Posts Tagged ‘big three’

A Great Example of the Free Market

January 11, 2009

This weekend, during the NFL Playoff games, I was bombarded with truck commercials from Toyota, Ford, Dodge and Chevy.  Each was touting their own features and downplaying those of their competitors, and all four talked about their great fuel economy.

This is a perfect example of the free market at work.  First, when Toyota came out with their new Tundra, and their new commercials (the see saw and braking ones, etc) the American automakers didn’t have an answer.  Now, they have all innovated to create new features to compete with the Tundra.

Secondly, when consumers demanded better fuel efficiency, the truck makers had to listen, and now all of these full size trucks are getting over 20 miles per gallon, highway, even with a V8.  The fact that they made these trucks so much more efficient so quickly shows how innovative the automakers can be.

The best part?  All of this was done without any sort of government intervention or mandates.  In order to sell their trucks, Toyota upped the ante with the Tundra and their marketing campaign, and the American companies countered with their own new features.  Then when oil and gas shot through the roof, they innovated again to make their trucks more efficient.  It was purely a function of the free market and competition.  Capitalism at it’s best.

I know this is only a small anectdote for economics, but it shows that we don’t need government to tell us what to do in order to make things better.  Lately we have been conditioned to think we need government intervention, and we just lack the vision to see when the free markets really work.  It also shows what happens when consumers demand a better product.  When more people bought Tundras, Ford, Chevy and Dodge all upped their efforts.

Imagine if we can get this kind of action in our healthcare industry.  Our costs would plummet and our care would improve.  Instead, with government’s heavy involvement, healthcare is one of the only industries where technology makes things more expensive.  You’d also be hard pressed to find people that are totally satisfied with their healthcare as well.  However, we are so tied to the current system that a consumer revolt is almost impossible.  If government would get out of the way, maybe there would be a chance of true reform, not little tweaks to a horribly broken system.

The lesson is that the government doesn’t always know best, and that we need to let the markets work.  Have you ever read the CAFE fuel standards?  It is the most idiotic way to measure fuel efficiency ever.  So, rather than make each model more efficient, they could just sell crappy, compact cars.  Now, that consumers have demanded better fuel efficiency in trucks, the companies have listened.

We need to carry this model over to every aspect of our economy.  Only then will we be able to weed out the failures and move forward in the new industries that are arising today.  We need government to stop propping up businesses and getting involved in industries they don’t understand.  Let the companies work and the consumers dictate what they want and we’ll all be better off!

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!

UAW Digging It’s Grave

December 11, 2008

They are already the scapegoat for the financial problems of the Big Three, and tonight, the UAW is making sure they look like the bad guys in this soap opera.

During negociations with members of Congress and the heads of the Big Three and the UAW, a bailout deal was supposedly really close.  It died when the UAW would not budge on pay cuts.  They said they would take cuts in 2011, but not in 2009.  Like they’re going to have a job in 2011 to get paid for in the first place!

The more hardball the union plays, the worse they are looking in the eyes of the public.  Who is going to have sympathy for them, when they get pensions, healthcare, and paid $30 an hour, when most of us have to fund our own 401k’s and foot some of our health insurance bills.  They are putting themselves in a very bad position, especially when Toyota, BMW and other foreign companies are keeping people employed and making a profit with non-union factories all across the Sun Belt.

The UAW needs the Big Three a lot more than the Big Three needs them, that’s for sure.  The loudest person saying “The Big Three are too big to fail” and “bankruptcy would be disasterous” is the head of the UAW, Ron Gettelfinger.  Why do you think he’s so adamant that the Big Three not go into bankruptcy?  Because he knows that when the automakers restructure, they will most likely ditch the UAW altogether.

The problem with their tough-guy stance right now, is that their tactics could backfire.  If they don’t make any concessions, the Big Three could turn to non-union workers now, with the full support of Congress and the public.  Why risk full unemployment for the entire union for a couple of bucks an hour?  Thirty bucks an hour is great pay for California!  They must live like kings in Michigan!

The UAW could look like heroes right now if they make the right concessions and act like they want to keep their jobs.  Instead, they are being uncooperative and are looking like the problem, not the solution.  I wonder how many union members actually are in favor of what their heads are doing?

All I know is that if they don’t get their act together soon, we’ll see the end of UAW within a few months.  While they might think they’re playing hardball for the benefit of the union members, the heads of the UAW are digging their own graves.

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.”

The Auto Industry in Trouble – Again

November 10, 2008

About a month ago, while we are all focused on the $700 billion Wall Street Bailout, Congress gave the Big Three automakers a $25 billon bailout.  Now, they are back for more, saying that they won’t have enough money to last the rest of the year.

I’ve read multiple articles and saw some interviews on TV this morning where experts and analysts are saying that without more money from the Federal Government, the automakers will fail.  The governor of Michigan even said that 3 to 4 million people will lose their jobs if the Big Three go bankrupt.

I agree that the US auto industry is vital to our economic health.  The problem though is not going to be fixed by giving them more money to burn.  This brings me to the question:  What really is the problem anyway?

There are two main reasons for the US automakers to constantly be in trouble:  the United Auto Workers union and unfair laws that give foreign car makers an advantage.

First, the UAW needs to recognize the changes in the way the world operates today.  When the union was first formed, it was to protect the auto workers from unfair manipulation by the automakers.  Today, they do not have the sympathy from the public because most of us do not get health packages and pensions equal to what the auto workers get.  Auto workers should have to help fund their insurance and retirement, just like most workers.  They need to realize that their demands will not be met at all if their employers are out of business.

Second, there are laws in that exist that give the US automakers an unfair handicap.  Government regulations require that a certain percentage of cars are made in the US if they are a domestic company.  Since Toyota and others are foreign companies, they can assemble a smaller percentage of profitable cars in the US.  They can use US factories to boost efficiency and make their business stronger.  

The US automakers have to assemble almost all of their cars in the US, whether they make business sense or not.  While the US companies make money on their trucks and large vehicles, they lose money on nearly every compact car produced domestically.  If they could shift some production to non-union plants or to Mexico, it would help the Big Three make their businesses more efficient.  These regulations were meant to help protect US jobs, but are crippling the automakers.  There won’t be any jobs to protect if they drive the companies out of business.

Another reason for the auto bailout is supposed to help the industry shift to producing more fuel efficient cars.  Do you know that our cars were more efficient in 1998 than they are today?  What happened over the last ten years?  The auto industry can make more efficient cars if they want.  Nothing will assure us that the bailout money will lead to more efficient vehicles.

Rather than throwing more money at the Big Three automakers, we should be looking at outdated government rules and regulations that are handcuffing the companies.  In order to really fix the problem, we need to tackle more than “slumping auto sales.”  If Congress and the Treasury look at more than just balance sheets, we can solve the crisis the automakers are facing once and for all.