Posts Tagged ‘detroit’

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!

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.