Don’t let U.S. automakers delay restructuring

November 19, 2008

morici– Peter Morici, a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission, testified before the Senate Banking Committee on the proposed bailout for the domestic auto industry. The following is his written testimony to the committee. The opinions expressed are his own. —

The domestic automobile industry has two major components—the Detroit Three and the Japanese, Asian and European transplants that also assemble and source components in the United States and Canada. Both contribute importantly to the vitality of our national economy. Ensuring these companies have the means to compete globally is vitally important.

The gradual erosion of the market shares of the Detroit Three over the last several decades stems from higher labor costs—having origins in wages, benefits and work rules–poor management decisions, and less than fully supportive government policies. Although the U.S. government has been sympathetic to the needs of the industry, the industry has fallen victim to currency manipulation and other forms of protectionism in Japan, Korea, India, and China.

The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization. It would be better to let them go through that process and reemerge with new labor agreements, reduced debt and strengthened management that would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.

Circumstances are dramatically different today than in 1979 when Chrysler received assistance from the federal government. In those days, the challenge at Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear plan to achieve that objective and succeeded. Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants.

Margins in automobile manufacturing are thin and there is no such thing as being competitive enough. Either a company is competitive or it is not—either it accomplishes the cost structure enjoyed by Toyota and Honda, operating in the United States, or it will continually cede market share and run into financial difficulties.

By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.

Without a new labor agreement that brings wages, benefits and work rules in line with those at the most competitive transplant factories, and without reduced debt and other liabilities, the Detroit Three will continue to lag in product innovation and field too few attractive new vehicles, because their higher costs, debt and other liabilities require them to spend less on new productive development than they should. Also, they are inclined to field products with less desirable content to compensate for higher costs.

As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China, the Detroit Three will cede market share of one or a few percentage points each year.

If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs than if these companies endure this difficult transition in 2009.

More jobs can be saved among GM, Ford and Chrysler and their suppliers if bankruptcy reorganization is endured now than in the future.

When Americans buy automobiles from the Detroit Three, more is contributed to the vitality of the U.S. economy than when Americans buy vehicles assembled here by transplants or imports. These vehicles have more U.S. content in terms of jobs, engineering and profits than do foreign nameplate vehicles.

The Congress could take steps to improve the attractiveness of making cars and parts in the United States by improving the public policy environment. This would include finally addressing, directly and forthrightly, undervalued currencies in Asia—currencies kept cheap by intervention by foreign monetary authorities in China and elsewhere. In addition, assertive efforts to develop fuel efficient vehicles could strengthen the industry and create export strength.

For example, Congress could offer an incentive for car buyers to trade in their gas guzzlers—the newer and the bigger the clunker, the more the car buyer would receive under the condition the vehicle is destroyed. This would raise the price carmakers receive from selling smaller vehicles.

Congress could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter includes Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at reasonable costs with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

15 comments

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I like it! But let’s try to make sure they’re still owned by Americans afterwards. Maybe that’s old-fashioned thinking.

Posted by Pete Cann | Report as abusive

I know that a segment of the population is waiting for a Regan-like revival of the auto sector. Regan did not pump money into the auto sector to keep the industry floating. He identified specific weaknesses – lack of computer automation and up-to-date industrial processes – and worked to put the United States on the same playing field as the Japanese. Regan’s argument also was that America had the ability to outgrow its debt in relative terms.

We have a completely different situation this time around. We have a certain level of market attenuation with saturated markets and low profit margins. With have a demographic ambush of sorts with baby-boomers retiring. We have a lot of high-quality vehicles on the road – reducing the need for replacement. We have set the stage for socio-economic changes that will lead to less driving in the future with a global push towards carbon controls.

Ronald Regan was probably one of the best presidents in recent history. But these are different times. We have a whole bunch of overpaid, under-intelligent auto executives immediately looking for a handout. With all due respect to the workers, bring your salaries in line with the rest of America before asking for a taxpayer bailout. I fully expect a bureaucrat will eventually send me a bill to pay a horse-and-buggy revival tax.

Executives would not be looking for a handout if they knew that the situation will improve. Actually they just have no idea what will happen. So they want cash. I certainly can’t blame people for asking. But the bottom line is that most folks are already struggling just to make ends meet. So in the world has the dying audacity to ask taxpayers to pay double or triple their burden to support a dying industy. Retrain and find something else to do – the way the rest of us did. Nobody gave me or my family a handout. The penalty for having overpaid staff, chumps in the engineering, research department and board rooms is bankruptcy.

Posted by Don | Report as abusive

The impact of the collapse of the US auto industry will be massive and therefore it is reasonable to consider proposals to avert this scenario.

The problem is that in the current situation the big 3 have admitted that they are “burning” cash and the problem is that under present economic circumstances they are likely to continue burning cash. If 25 billion dollars was loaned to them then how will will change their position?

Will the 25 billion loan end up as a cash bonfire?

A restructuring of the auto industry would take some time to implement and will also be very costly to implement and with the time frame in which the cash pile will be burnt it will not be achieved.

Posted by Gregory | Report as abusive

The prevailing wage for a UAW worker is $28/hour. For a worker at Toyota’s Georgetown, Kentucky, plant, it’s $25/hour. Both make a bit more than the average plumber or electrician. Some reason we have to race to the bottom? Or is this just some elitist angst because these people may not have a college degree?

Yes, things like the jobs bank need to go; they’re a leftover from the 1980s when they were supposed to cover short-term layoffs during production changes.

However, the real killer is healthcare: the UAW has the kind of healthcare we all wish we had and the automakers have swollen their retiree rolls by forcing early retirement on just about everyone with more than two weeks’ seniority for the past 15 years.

If you want to do something about the major expense that makes Detroit wages higher, push for healthcare reform.

The other fallacy in the argument that blames all on the unions is the fact the Detroit automakers are suffering in large part from their failure to invest in newer technologies and better products. This has allowed the Japanese, Korean and European cars to make huge inroads into the American market. The American products have made great strides in recent years, but long-standing perceptions still hamper sales, especially with the shift away from SUVs and pickups. Exactly none of this can be attributed to the unions which don’t design the products, specify the materials or even dictate how they will be built.

Another competitive advantage enjoyed by the Japanese companies is the lower rate of executive compensation. The gap between the workers and upper management is far narrower at a Japanese company that it is in Detroit.

Bankruptcy really isn’t an option. Chapter 11 would become Chapter 7 in short order for the simple reason consumers wouldn’t buy cars from a bankrupt manufacturer. It’s not like the airlines; you buy a ticket on an airline and the carrier goes belly-up, you’re out the price of a ticket and some inconvenience. You buy a car from a bankrupt automaker and you’re stuck for years. Who’s going to honor the warranty or provide spare parts? The dealers are gone, so where can you get your car serviced? Much simpler to go on down the road and buy from a company that isn’t in the courts.

Enough of the simple-minded knee-jerk garbage. It’s a tough problem and calls form some real answers.

By the way: has anyone started calling for all those Wall Street folks who were making millions of dollars a year to give up their wages? Or even their bonuses? And why aren’t they being urged to file bankruptcy?

Posted by Bill Cawthon | Report as abusive

A bankruptcy and reorganisation of terms is a much better idea, when assuming the car companies can not remain competitive or solvent when paying on each unit prepared $2,000 in benefit charges, when an average car is probably in the regions of $20,000 or less! To me the car companies are no different than many middle class Americans; In relation to others have borrowed too much pay way too much for benefits and cant maintain your lifestyle this way.. Chapter 11 is really the only viable way to lower costs at the detriment of shareholders, creditors and previous and current staff.

Posted by marcus | Report as abusive

If I remember, GM was trying to buy Chrysler because it was sitting on 10b in cash that GM sure could use. These guys need to work out their problems between themselves.

Posted by Gregg | Report as abusive

Since declaring bankruptcy does not mean that the car companies are out of business I say let them go… the airlines have done that several times and they are still in business.

In regards to the bailout… money should be allotted after a bankruptcy on an as needed basis by an independant commision where there is a clear plan to the benefit and the payback. The US companies should headhunt the Toyota CEOs and fire the rich “same way its always been done” management to get leaders in there that CAN actually do the job.

In terms of fuel efficiency and any funds that come from the government, the automakers should be forced to look into clean diesel hybrids and should be required to come up with alternative options to every model like 4 cylinder turbo diesel versions of most cars and things like shutting off un-needed cylinders when cruising at speed. In addition there should be progressive weight limits on cars and light trucks so that innovations can be implemented in materials and these innovations and gas savings would be applicable across the board even to the Japanese companies…

There are metrics that the government needs to make mandatory if they are going to give money to the auto companies. The emissions and environmental standards should be geared to make the American companies actually competitive and hopefully this green bubble will last.

One thing that pisses me off about bureaucrats is that they blame the companies for selling monster SUVs… I blame the finicky consumers for not demanding things like the EV1 back and for forgetting all about it in the first place! The blame is never pointed to the consumers because there is fear of repercussions and votes! But we are talking about America and it has an inherent lack of personal responsibility!

Posted by Gabriel | Report as abusive

I just want to know whether Professor Peter Morici has any industry experience? Or he is always be in the academic industry?

Many of theoretical models do not fit into the realistic business environment. The current situation is to stabilize the market confidence and keeping worker’s salary. The fall of Lehman Brother’s impact is still serious damage the economy. It Detroit falls; the impact will be at least 10 times than Lehman Brother.

The Economic Profession is always ignore on people’s motion control and try to fit in their ideal model. The most case burning organization should be the Universities. If Professor Peter will lost his job today, what will be his suggestion on the same issue? Will he say: “Yes, I should be competitive to those predecessor’s income in China, India…”

For cut down of cost, it will be the management decision and also the company business process. If you just want to rob the Union at this moment, you will hit the wall. Think about workers with no food and living fee, what will they do. Try to simulate yourself then you know the answer…

Martin Wang
Singapore

Posted by Martin | Report as abusive

The posting which notes the UAW wage at $28 and the Toyota wage at $25 is grossly misleading. If cars aren’t selling, the UAW worker goes home, hauls out a beer and turns on the TV while collecting 95% of his wage, plus benefits. At Toyota the worker goes home and may quickly be looking for another job. At the UAW the companies are forced to hire workers with seniority before workers that are competent, therefore productivity and quality stink. At Toyota, you get ahead by working better and smarter — geee, now that sounds like the America I used to know. Time for the Big 3 go bankrupt and send the UAW packing for good.

Posted by Jack | Report as abusive

one word: unions. They were meant to prevent the various abuses to workers, not to suck an already failing company dry of all its profits. Profits get recycled into the business to push expansion. You can’t grow or restructure your business if you got a bunch of whining, lazy workers asking for more bottom line every time you turn your head, while providing you with less and less productivity. You can blame the “rich guy” all you want. You don’t s**t where your eat.

Posted by Tony Caban | Report as abusive

who cares what y’all think?

what does joe the plumber think?

Posted by OhioOrrin | Report as abusive

Every single time an industry fails, the parasites come out of the closet to blame labor for everything. They are like vultures. And the guilty are always the first to point fingers. They fail to
Mention that $1600 of every U.S. Made vehicle is health care costs. At 34 labor hours per vehicle, that is $47 dollars per hour. In Japan, the government pays for health care. Labor is alsp MORE expensive in Japan. Gee, its like Japan realizes what we used to: “the liberal reward of labor” is critical to the success of sosiety” amd “it is not high wages that cause high prices, but high prices.”-Adam Smith. Oh, but what would he know about economics?
And the oh so “liberal media” would certainly point out how much of this, right? Like how much of these labor costs goes to private health companies? Those are the kinds of “high profits” Smith was talking about. As if the rise in health care costs is the fault of the workers? Why do they say nothing about the greedy parasites in the “health care” industry? Why don’t they talk about “re-negotiating” with the disease (“health care”) industry? Simple: the horrible economy affords them an opportunity to take advantage of a surplus of workers who are hungry. They are salivating over the opportunity this economy gives them. They fail to mention the real and actual causes of G.M.’s demise: the greed of oil companies and the Iraq war which drove the price of gas up. Also the enormous debt incited by the aforementioned and the greed of the banking system. And apparently it’s perfectly acceptable to let CEO’s walk off with 70 billion in bonuses, 1/10th of the bailout money. Once again, the people who actually work and produce something get screwed by the real parasites in congress who get who get their entire 140k per year AND health care paid for by tax payers while they accuse workers of being “socialist” and parasites. Hypocrates have a very special place in help…

“it is not high wages that cause high prices, but high profits”-Adam Smith…

Reagan had more protection for American Insusteies than all other post war presidents COMBINED! (despite the media charactarization that he loved “free markwts”). Why do some profess to honor people like Reagan and Adam Smith while we do exactly the opposite of what they said and did? One word: Media. And despite how the media tries to convince usvthat the media is so “liberal” (huh?) they have tried to erase oir public consciousness of our philosophical roots.
“He who conrols the future controls the past. Who controls the past controls the future.”-George Orwell-1984.
Who controls the “present” (media)? Corporatios. THAT IS A FACT!

“He who controls the present controls the past. Who controls the past controls the future.”
(and speaking of which, that is the second time a quote was posted different than I wrote it).