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November 19, 2008

Mitt to Detroit: Drop Dead!

Whoops! DrewM already cited the Op-Ed. Oh well. I've wanted to write on this for a while... despite not really knowing what I'm talking about.

Hank Paulson doesn't know what he's talking about, either, but he's pretty comfortable offering diagnoses and prescriptions.

...

Romney doesn't quite say "Drop Dead!," but does want Detroit to take the normal course of action of failed business, chapter 11 bankruptcy.

His op-ed in the NYT was good, too:

I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

I feel stupid offering my opinion, as I don't know what the hell I'm talking about. But this is how it seems to a moron:

Detroit has been dying, and should have been dead, fifteen years ago.

But something intervened to keep them alive, temporarily. And for a while they looked healthy... but they weren't. That intervention was the SUV craze.

SUVs became huge. And this craze allowed Detroit to conceal its massive competitive disadvantages. Because SUVs were pricey cars, the excess cost of labor could be more easily hidden in the cost of the car. And, I'm guessing, SUVs are not terribly more labor intensive than an entry-level two door sedan; the increased costs come from all that extra steel, a bigger engine, better components, etc. Ultimately they have pretty much the same number of welds and screws and rivets as cheap entry-level cars. A few more, an extra few hours to assemble, but not much more.

If an entry level two-door cost, say, $6,000 in parts and $5000 in labor to produce, and sold for $10,500 (yes, selling for a $500 loss just to maintain market share), an SUV might cost $14,000 in parts to produce, and $7000 in labor, and might sell for, I don't know, $30,000. A nine thousand dollar profit, partly because people are wiling to pay a lot more pure-profit on a luxury (or at least semi-luxury) purchase.

The Japanese (and non-union American South) would still have a $2000-$3000 competitive advantage in the costs of labor to produce such vehicles, but that's only a small fraction of the vehicles' total cost, and, again, at that price level people are making their decision more on features, design, etc., and less on pure cost.

(Trucks, by the way, similarly work in Detroit's favor, but unlike SUVs, demand for trucks remains, basically, static. Oh I'm sure they've been selling somewhat better over the years as trucks have gained a coolness factor, but they certainly didn't explode like SUVs. So while trucks might continue to be profitable for Detroit, it's a small part of the market and not a really growing one.)

Detroit has not been able to make decent entry level cars for a long, long time. Two generations of Americans have learned to avoid low-cost American cars at all costs. They're simply crappy cars -- to offset the big additional labor costs, they have to go with the cheapest possible parts. They can compete in quality or they can compete on costs, but not both. (I think they actually half-compete on both, resulting in cars that are still a thousand or $1500 more than Japanese cars of that class, but still a lot less car for the money.)

If the SUV craze had not hit so hard and persisted so long, Detroit never would have recovered, such as it did, in the nineties to look like a somewhat profitable industry. They got extraordinarily lucky that the public just happened to go bananas for one of the few types of cars they could sell at only a small competitive disadvantage.

The trouble is that you can't persist long on the basis of a lucky fluke. The SUV craze would have ended eventually, anyway, probably, but $4.25 gas surely cut the craze short. The public doesn't want to buy low-gas-mileage car-trucks anymore, leaving Detroit in the position of trying to produce lower cost, lighter cars... where once again their competitive disadvantage is at its most acute.

Incidentally, the auto manufacturers about to be laid off can partly thank the Democrats' offshore drilling ban and ANWR ban for their coming misfortunes. American oil stocks flowing into the market would not have kept oil costs from rising to historic highs -- but they would have kept it from rising quite so much. If the Democrats were not ideologically committed to artificially-spurred rising gas prices as a supposedly "natural" check on gas consumption, SUVs would not be at their current level of disfavor and Detroit might not be on the verge of bankruptcy. But the Democrats are so ideologically committed, and that means that the car-type keeping Detroit afloat is now all but dead.

The SUV craze put off the reckoning, but now the reckoning is at hand. Detroit simply cannot continue paying its workers $73.00 per hour in salary and benefits when the Japanese pay its own workers $43.00. You can't engineer your way around that problem -- and, in any event, even if you do engineer a cheaper, smarter way to make a car to help offset that disadvantage, the Japanese will be doing the same thing in a month, anyway, taking away that very brief advantage. (And it's silly to even pretend that American engineers and designers are superior to the Japanese -- possibly they're on the same level, but no way are they so superior they can out-engineer them to over come a $30.00/hour labor disadvantage.)

A bailout only delays the inevitable changes that must happen. Which is what the automakers want, and what the auto workers want. They want delay. They want the government to continue subsidizing a model that just can't work without outside help.

The rest of us shouldn't want that, though. It's one thing to give a relative or friend a loan in a pinch if you're comfortable that it's a one-time thing just to get him past a bad patch. But if he's addicted to drugs and putting most of what little money he has up his nose, there's no such thing as a "loan." What there is is the first payment of many future payments in a permanent subsidy for his bad lifestyle choices.

Time for an intervention -- a real intervention, and not a bailout.

"Green Tech" Won't Save Detroit, Either: I hate the "green tech" label. Let's just say higher-gas-mileage hybrid models.

Hybrids have two, count 'em, two entire systems for providing locomotion, as opposed to a standard car's one. They have the conventional gas engine and the battery system.

That sounds like a doubling of labor costs, to me, at least as regards engine/power/etc.

So even if Detroit could flood the market with hybrids, and even if the public wanted only such vehicles, that would mean... the Japanese and non-union, non-Detroit autoworkers have an even greater labor cost advantage on such models.

Perhaps SUVs could remain popular were they hybrids... but in that case, the public would be buying non-Detroit made hybrids. Hybrids are pretty damn expensive, and those double-labor-costs will make Detroit models unattractive. There's only so much excess cost one can hide in a higher price. When it gets to the $8-10,000 level, even fairly rich people notice.



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posted by Ace at 02:39 PM

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