Olympic Gold and the Detroit Automakers
Posted on November 17, 2008
In the interests of full disclosure, I do some work for one of the Detroit Auto Makers.
But I will try to be objective nonetheless.
The talk of a bailout for the American automobile manufacturers reminds me of the decision by the United States Olympic Committee to start using professional basketball players in the early nineties.
Let me explain.
During much of the Cold War, basketball was the one sport that America clearly dominated. That was true up until 1972, when the Soviet Union team beat the American squad in a contested and controversial game.
For many years, because America had such a clear advantage in the sport (after all, it was invented in the States) they could afford to send their college kids to take on the rest of the world.
Most of their best players played professionally, and were therefore barred from playing in a so-called amateur competition. The Soviets didn’t have professional leagues because it was against the law in the Soviet Union to make any money. (From all according to his ability, to all according to his needs, blah blah blah). So their best players continued to play for the Olympic team, getting small salaries for their efforts (and kushy jobs that allowed them to practice a hundred hours a week).
The same was true for the Soviet hockey team, which at the time was probably the best in the world.
After the 1972 upset, it slowly dawned on the Americans that the rest of the world was catching up, and twenty years later, the rules were changed to allow NBA players to play in the Olympics.
In much of the same way, General Motors, Ford and Chrysler dominated the auto industry for much of the 20th century. They sold the most cars, they were the most innovative, and they pretty much were able to get their way.
Like in the Olympics, that all started to change when the Japanese started to compete for the American market in the early 70’s.
The Japanese (and later the Koreans) focused first on smaller cars, and were able to make high-quality, low cost cars for the small portion of the American market that wanted those kinds of cars.
Soon they dominated that part of the business. The American auto manufacturers didn’t seem too concerned about that development, however, as they dominated the higher-cost, higher profit margin, bigger car and SUV market. Since Americans loved their SUV’s and since gas prices stayed pretty cheap, that seemed like a good bargain.
Both the Japanese and the US car companies were making money, so some of the structural advantages that the Asian automakers had didn’t become so apparent.
Those structural advantages were three-fold. First, because the Japanese didn’t have a long history with labor unions, their labor costs were much lower than the Detroit automakers. Second, since the Japanese government paid for much of the health costs for its employees, it didn’t have a huge debt burden of legacy costs that afflicted Detroit.
And third, the United States Federal Government insisted on imposing environmental regulations that seemed to be aimed at putting the American auto companies at even more of a disadvantage. Since the Asian automakers make smaller cars, the tough CAFÉ standards hit the Americans the hardest.
High labor costs, high legacy costs and high regulatory costs have combined to put the American auto companies at competitive disadvantage vis a vis their Asian competitors.
And that brings us to today, where those competitive disadvantages have been compounded by the worst credit crisis to hit America in 70 years. That credit crisis has made it impossible for the Detroit automakers to get loans at reasonable rates, making it impossible for them to put the right investments into the companies for retooling or even to make payroll without incurring huge financial penalties. The credit crisis has also spooked consumers, who have decided to not buy the new car until that crisis passes (which at this point seems far into the future).
The Federal government, in its eternal wisdom, has done two things in the face of this crisis. It passed legislation to impose more expensive regulations on the industry while threatening to allow California to impose even more expensive environmental regulations. And it gave the auto industry a so-called $25 billion dollar bailout, but made it almost impossible for the companies to get access to this money by having the energy department administer it in a program that has not yet been set up, and in such a way that it can’t use the money for anything other than future investment.
The Republican reaction to this has been less than clear eyed. They are tired of bailouts and they would rather see the companies go bankrupt than give union members any more money.
The Democrats, of course, are for the bailout, but they don’t offer the taxpayers much in the form of comfort. They are calling for even more environmental regulations and are not requiring any steps that will make the companies more competitive (i.e. more labor concessions).
It is time that we all acknowledge a couple of big truths.
Our car companies can’t compete if our federal government continues an adversarial relationship with them. As with our Olympic basketball team, America can’t afford to act like it dominates the world. We don’t dominate the world. We have to take steps to make our industry more competitive. We have to look at high regulatory costs, high, labor costs and high legacy costs and find out a way to make them lower. We have to acknowledge that we can’t be the only ones playing in the free market, and that everybody else is getting a boost from their governments.
We have to make a big decision. Can we afford to do away with our auto industry? Can we afford to lose the million jobs? Can we afford to sacrifice the biggest part of our manufacturing base? Can we put our national security in danger by closing down the biggest part of our industrial productivity, should we need it in a crisis?
If we can’t afford to sacrifice this industry to the gods of misfortune, than the government has to help them through this crisis. It has to work with the industry to come up with a plan to make it more competitive for the long-term. It has to require that they deal with their labor costs, it has to give them a break on regulatory costs, and it has to come up with a better plan to deal with its legacy costs.
This is not about the free-market. The rest of the world is not playing by the free-market rules and frankly, we can’t afford to compete with one arm tied behind our backs.
In my view, it is not responsible to say “let them crash.” We have too much to lose if the domestic automobile industry collapses.