Tuesday, December 09, 2008

Bail Out? Not so fast...

The American automotive industry isn’t in as much trouble as people think. While it’s true that the so-called “Big Three” are in serious trouble, people forget that many of the foreign makes are manufactured right here in the United States. Honda has been cranking out cars in Central Ohio since 1982 and other companies such as Toyota and Subaru build cars domestically as well.

The economy is taking a toll on all everybody but it’s the American companies that need the American consumer to float them a loan. Why is that?

Conservatives are quick to point the finger at the unions. They, the conservatives say, bled the industry dry. That’s not entirely accurate. Those executives who went to Washington to beg for money didn’t hitchhike and share a room at Motel 6; they flew in on private jets and stayed in luxurious penthouse suites. It’s likely they ate $50 steaks and drank single malt scotch by the bottle. There’s no question that UAW workers are overpaid for the simple task of working on an assembly line but somehow the corporate suits have always managed to find enough money for country club dues and six figure quarterly bonuses. Perhaps the American consumer got the shaft in the way of inferior vehicles, but everybody is getting their money.

The reason the bottom fell out of the market is because gas prices spiked and sent the economy into a tailspin. Now Americans are unemployed in record numbers and the handful of people who are in the market for a new car are still shell-shocked by the $4 per gallon prices at the pump this summer. So the demand is for smaller cars that get better mileage and that has never been something the “Big Three” was any good at.

In fact, Ford, GM and Daimler-Chrysler force-fed trucks on the American public. Trucks are simply more profitable to manufacture. Engineers don’t have to worry a much about emissions controls, fuel economy or crash safety when they build trucks so Detroit invested heavily into building bigger and flashier trucks while they farmed out the manufacture of compact and subcompact vehicles to the lowest bidder.

It was fine and dandy as long as gas prices were low. American consumers didn’t see the need to worry about getting 8 miles per gallon when gas was cheap. Then prices started to rise and when the national average went over $3, people started parking those trucks. Suddenly the demand was for hybrids and dealers couldn’t give away trucks.

Honda and Toyota offered trucks and SUVs, but they didn’t base their entire business around it. They could have stopped making high-quality compact cars and offered 30 variations on their full-sized truck, but they didn’t compromise their vision. Rather than looking for loopholes the Japanese-based companies exceeded regulatory standards and continued to offer the best vehicles they could build at a fair price.

Somehow the Japanese-based companies have also managed to avoid unions. In a stroke of brilliance, these companies actually treat their workers with respect and offer fair compensation. It took a while for the two cultures to adjust but after 26 years in Central Ohio both Honda of America and Honda employees seem to be quite happy with the arrangement. Central Ohio endured a tremendous labor shortage in the late 1990’s but s Honda managed to retain and recruit great employees.

The “Big Three” have always been at odds with their employees. Unions were formed in the early 1900s to help mistreated workers take a stand against powerful companies. As badly as unions are maligned, with conservatives comparing union labor to socialism, there’s really nothing more American than disadvantaged people standing together to effect change. That’s what unions do and to this day most unions are respectable and fair.

The problems occur when the corporation fosters an adversarial relationship with the union. For years the “Big Three” automakers worked together to undermine the United Automotive Workers union. The companies would tell the union that they couldn’t offer raises or increase medical coverage for workers only to hand their CEOs a multimillion dollar bonus when share prices increased. So the UAW fought back and eventually the corporations caved.

The same situation occurred when the steel industry hit rock bottom. Steel companies insisted that they were running out of money but the unions didn’t believe them. Finally, after years of fighting back and forth the steel companies open their books to the unions and showed them the truth. There was no money. The unions quickly agreed to roll back wages and benefits in order to keep the industry afloat but it was too little, too late. Foreign steel was too cheap, and wouldn’t you know? It was companies like Ford, General Motors, and Chysler that were all too happy to buy it. That’s greed.

The Japanese-based companies are greedy too, but not in the short-sighted manner that the “Big Three” have been. The Japanese companies operate with a global view in mind and anticipate market changes. Every elementary school student knows that oil is a non-renewable resource and that means that it is going to run out. So the Japanese-based companies didn’t balk when oil prices stayed so low in the US for so long. They understood that the market would correct itself and they were positioned to thrive in that market.

It was that sort of thinking that brought those factories to the US in the first place. It would be much cheaper to manufacture Civics and Accords in Mexico but back in 1982, when the American manufacturers were trying to find the cheapest source of labor Honda wondered who would buy their cars if Americans weren’t earning good wages. So they made a long term investment in the American consumer.

It wasn’t altruistic of them…this was not a charity case. It made good business sense in the long term. By investing more money up front, Honda would realize long term rewards. It was much more expensive to build the Marysville factory than it would have been to put that same facility in Mexico and Mexican workers would happily accept a fraction of the wages American workers required. But Honda was also able to avoid import tariffs and they brokered tax abatements to offset initial costs and in the 26 years since that plant opened Honda has become one of the most successful companies in the world.

When you contrast that with what the American automotive companies have done you have to wonder why anybody would want to give them money. What investments have they made in this country over the past 20 years?

When you look at all the facts, this country would be better off if the “Big Three” went away. In the sort term the impact of losing those companies would be severe but when you take a look at the big picture it’s hard to see what we’d be missing.

No comments: