Why bail out Ford, GMH and Chrysler?

Peter Klein at Organizations and Markets has pointed out that the US has a thriving auto industry that does not need to be bailed out.

The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. Thats vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. Its an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.

Oh, yes, theres also a legacy industry, based in Detroit, but its rapidly, and thankfully, going the way of the horse-and-buggy business.

One of the reasons why GMH is in trouble.

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15 Responses to Why bail out Ford, GMH and Chrysler?

  1. rog says:

    Apparently one benefit of the auto bailout would be that the UAW would have to drop its Jobs Bank although some would argue that its too late now and the damage had already been done.

  2. NPOV says:

    So let me get this straight: the senior management of Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi and Subaru have all managed to avoid being held to ransom by militant unionism, but the fact that GM, Ford and Chrysler haven’t is all the union’s fault?

    Oh and we won’t mention that UAW membership has been in massive decline since the 1960s when U.S. car manufacturers reigned surpreme.

  3. NPOV says:

    Oh, the other figure that should be thrown in:

    Toyota’s revenue for 2007: ~$250B. Total profit: $13.4B. Salary of top 32 executives: $12M – ~0.005% of revenue.

    Ford’s total revenue for 2007: $156B. Total profit: -$2.7B. Salary of top 32 executives: difficult to say, but the CEO supposedly earned $28M in at least one 3 month period, and looking around it seems most CEOs earned somewhere in the $2-$3M range, so let’s say $80M – ~0.05% of revenue.

    Now it’s true that if Ford cut it’s executive pay to Toyota levels, it would equate to a whole $11 reduction in costs per vehicle per manufactured, but it would also surely make it far easier to negotiate pay cuts for its 245000 workers, where an average salary cut of $5K could allow for reducing the cost of each vehicle by another $200. But honestly even then, cutting the per-vehicle cost by $211 isn’t going to make Ford competitive with Toyota. Some belt tightening in the salary department across the board might well be justified, but it’s not going to save the company.

  4. Rafe Champion says:

    Nice point NPOV, symbolism can be important, like the way the execs of the big 3 travelled to Washington in their private jets to ask for handouts. Check out the cost of the GMH executive fleet of jets!

    What you tend do get when militant unions get the support of government is a general decline in the capacity or willingness of managers to manage. This happened in Australia over the term of the “Australian settlement” post 1905 when the manufacturers achieved tariff protection and the workers got the centralised wage fixing system.

    Under a deregulated regime managers have to learn to manage instead of heading off to Canberra or Washington for more corporate welfare. That is why it is disturbing to see so many bailouts happening at present.

  5. Rafe Champion says:

    NPOV, looking at your figures on cost cutting by wage and salary reductions, the real issue is work practices and productivity, that is where the real gains are achieved. This is not a criticism of your “back of the envelope” calculations, just to make the point that the debate about wage fixing has focussed too much on controlling wages, as though the primary aim of managers is to cut wages. What good managers really want is productivity because that delivers win win outcomes for both sides. The zero sum mentality of traditional union vs management confrontation has failed.

  6. NPOV says:

    Absolutely agree – but I also suspect that there’s only so much workers can do to improve their own productivity. Most productivity gains come from better technology and whole-of-company approaches in better utilitising labour.
    If productivity levels arenot competitive, management deserve to take the bulk of the blame, and ideally be replaced.

  7. Ken Lovell says:

    What good managers really want is productivity because that delivers win win outcomes for both sides.

    While this might be true, it’s not sensible either to analyse workplace relations or to propose changes on the assumption that ‘good’ managers are the norm or even in the majority.

    It’s also true that trying to minimise labour costs is not necessarily inconsistent with maximising productivity. The search for the holy grail of the ‘right corporate culture’ often means (for some managers, although perhaps not ‘good’ managers) an enterprise where employees bust a gut in the interests of the business for minimal rewards, all because they love their work.

  8. Tel_ says:

    I also suspect that theres only so much workers can do to improve their own productivity. Most productivity gains come from better technology and whole-of-company approaches in better utilitising labour.

    One of the things most often said about Toyota (and I haven’t worked there so I’m relaying this second or third hand) is that the lowliest floor sweeper or spanner monkey can speak directly to their superiors and say, “this is a problem, it needs fixing, we could do better”, and they get taken seriously. Many companies provide lip service to this concept of “upward mobility for ideas”, but very few actually show any interest.

    Another thing common in Japan is to get the executives to do shifts on the shop floor. This helps them remember what exactly it is that the company does for a living. It’s a frighteningly common thing to have senior management with no idea about the technology or practice involved in the company that they manage… and worse, they believe that there is no reason why they should have to know anything about real-world stuff, because they have generic management skills that apply to all possible companies.

  9. John Greenfield says:

    Can some economics boffin explain to me this:

    OK, let’s accept for argument’s sake these ‘too big too fail’ arguments. Why doesn’t the government hand over this money in exchange for equity? OK, I’m on board with the whole ‘governments make lousy business managers’ shtick, but these Big 3 auto makers aren’t too good at making that argument themselves are they? Put some government types on the board, more as overseeers than active strategists. If things pick up in the near future, slowly sell the government stake. If it continues being a dog, close the whole shop down.

    The whole idea of vanilla handouts is digusting and people should get REALLY fucking angry if it happens.

  10. Tel_ says:

    The whole idea of vanilla handouts is digusting and people should get REALLY fucking angry if it happens.

    But I’m angry about so many things… and still they keep happening.

    Once we start offering rewards for failure, do we then offer bigger rewards for more extreme failure? How far do we go down that track before it comes time to start rewarding success?

  11. FDB says:

    Success is surely its own reward.

    I find myself in uncomfortable agreement with JG. “Investor of last resort” does NOT and should never mean “giver of free money”.

  12. Nabakov says:

    America has at least two dozen thriving auto assembly plants, providing direct and indirecting jobs for hundreds of thousands of locals – and very decent vehicles as well. The fact they’re badged as Toyota, Honda et al has nothing to do with their economic contribution to the nation.

    The whole UAW/GM model is dead. Let’s move on.

    Mind you if the US had a decent public health/super system, GM, Ford and the UAW would never have got trapped into this self-destructive spiral in the first place.

    I blame FDR.

  13. pedro says:

    Nabakov I reckon the UAW would have just extracted some other deal. It doesn’t really matter how they structured things, the point is that they had the power (and I expect patronage) to extract the gross amounts.

    I think I read that part of the problem is legacy costs, which includes pensions, so to some extent deals were done with deferred costs. When we get business closures here with entitlements disappearing it makes me wonder whether long range entitlements should not be cashed out into current remuneration so we don’t get the problems.

  14. JC says:

    Can I agree with the first 1/2 of Nabs comment.

    the 2nd part is a little more complex.

    The other point is that letting them fail could allow for an excellent domestic industry rising from the ashes.

  15. Patrick says:

    I’m with JC on this one.

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