Wednesday, February 18, 2009
Detroit back in D.C.
We knew this was going to happen when The Big 3 said that they needed 25 billion USD to last until March. So, we gave them 25 billion, and the US economy nearly imploded since then. Now, with March looming ahead of us in just a few weeks, The Big 3 are back, and, well, nothing has changed for them.
One of the major reasons why Detroit has been uncompetitive is because they had the ridiculous policy designed to be just that. Detroit's hemorrhaging, you see, isn't caused by a one-off event that will be contained with a blank check from Uncle Sam. It's driven by factors that have been brewing for decades. Mainly:
*Uncompetitive labor and legacy costs.
*Reliance on vehicles nobody wants anymore.
The first issue could probably dropkick auto giants into oblivion all by itself. GM's health-care costs tack on $1,500 per vehicle. Toyota (NYSE: TM) and Honda (NYSE: HMC) spend a mere $400 per vehicle at their U.S. production plants -- in Japan, it's as low as $150 per vehicle. Futhermore, in recent years, GM had a staggering 2.5 retirees per current employee. The rough reality of globalization is that the country with higher labor costs -- us -- gets the shaft when it comes to manufacturing and production. Unless a bailout entails permanently subsidizing labor costs, Detroit will probably never be competitive.
The second issue -- a reliance on SUVs and trucks -- is really the 800-pound gorilla here. The profits Detroit gushed in years past didn't come from selling small, fuel-efficient cars, but from SUVs with downright stupendous profit margins. In some cases, Detroit could pull down five-figure profits per SUV sold, while accepting slight losses on small cars. Selling small cars at a loss probably didn't seem like a bad idea, because it built a stable customer base and enabled manufacturers to meet fleetwide gas-mileage requirements. Ford, for example, made as much as $18,000 profit on every Excursion SUV, while losing money on its Focus compact car. For years, that balance worked beautifully. But as soon as energy prices soared and the green movement took off, demand for those profitable SUVs drove right off a cliff.
In other words, the only avenue Detroit could rely on to remain profitable has been thoroughly roadblocked. And unless we discover another Saudi Arabia, it probably won't reopen.
Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.
In other words, the only avenue Detroit could rely on to remain profitable has been thoroughly roadblocked. And unless we discover another Saudi Arabia and somehow get credit flowing to the masses, it probably won't reopen.
If we don't save the Big Three, America will lose 3 million (some figures as high as 5 million) family-supporting jobs, and almost a million retirees would lose their health care coverage. Thousands of small and medium-sized business that support the auto industry would vanish. Hundreds of communities across the country would be devastated and the current nasty recession might become a full blown depression. How many cities do you know have "auto-malls" or "auto-centers"-- all of those jobs from manufacturing, to selling, to washing and oil-changing are in jeopardy.
All one needs to do is examine the impact of GM's closing on Janesville, which has the highest unemployment in Wisconsin and is among the nation's leaders in job loss. About 1,200 GM employees have already lost their jobs. Another 1,400 will be laid off when the plant finally closes. Supplier firms like Allied Automotive Group (117 jobs) LSI (159 jobs) and Lear (371 jobs) are also closing. The GM shutdown will ultimately cost Rock County 9,000 total jobs and nearly half a billion dollars of labor income.
Wisconsin is the home of hundreds of automotive supplier firms, such as Johnson Controls Inc., Dana Holding Company, Charter Wire Inc. and Strattec Security Corp., as well as hundreds of dealerships. We have seen what deindustrialization has done to cities like Milwaukee, which has the seventh-highest poverty rate in the country, and Racine. We simply cannot afford to allow auto, which accounts for one out of ten private sector jobs, to disappear.
Some have even argued that we need to keep the mnufacturing industry alive in America because it is vital to our national security. In the 1940's, the auto industry rolled out tanks and airplanes. If we let the auto industry implode, who will make the tanks and airplanes for the US in the future world crises? Others argued that once the economy is on the rebound (which it will), there will be a demand for the "greeneconomy" and that an American auto-fleet of energy efficient cars is necessary to have a competitive edge on the global market.
So, here' the question... do we continue to bail out the American auto industry in hopes to stave off a collapse of a huge section of our economy, or do we let them fail and figure things out via Chapter 11 and hope that they can reinvent themselves to be profit driven and competitive in the world market?
One of the major reasons why Detroit has been uncompetitive is because they had the ridiculous policy designed to be just that. Detroit's hemorrhaging, you see, isn't caused by a one-off event that will be contained with a blank check from Uncle Sam. It's driven by factors that have been brewing for decades. Mainly:
*Uncompetitive labor and legacy costs.
*Reliance on vehicles nobody wants anymore.
The first issue could probably dropkick auto giants into oblivion all by itself. GM's health-care costs tack on $1,500 per vehicle. Toyota (NYSE: TM) and Honda (NYSE: HMC) spend a mere $400 per vehicle at their U.S. production plants -- in Japan, it's as low as $150 per vehicle. Futhermore, in recent years, GM had a staggering 2.5 retirees per current employee. The rough reality of globalization is that the country with higher labor costs -- us -- gets the shaft when it comes to manufacturing and production. Unless a bailout entails permanently subsidizing labor costs, Detroit will probably never be competitive.
The second issue -- a reliance on SUVs and trucks -- is really the 800-pound gorilla here. The profits Detroit gushed in years past didn't come from selling small, fuel-efficient cars, but from SUVs with downright stupendous profit margins. In some cases, Detroit could pull down five-figure profits per SUV sold, while accepting slight losses on small cars. Selling small cars at a loss probably didn't seem like a bad idea, because it built a stable customer base and enabled manufacturers to meet fleetwide gas-mileage requirements. Ford, for example, made as much as $18,000 profit on every Excursion SUV, while losing money on its Focus compact car. For years, that balance worked beautifully. But as soon as energy prices soared and the green movement took off, demand for those profitable SUVs drove right off a cliff.
In other words, the only avenue Detroit could rely on to remain profitable has been thoroughly roadblocked. And unless we discover another Saudi Arabia, it probably won't reopen.
Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.
In other words, the only avenue Detroit could rely on to remain profitable has been thoroughly roadblocked. And unless we discover another Saudi Arabia and somehow get credit flowing to the masses, it probably won't reopen.
If we don't save the Big Three, America will lose 3 million (some figures as high as 5 million) family-supporting jobs, and almost a million retirees would lose their health care coverage. Thousands of small and medium-sized business that support the auto industry would vanish. Hundreds of communities across the country would be devastated and the current nasty recession might become a full blown depression. How many cities do you know have "auto-malls" or "auto-centers"-- all of those jobs from manufacturing, to selling, to washing and oil-changing are in jeopardy.
All one needs to do is examine the impact of GM's closing on Janesville, which has the highest unemployment in Wisconsin and is among the nation's leaders in job loss. About 1,200 GM employees have already lost their jobs. Another 1,400 will be laid off when the plant finally closes. Supplier firms like Allied Automotive Group (117 jobs) LSI (159 jobs) and Lear (371 jobs) are also closing. The GM shutdown will ultimately cost Rock County 9,000 total jobs and nearly half a billion dollars of labor income.
Wisconsin is the home of hundreds of automotive supplier firms, such as Johnson Controls Inc., Dana Holding Company, Charter Wire Inc. and Strattec Security Corp., as well as hundreds of dealerships. We have seen what deindustrialization has done to cities like Milwaukee, which has the seventh-highest poverty rate in the country, and Racine. We simply cannot afford to allow auto, which accounts for one out of ten private sector jobs, to disappear.
Some have even argued that we need to keep the mnufacturing industry alive in America because it is vital to our national security. In the 1940's, the auto industry rolled out tanks and airplanes. If we let the auto industry implode, who will make the tanks and airplanes for the US in the future world crises? Others argued that once the economy is on the rebound (which it will), there will be a demand for the "greeneconomy" and that an American auto-fleet of energy efficient cars is necessary to have a competitive edge on the global market.
So, here' the question... do we continue to bail out the American auto industry in hopes to stave off a collapse of a huge section of our economy, or do we let them fail and figure things out via Chapter 11 and hope that they can reinvent themselves to be profit driven and competitive in the world market?
