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Thread: Detroit Blues....

  1. #1
    Vulture of The Western World Eric's Avatar
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    Detroit Blues....

    There are three ways to find yourself at the bottom of a deep hole: One is to dig the hole yourself and jump into it; the other is to fall into it accidentally. The third way is to get pushed from behind into the hole.

    By an amazing trifecta of bad luck, bad decision-making and bad public policy, the U.S. auto industry now finds itself at the bottom of a very deep pit - with daylight far away and no ladder in sight.

    Bad luck for the U.S. auto industry came in the form of the first energy shocks of the early 1970s - when formerly cheap and readily available fuel suddenly became expensive and sometimes, even hard to get. Detroit was caught unprepared for a market that suddenly demanded more fuel-efficient vehicles to cope with the increasingly uncertain energy situation.

    Unfortunately for GM, Ford and Chrysler, the models they had on hand in the early '70s had been designed for the most part in the late 1960s. Their basic layout assumed that fuel would continue to be cheap and plentiful - so they tended to be large and heavy, with big V-8 engines under the hood. But when gas prices suddenly shot upward after the OPEC oil embargo and people found themselves waiting in queues for a partial fill-up, such cars became almost instantly unpopular.

    Drooping sales were just the leading edge of a much larger problem for Detroit, however.

    Enormous sums had been committed to the design of suddenly unsalable vehicles, including capital investment for tooling and manufacturing facilities. Normally, these costs are amortized over the production life of the vehicle - which is typically six to as much as ten-plus years on the market (with periodic updates during that time). But when the market changes suddenly - as happened during the early '70s - an automaker can be left with hundreds of millions in asset liabilities that may never be amortized and which must either be written off or folded into the cost of current product, decreasing potential profit margins or increasing the final cost to consumers. Either way, it's a terrible blow to the company's competitive position.

    And in the case of the U.S. auto industry, it wasn't just a single model or type of vehicle that was affected; it was a wholesale slaughter affecting virtually the entire model lineups of GM, Ford and Chrysler.

    Losses of such magnitude were absolutely crippling - even for an industrial leviathan like General Motors, which once held an incredible 60 percent of the entire North American new car market. (1)

    The long-range effects, in terms of diminished resources available for research and development into newer, more efficient engine types, updated car "platforms" (the underlying chassis) and emerging technologies (for example, hybrid gas-electric technology or fuel cells) have put domestic automakers at a tremendous disadvantage relative to the imports, especially the Japanese. It's no accident Toyota pioneered the hybrid car brought to market, the Prius - while Honda was the first automaker to develop a viable fuel-cell vehicle. Both automakers - flush with profits - had the resources to invest in hybrid/fuel cell R&D; U.S. automakers simply didn't have the reserves available - and continue to play catch-up. (2)

    The massive losses sustained by the U.S. auto industry in the wake of the oil shocks of the early '70s cast a pall on the competitive edge of American car companies that lingers even into the present era. Tight budgets made it very difficult for U.S. automakers to update their designs as often as the Japanese did - which allowed the Japanese to be on the cutting edge of new car design while the domestics fell behind in both customer perception and nuts and bolts reality. For example, the Japanese mass-marketed efficient overhead cam engines with variable cam/valve timing technology long before the domestics brought such technology into mass production. Cost pressures also led to the use of cheaper, less durable components that tended to fail more often or which led to end products that simply looked "cut-rate" and didn't feel as refined and "finished" as competitor models typically did. Sub-par build quality became endemic - and the Big Three suffered for years from a higher incidence of recalls and manufacturing defects.

    Customers, predictably, fled.

    Meanwhile, the Japanese got an unexpected wind at their back as a result of the OPEC oil shocks. The small, efficient cars they specialized at building like the original Civic CVCC were suddenly hugely popular. And the Japanese did not have to amortize massive investment in brand-new car designs, engine types, tooling and manufacturing facilities. Instead, their profit margins (and market share) increased. Much of the money they made was promptly reinvested in newer, even better designs, expanded manufacturing facilities and so on. The synergies enabled the mainline Japanese brands - Honda and Toyota, in particular - to grow into full-line, major manufacturers from relatively small potatoes manufacturers of economy cars in the space of a decade. By the late 1980s, they had grown into major players and even began to launch their own luxury car divisions - Acura, Lexus and Infiniti.

    The Japanese have looked back. And GM, Ford and Chrysler have never fully recovered.

    Around the same time - and in response to the energy shortages of the '70s - Congress passed a watershed piece of legislation, the Energy Policy Conservation Act (3). It was signed into law by President Ford on Dec. 22, 1975. In addition to establishing the Strategic Petroleum Reserve, EPCA also contained a provision creating, for the first time ever, fuel efficiency mandates for all new vehicles sold in the United States. Under these Corporate Average Fuel Economy (CAFE) requirements, each automakers' combined "fleet" of vehicles - all the car models/types of vehicles it sold - would have to meet an average MPG figure or be slapped with "gas guzzler" penalties. The current CAFE standard for passenger cars is 27.5 mpg; for light trucks and SUVs, the standard is 20.7 mpg. (4)

    Though well-intended, CAFE amounted to another right hook aimed squarely at the jaw of an already hurting domestic auto industry. Most Japanese cars of the time had no trouble meeting CAFE as they tended to be smaller and lighter than their American competitors. But American cars had to be "downsized" to make the cut - forcing yet another wholesale change in the U.S. automaker's product lineup.

    CAFE's single biggest impact on the U.S. auto industry was on large station wagons and sedans. Such cars had been the typical American family's vehicle of choice for many years and were the kind of car Detroit excelled at building. But large sedans and station wagons became increasingly uneconomic to build due to the double whammy of rising gas prices and the newly created "gas guzzler" taxes - which were simply passed on to consumers. (5)

    It was also during this era that unions such as the UAW became more and more obstreperous and obstructionist - demanding higher wages and benefits at just the moment when the domestics, already weakened by the events of the '70s, were least in a position to be able to accede to these demands. It became increasingly difficult for GM, Ford or Chrysler to adjust to changing market realities and make necessary changes - such as closing down money-losing assembly lines or let go workers who were no longer needed.

    Even though market share and profitability continued to slide, the unions' demands for "full employment" and ever-expanding benefits (6,7) refused to take into account the dangerously changing realities or attempt an accommodation that might help improve their employer's immediate and long-term competitive situation.

    In addition, both the Japanese and European brands enjoyed the artificial leg up provided by their home countries' single-payer health insurance programs, including generous old age/retirement and pension benefits. (8) It has been estimated that these "legacy costs" alone add approximately $1,500 to the cost of every new American brand car, placing U.S. automakers at an enormous competitive disadvantage vis-a-vis the imports. No Japanese or European automaker has to absorb anything approaching these costs.

    It's true, of course, that the overall quality of domestic brand vehicles was not quite as good as that of the mainline imports from the mid-late '70s through the late 1990s - and that at least some of the blame for that rests with the managers and workers who allowed it to become such a problem. Certain lapses in judgment (for example, Ford's failure to update the once-popular Taurus, allowing it to slide into irrelevance) are inexcusable.

    Consider that part digging the hole yourself.

    On other hand, it's arguable that the disastrous effects of CAFE, the unions and legacy costs triggered these problems - or at least made them much worse than they might otherwise have been. The pressure to cut cost often led to cutting corners - and to keeping dated engines and car designs in production longer than they might otherwise have been. And legacy costs that render an American-built car significantly less profitable than an equivalent Japanese car present a daunting challenge to Detroit's future health.

    If these competitive shackles had not been fixed around the ankles of Detroit's Big Three, it's entirely likely that Ford would not be reeling from the biggest losses in its entire corporate history, that Chrysler would not be in "financial rehab" under the wings of a privately-held equity firm, and GM would not have dropped to a 24 percent market share and second fiddle to Toyota - which just became the world's largest automaker.

    It's a tragedy of events - and of almost suicidal policy-making - whose repercussions are just now becoming evident.

    END/NOTES

    (1) Today GM clings to roughly 24 percent; Ford and GM have suffered similar setbacks.

    (2) Ford had to license hybrid technology from Toyota to build its first production hybrid.

    (3) See Almanac of Policy Issues, http://www.policyalmanac.org/environ...tandards.shtml

    (4) See Almanac of Policy Issues, http://www.policyalmanac.org/environ...tandards.shtml

    (5) In the early-mid 1990s, a loophole in CAFE that allowed a lower MPG standard for so-called "light trucks" provided a temporary respite for U.S. automakers, who began to sell large numbers of SUVs - which for many buyers served the same purpose as large wagons once did. Profits and market share went up, briefly. But as gas prices increased - and higher CAFE standards for lights trucks fell into place - sales of these large SUVs tanked. Current gas price spikes have caused a massive downturn in the sales of larger SUVs, which is part of the reason Chrysler Corp. was recently sold off by Daimler Ag.

    (6,7) For example, under the UAW contract in place in 2005, 12,000 union workers were paid for not working at all. They were retained in a "job bank." Dr. Sean McAlinden, The Center for Automotive Research and " The Meaning of the 2003 UAW-Automotive Pattern Agreement" http://www.cargroup.org/publications.html. The Center for Automotive Research found that "in 1960, the unionized UAW autoworker wages were 16 percent higher than the overall U.S. wage rate." But by 2003, "the UAW average rate (with COLA) was 68-percent higher than the average manufacturing rate of $15.74 an hour."

    (8) Ford Motor Co., for example, estimates it had long-term U.S. pension plan obligations in 2003 of more than $37 billion. General Motors had a health care bill of $5.3 billion in 2005 alone. See http://www.ford.com/en/company/about...ufacturing.htm and http://www.gm.com/company/gmability/...fifty/350.html. Also: The National Association of Manufacturers has estimated that, when compared to its nine largest trading partners, U.S. automakers had a 18.3 percent cost disadvantage: 5.6 percent in corporate tax rates, 5.5 percent in employee benefits including health care and pension costs, 3.2 percent in litigation costs, 3.5 percent in pollution abatement costs, and 0.5 percent in rising natural gas prices. When the higher hourly labor costs of U.S. workers was factored in, the total net cost burden was calculated at 22.4 percent.


  2. #2
    Senior Member misterdecibel's Avatar
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    Re: Detroit Blues....

    How to make a billion in the auto industry -- start with a hundred billion.

  3. #3
    Vulture of The Western World Eric's Avatar
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    Re: Detroit Blues....

    Quote Originally Posted by misterdecibel
    How to make a billion in the auto industry -- start with a hundred billion.
    Helluva bumper sticker!

  4. #4
    Senior Member misterdecibel's Avatar
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    Re: Detroit Blues....

    Quote Originally Posted by Eric
    Quote Originally Posted by misterdecibel
    How to make a billion in the auto industry -- start with a hundred billion.
    Helluva bumper sticker!
    That would go over well in Grosse Pointe, I'm sure.

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