

Of course, there are macroeconomic issues that are effecting everybody.  These are issues that are basically out of our control, which include the credit crisis, foreclosures, and the entire recessionary environment.  Everyone is facing tough times.  Why shouldn’t every small business get a sizeable bailout then as well?  Macro issues are not the reason for the constant struggles of the auto industry.

I’m tired of hearing politicians talk only about bailouts.  What about some of the regulations that are crippling the automakers?  Or the years of laws that were basically handouts to the Big Three?  We need to find the real problems, not just put $25 billion bandaids on them.

If we are going to bailout the Big Three, we need to have a pre-arranged bankruptcy deal with the government.  Let the Fed pay for all the outstanding debt these companies have.  During this time, Congress should look at every piece of legislation that has to do with the auto industry.  The UAW will have to make concessions as well.  Let the automakers shift some of the production to Mexico so they can actually make a profit, while the higher paying assembly jobs stay here in the US.  Make the UAW have to pay for health insurance like most workers do and make them fund their own retirement accounts.

While this will still cost the taxpayers money, it will help the Big Three emerge from bankruptcy on the same footing as the Asian and European automakers that assemble cars here in the US.  With less costs and more freedom to allocate production where it will be the most profitable and most efficient, they can focus more on innovation and research and development.

A bailout will just prolong the problems the Big Three are facing and nothing guarantees that this will help at all.  If they need $25 billion to get through December, will they need $25 billion more to get through January?  What if new car sales don’t pick up for a year?  We have no idea if this money will help at all.

Choice for UAW – Cuts or Unemployment?

November 15, 2008

Today, the head of the United Auto Workers (UAW), held a press conference where he said that the union would not make any more concessions to the Big Three automakers.

You can read an article from the AP here.  In summary, he said that the Big Three need to be bailed out because if one goes bankrupt, they will all go bankrupt.  He also said that it’s the overall economy that is hurting the Big Three and that his union has made a lot of concessions already and should be applauded.  According to him, labor costs make up only 8-10 percent per vehicle.

This article makes it sound like the UAW has nothing to do with the struggles of the Detroit automakers.

Before we make that assumption, read this article from January 2007 in Fortune magazine.

Just look at the per car costs between the UAW plants and the Japanese automaker plants in the US:

Healthcare per car:

UAW:  $1,635      Japanese:  $215

Work rules, line relief and holiday pay (Union rules)

UAW:  $630        Japanese:  $0

Paying UAW workers when plants are closed:

UAW:  $350       Japanese:  $0

That is an almost $2500 difference per car!  This doesn’t even include the employee pay.

Think about those costs above when you look at each manufacturer’s per car profit.  Nissan makes about $1800 per car, Toyota and Honda make about $1400 per car.  Ford loses $1400 per car, Chrysler, loses $1100 per car, and GM loses about $333 a car.

Even the “profitable” companies don’t make that much per car.  The margins are pretty slim.  You can see that the Union costs are basically the difference between profitability and losing money.

While it is not just the UAW that is causing many of the problems with the Big Three, it is easy to look to their compensation as a big reason.  It does not help their cause when their head comes out and starts grandstanding and looking for public sympathy.  It’s a tough time for everyone, and him saying “no more concessions” makes them look greedy and better than the average American worker.

Oh, and one more point about the Union rules.  Does this look like a system that benefits all parties involved?  Read this from the Fortune article:

“If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn’t make.

If the company decides to go ahead and run the plant for a week without any dealer orders, it will have distressed merchandise on its hands. Then it has to sell the vehicles to daily rental companies like Hertz or Avis at discounts of $3,000 to $5,000 per vehicle, which creates a flood of used cars in three to six months and damages resale value. Or it can put the vehicles into storage and pay dealers up to $1,250 apiece to take them off its hands.”