For Cars, the “Free Market” Is Dead, at Least for Now

Mother Jones, "most dangerous woman in America"

Mother Jones, labor leader, "most dangerous woman in America"

Now I’m going to have a few words with my buddy tgriffith, who put a photo of a babe on his latest post to draw viewers. Hmm, I can forgive that. But, more important, why does he keep banging away at auto workers preparing to lose their jobs?

I think his attitude reflects the common anger at how this whole economic disaster has played out. Yet, as one of tg’s commenters, Gary Borland,  said: “If we are not in the business of government handouts then what about AIG and the financial industry?”

It’s awfully easy to target the financial abuses that brought about our present calamity. It’s equally easy to point out the failures and stumbles of the Big Three. So why not offer a simple Chapter 11 punishment to these perpetrators for their misdeeds? Line ‘em up against the wall and put ‘em out of our misery. Well, let’s think for a moment about the law of unintended consequences.

Rick Wagoner biting the bullet

Rick Wagoner biting the bullet

It’s time to stop the constant bitching about government bailouts and face reality, ladies and gents. The question is not whether GM and Chrysler will live or die. It’s how to bring them back to life.

I assume you’re all familiar with these arguments:

  • Allowing the industry to fall into bankruptcy on its own is to condemn 2-3 million people to joblessness, throw a significant portion of our industrial capacity onto the trash heap, and set up a cascade of failure throughout the industry—both here and abroad.
  • The government will then have to assume enormous additional healthcare and welfare costs for the newly unemployed, plus shoulder the tax loss and other economic burdens for those failed businesses. Car dealers, for example, will not just be people out of work but businesses that have gone under.
  • The auto industry’s biggest problems are its complexity, high fixed costs, and overcapacity. To make and sell cars, you need parts suppliers, assembly plants, sales, merchandising, and financing outlets. In the last several years, all automakers have established global connections for these things. The industry is now becoming a network of global enterprises.

Here’s one instance of how this network operates, as described by one informed blogger:

Making Jettas at Puebla, MX

Making Jettas at Puebla, MX

For example, a U.S. customer who purchases a certain VW model will end up owning a car assembled in Germany, but equipped with an engine built in Mexico. In other words, a Mexican VW plant builds an engine, sends it across the Atlantic Ocean to Germany, which in turn sends it back across the Ocean in the form of an assembled car, to be purchased at an American dealership. This global supply chain is expensive, fragile, and only makes economic sense if all the manufacturing components of the business are operating at full capacity. What I just described has all the characteristics of a Rube Goldberg business model, yet virtually every major automobile company in the world conducts their business according to the pattern I have just described.

With worldwide demand for cars sinking from 90 million to 50 million, and the industry geared to produce that higher number, you can see that overcapacity is not just an economic abstraction.

It is a very messy and massive problem with severe consequences if the auto companies fail—and severe consequences if they don’t. Either way, their business models must change drastically, and simple bailouts and simple bankruptcies will not produce that result. Toyota, a much stronger company than GM, is in the same boat and is also running to its government for help.

One month ago at the Chicago Auto Show, Hyundai CEO John Krafcik called out his colleagues on their past failures and follies. He also came up with some words about the future that we hope are not empty:

The lines between domestic and import will become increasingly blurred. We will exercise more sensitivity, more discipline, and be more inclusive, in all aspects of our business. We will increasingly lead government regulators on key matters of safety, energy efficiency, and the environment. And we will achieve a new level of innovation across our enterprises, as we better learn to better prioritize what is most critically important to our customers.

The fact is that no one—including many in Detroit—wants bailouts and, as I’ve said before, only a managed form of bankruptcy (or “court-led reorganization,” as the Wall Street Journal delicately put it) seems workable now. I’m betting the Obama task force will come down on this in some form, since Republicans are now talking that solution.

Let’s not forget the free market is what produced this calamity. Like the banks and investment houses, the automakers leveraged themselves heavily to build to what they thought was capacity. They willingly signed health care contracts with the UAW adding $1,200 or more to the cost of a car. The union’s givebacks are not enough to make up that differential.

So who is at fault here, the automaker or the union? Unless you enjoy litigating cases like this, it’s far better to settle with the stakeholders and start over. To get out of this mess will require some real smarts, much careful negotiation, and a dose of good will on the part of us all. It’s time to get on with it.

Everyone has his or her own simple or complex axe to grind in this story. What’s yours?


1 Comment

  1. Well done jsg! My only complaint is that all Big 3 manufacturers were aware of the potential bombshell awaiting them as early as five years ago yet chose to play ostrich and pretend that problems did not exist. I feel badly for all the workers that will have to pay the price, especially those in their 50s. Much as I favor the government sponsored bankruptcy to give them a chance to become profitable again, many suppliers will end up bankrupt as well. The steel industry in my town went through this and unlike Detroit, we didn’t get a bailout. We went from 13000 employees to 800 today. Truly, truly sad.

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