US Auto Rescue - A Society Health Check

By Julian Delasantellis

During the summer, a local car dealer, eschewing the standard offers by his ilk of "free balloons for the kiddies, and all the franks you can eat", offered those taking a test drive in one of the dealership's new cars shares of stock in either Ford or General Motors, as the ad put it, in "America's great car companies".

I wasn't looking at a car back then, and even if I had been, I think I would have gone to the dealers offering the barbecued hot dogs instead of the stock shares. Now, it doesn't really matter. Both the franks of summer and the stock shares currently share a similar fate, in that they have degenerated from being items of at least some value to now being absolute excreta.

Recently, on their second trip in three weeks to Washington DC to beg the US Congress for US$34 billion in immediate largesse necessary to save their enterprises from near-term vaporization, the head of America's three great storied and legendary automobile companies, Alan Mulalley of Ford, Robert Nardelli of Chrysler and General Motors' Rick Waggoner, along with United Auto Workers' president Ronald Gettlefinger, met substantial resistance to their requests to access government aid.

As the auto industry executives must have realized in late November as they flew into Washington on the wings of their private jets and then were subsequently ridden out of town by rail, now is a particularly inopportune time to seek coinage from the public purse.

Americans, a nation of people that worships private enterprise but despises the banking and finance industry that allows it to exist, looked on impotently as a $700 billion financial system bailout that they hate, the TARP (Troubled Assets Relief Program), was passed into law in early October. They are thus now even more hostile to having even more of their taxes going to "corporate bigshots".

Many Republicans, still seeing stars from their election drubbing of November 4, have, after being forced to gulp down a year of massive government financial-system bailouts from their nominal party leader President George W Bush and his Treasury Secretary Henry Paulson, have come to the conclusion that the party must return to its ideological roots as a limited, small-government political force.

The fact that its Congressional defeats in both 2006 and 2008 have left the Republican Party as an organization with a significant part of its core membership (and almost all of its leadership) in the Deep South, where Mercedes, Toyota, Honda, Nissan, Subaru and Kia have in recent years opened highly profitable non-union manufacturing plants that are now very successfully competing with Detroit, is not enamoring the arguments of the US flag carmakers with the minority party either.
The Democrats do not have the same ideological opposition to government intervention in the private markets, but after years of having their policy concerns, on issues such as energy conservation and global warming, dismissed by Detroit's power elite with utter back-of-the-hand contempt - such as GM vice chairman Robert Lutz famously opining that "global warming is a total crock of [excrement]" - they're swallowing hard when being called on by their party leadership to support auto-industry aid.

Add the fact that, at every office water cooler or holiday party in the country, the bailout is being decried by all those Americans who bought a US nameplate car over the past 30 years or so "and I'll never buy one of those hunks of junk or step into one of those den of thieves dealerships again" means that, just at the point of greatest need, the US auto industry has a long way to go before it can confidently expect a substantial government rescue.

That is unfortunate. Although many arguments can be made that Detroit's travails are all of Detroit's own making, not all are, and, even if that was not so, the present state of the American economy makes standing on principle in opposing a bailout about as sensible as demonstrating proper methods in gun cleaning by blowing one's heads off.

In one sense, the plight of the auto industry is a fairly common American problem, as it has been allowed to fester and worsen right up until the situation has become the most dire crisis possible. This is the common way in which public policy concerns are addressed in modern-day America; one should not expect much of a consensus on what to do regarding global warming to develop prior to most of the Great Plains being burnt to a crisp.

I recollect seeing in the early 1980s a TV news crew sticking a microphone in front of a just laid-off US autoworker. His response was far from surprising: "I lost my job to the Germans and the Japanese. I thought we beat those two countries."

The person being interviewed was too young to have even been alive during World War ll, let alone to have fought Germany and Japan, but his sentiments were far from uncommon. Much of America felt the same way about the new economic competition from its previously vanquished foes; to judge by the way they did their job, that included most of the management of US auto companies.

As described by David Halberstam in The Reckoning, his massive 1986 book on the decline of Ford and the rise of Nissan, the generation that came to occupy the highest levels of management in the US auto industry in the 1970s and early 1980s cut their teeth in the business as young executives in the 1950s, certainly, the fields of Elysium for US automakers.

Their main pre-war competitors, Germany, France, Britain, and to some extent Japan, had been either bombed or bankrupted out of the market, leaving Detroit alone to satisfy the needs of the huge and car-voracious domestic market. Most of the US automakers were about equal in terms of the quality of their product output, but that factor wasn't even all that relevant, since cars then were far less complicated machines than they are today, and prosperous America of that time made car purchase decisions far more on the basis of sleek lines and added chrome than anything else.

The Germans and Japanese were making tentative inroads into the market by the mid-1960s, but their initial products, Volkswagen Beetles and Toyota Crowns, with their small (less than one liter) engines, were more seen by Detroit as objects of derision, said to be probably driven by pinko liberal arts professors and beatniks, rather than serious competition. In Detroit, they were still very happily pumping out all those full-throated rubber burning V-8s .

Thus, in corporate, just like in animal, evolution, it was the slow, fat and the dull that were the first, easy prey for the lean, hungry and lithe predators.

The first tick on the clock for Detroit was the 1973 Arab oil embargo and subsequent oil price shock. American car owners soon realized that all those little "foreign jobs" they so derided were now breezing past the gas stations where those with gas guzzlers were spending hours in line. Also, something else was noted - the foreign cars didn't seem to be so prone to breakdown as the American cars.

Very few mechanics were at first competent in working on foreign cars, so the foreign manufactures realized that to sell their product in America, they had to be exceptionally well made. If there were no mechanics, the cars would be built so as not to need them.

American W Edwards Deming, a veritable prophet without honor in his homeland, became a much revered and respected figure in Japanese industrial circles; yearly, the Japanese Union of Scientists and Engineers awards the Deming Prize for those who advance the concept of quality in manufacturing.

Seeing their sales plummet following 1973, the auto industry realized that they had to give at least the appearance of respecting market demand and build smaller cars. This was an absolute disaster. Like a large woman who tries to look more svelte by pouring herself into a smaller dress or shoe, Detroit's initial idea of a viable small car was a vehicle with pretty much the same big engine bolted under the hood, with not a millimeter of clearance to spare, into a smaller frame.

This period, from the 1970s to the early 1990s, saw Detroit producing some of the worst cars ever made - the AMC Pacer and Gremlin; the Ford Pinto and Escort; the Chrysler "K" Cars, the Aries, the Lebaron, and the (not very much at all ) Reliant. Finally, GM's X Cars, such as the Chevrolet Citation, and its 1982 J car line, featuring the Chevrolet Cavalier and the Cadillac Cimarron. This last was essentially a Cavalier, which since it featured cheap fake wood appliques glued across the interior and an imitation leather wrapped steering wheel, GM felt was justified having a sticker price twice that of the Cavalier.

The quality issue, its presence in foreign nameplates and the perceived lack of such in the American domestic product, had a predictable impact - American manufacturers began steadily to lose market share to the foreign companies. Still, the situation was, at first, not all that bleak. Up until very recently, the domestic manufacturers still captured 60% of more of the US auto market. This was due to brand loyalty, family purchase history, and, to a large extent, the patriotic feelings of US auto consumers. Toyota could trumpet the high quality of their vehicles, but there was just no way that they could say that their cars were as innate to the American way of life as "baseball, hot dogs, apple pie and Chevrolet".

American auto consumers were willing to pay for an inferior quality product, but they weren't that willing to pay a premium price for that inferior quality. American nameplates realized that they had to price their products at or below the price points of similar products sold by the Japanese quality leaders, Toyota and Honda. Thus, the second nail was entered into Detroit's coffin. For all the trouble they had in competing with the foreign brands on quality, they had just as much competing on cost. Without being able to charge a price premium to the Japanese, Detroit was sealing its fate as the place that, while it could sell cars to Americans, it just couldn't make that much money doing so.

Economics teachers usually start the lecture on international trade with the theory of competitive advantage. This states that nations should not try to be completely economically independent and produce all their needs domestically (in economic lingo, an "autarky"), but should produce lots of what they're good at, what they can produce cheaper than anyone else, and trade what they don't use domestically to other countries who can most efficiently produce what the home country can't.

For instance, I suppose that if Saudi Arabia really thought that it was important to be self sufficient in lobsters, they could do so. They could excavate millions of desert hectares, fill the space with sea water, and then make sure the water was kept cold enough for the crustaceans' liking. Obviously, however, it's far cheaper to buy the lobsters off the docks in New England then sell the Americans what they can't produce cheaply - crude oil.

The common conception was that America used to have lots of competitive advantages in international trade. Abundant national resources and land, a fairly educated workforce (at least in comparison with many of its competitors at the turn of the 20th century) a government that, for the most part, enjoyed popular legitimacy, and a fairly tranquil domestic society were, it was said, major contributing factors to America's rise as world industrial powerhouse. Lately, though, one factor has emerged as a burgeoning source of American non-competitiveness - its dysfunctional healthcare system.

Should an interplanetary alien land on Earth and inquire as to why the American healthcare system looks the way it does, on being told so, our little green friend would have serious doubts as to whether he had indeed landed on a planet where intelligent life resides.

Suffice to say, America is unique, among the countries with highly sophisticated health systems as well as those where healthcare is delivered by shamans and witch doctors, in that healthcare is intimately tied together with employment.

The roots of this bizarre practice go back to World War ll. As American industry armed the arsenals of freedom, the factories were running at maximum capacity and beyond. With 12 million men in uniform, the plants were absolutely starved for labor, but wartime wage and price controls precluded their offering higher wages to attract them. However, enhanced benefits were not part of the wage controls, so, to attract workers, the plants tempted workers onto the production line with new benefits - such as health benefits.

Following the war, many saw the illogic of this approach, especially as the European democracies moved to implement national healthcare systems. Many, of course, except those who benefited from the American system - at that time doctors and since then the huge new medical-industrial complex. These interests opposed national healthcare insurance, feeling, probably correctly, that a single payer, government, financing all of a countries' healthcare bills, would have tremendous power to drive down remuneration to healthcare providers. So, in the United States, healthcare is something companies give to their employees.

It was in the 1930s that the nascent United Auto Workers union (UAW) and the American auto industry, in particular the amalgamation of previously independent car companies that came to be known as General Motors, fought a series of pitched, brutal, and frequently bloody, battles, culminating with the 1936-37 sit-down strike in Flint, Michigan, over whether the US auto industry would be unionized.

After the war, the auto industry and the unions decided to play nice. This was not a sudden breakout of magnanimity or capital/labor bonhomie. There was just so much money to be made in selling autos to car-crazed postwar America that nobody wanted to spoil the party with strikes. A pattern was set for very generous labor settlements between the American auto companies and the UAW.

Obviously, this manifested itself in high wages, but also with generous medical benefits. These benefits were granted not only to current workers, but to retirees as well. This was very significant for its time, since Medicare, the US Federal Government's single-payer healthcare system for the aged, did not even become law until 1965, and even after it was established, the medical benefits for retirees negotiated by the UAW were more generous than the government system.

Of course, as American life expectancy lengthened after World War ll, the seeds for the current catastrophe were planted. A US autoworker might retire in his mid-50s or so, and then the auto companies would be on the hook for up to 30 years of his medical bills. The bill for the labor peace the companies bought in the 1950s and 1960s has now come due with a vengeance, as medical and retirement benefits going to those former workers are now a significant part of the cost of building today's cars - on GM's expense ledgers, healthcare is a greater expense than steel.

Many anti-UAW and anti-union polemicists note that the auto companies' main problem is its high labor costs; here it is said that, as an example of this, the average GM worker earns a whopping $77 an hour.

This is highly misleading. No GM worker takes home $3,080 a week (77 x 40) in his weekly pay packet. The $77 per hour figure comes from dividing total UAW worker and retiree compensation by total hours worked. Take out the retiree healthcare costs, and the American nameplate auto companies' worker compensation expenses are roughly comparable with that at the foreign transplant factories in the American South.

Of course, life expectancy in Japan is at least equivalent, or probably higher, than in the United States, but auto factories in Japan do not struggle under the burden of these retiree health costs, called legacy costs, due to Japan's superior government healthcare system. At the transplant plants, the non-unionized workforce has not been granted this type of extensive retiree benefit; even if they had, the plants have not been operating so long that many workers have retired from them.

At the UAW/GM contract talks of 2007, the union made a major concession, in that new employees would no longer be eligible for post-retirement company health benefits. In addition, a new funding vehicle, called a Voluntary Employee Benefits Association (VEBA), would be formed that would gradually shift the responsibility of current retiree and currently eligible worker health benefits to the UAW. For its part, GM would fund the startup costs of the VEBA with a $29.9 billion contribution.

GM does currently not have the money to make its next scheduled contribution of about $10 billion to the VEBA, and, in a major concession, the UAW has assented to GM's delaying that payment. Still, the issue of the costs of retiree healthcare illustrates another major reason for the US automakers' current plight.

I previously described how the recent history of US automakers have made them unable to compete with the foreign, mostly Japanese, nameplates, on the issue of the perceived quality of their product, and that forced them to price their products below that of their competitors.

The legacy costs factor means that, as their costs are higher for a product that they have to sell for a price lower than their competitors, they're not going to make a whole lot of money operating this way either. Prior to the VEBA agreement, one observer noted that, in the purest sense, the US big three automobile companies aren't really conventional profit-seeking private enterprises at all; they exist solely as healthcare funding machines. This led to another disastrous decision that led to the current crisis - Detroit's recent obsession with the production of big passenger pickup trucks and sports utility vehicles.

If you're making a flat 20% profit on your product, you sure want to sell more products costing $40,000 than $10,000. If you're in a desperate struggle with foreign automakers with both lower cost structures and higher consumer loyalty, your resolve to make the most money selling each of your products will soon become an obsession.

Around 1995 or so, Detroit looked out at the world and didn't particularly like what it saw. Asian automakers, including the relatively new entry into the market, Hyundai, were eating Detroit's lunch in the small-car market. After the Big Three's disastrous attempts to compete with Asian companies in the US, consumers didn't like or trust America's compacts and subcompacts, and Detroit couldn't price them at a price point that would make it a lot of money producing them.

At the high end of the market, Americans were choosing BMW and Mercedes Benz, and, increasingly Lexus and Acura, over the flagship US luxury nameplate, Cadillac. That storied brand was then burdened with the most gruesome demographics; a large part of its customer base died or went into nursing homes before they could make another purchase, and, once their kids sold off Dad's old Eldorado, they were off to the high-end European dealerships, where their preferred images of a luxury automobile were sold.

But there was one place where Detroit still seemed to possess a market niche, in the relatively new mass market for light trucks and SUVs. Detroit had long possessed almost sole ownership of this market, but in the 1990s it saw that the demand for these products was moving beyond their traditional consumers.

Light trucks were usually the choice of manual workers such as plumbers and carpenters who needed space to carry their tools, but now they were being purchased by white-collar workers who wouldn't know an Allen wrench from a Woody Allen movie. The modern SUV craze started with surprisingly and sharply higher sales of American Motors' (purchased by Chrysler in 1987) Jeep Wagoneer among the cognoscenti in the 1980s. Designed for vigorous off-road use in the country, they were soon seen as favorites among those whose idea of roughing it was drinking an American champagne with their duck l'orange.

Whole forests have been felled to produce weighty tomes on why Americans, both men and women, developed an obsession with driving automobiles far larger, and with more performance capabilities, than they really needed; my favorite is this, most likely an escapee from some colloquium of Critical Studies scholars. It posits that, with the perceived effeminacy of the Bill Clinton 1990s following on the hyper-masculinity of the Ronald Reagan/George Bush 1980s, SUVs and light trucks represented a sort of gasoline-powered precursor to Viagra.

What is not in question was the fact that these vehicles were insanely profitable for Detroit. Japan was slow to get into this market (although by the early part of this decade Toyota was going after it vigorously with its huge Tundra truck and Sequoia SUV, along with Honda's massive Ridgeline); also, these vehicles sold particularly well away from America's cosmopolitan coasts, in its heartland, where driving a foreign car was still seen by many as unpatriotic.

Detroit was not generating enough profit to fully fund modernization of its entire line, from subcompacts to the big trucks, so, it essentially decided to let its small and medium car lines wither on the vine, to focus almost exclusively on its big-profit behemoths. By the early years of this decade, fully half of Ford Motor's profits were being derived from sales of just one model, the F-150 truck.

The dangers in this decision were obvious. Big, heavy 4,000 to 6,000 or more kilogram vehicles need a big engine to push all that metal down the street. Big, six-, and more likely eight -cylinder engines, by the very nature of the laws of physics, used more gasoline than vehicles with smaller engines.

Probably the Tyrannosaurus Rex of this now rapidly becoming extinct breed was a version of the massive 2008 Dodge Ram truck, with a 5.7 liter, 345 horsepower engine. It tipped the scale at almost 9,000 kg. That was 10 times heavier than the artillery shells fired by the dreaded World War I German artillery howitzer Big Bertha, and, if it collided with a smaller vehicle at highway speeds, probably just as lethal.

In the winter of 1998-99, world oil prices reached lows they had not seen since before the second oil shock in 1979, under $11 barrel for oil, and a US average price of just over 90 cents a gallon for gasoline. With interest rates lowered by Federal Reserve chairman Alan Greenspan to counteract the effects of that autumn's Russian debt and Long Term Capital Management crises, it was as if someone was ringing the dinner bell for Detroit.

Sales of their heavy-metal, big-profit monstrosities shot through the roof, barely slowing down at all for the 2001 recession. As world oil prices began their slow and steady climb off their 1999 lows, analysts marveled how first $2 a gallon retail price for gasoline, then $3 gasoline, failed to make much of a dent in the demand for the big gas guzzlers.

Until this year. World oil prices virtually tripled from early 2007 to July of this year; at the same time, US retail gasoline prices doubled. It was the prospect of weekly $100 or more gas fill ups that at last had Americans climbing down out of the saddle of their SUVs and light trucks, and when they did, they weren't climbing back. Sales of the Dodge RAM, which averaged nearly 40,000 units a month in 2006, fell to just over 15,000 a month in the summer of 2008.

Of course, this was the hemlock-filled chalice for US automakers, who had gone all-in with this section of the market, and now were getting called. Sales of Japan's, and of the Japanese transplant plants, trucks were also getting clobbered, but they had advantages that the US nameplates lacked, specifically, a much stronger presence in the small and mid-size car line, plus a capital cushion obtained through the fact that they, unlike Detroit, actually made money when they sold their product.

Many congressmen and media types claim that Detroit's tribulations with high energy prices are the just recompense for Detroit's own incompetence in not developing and bringing to market fuel efficient and "green" automobiles, in short, in failing to make the product "that America wanted".

Here is one of the greatest hypocrisies in the public's opposition to aiding the Detroit automakers. For, by specializing in the big gas guzzlers, the US nameplates were giving the American public precisely what it wanted - right up until the moment this year when the public suddenly decided that that was not what it wanted. The Japanese nameplates may have had the capital reserves to push research and development across the entire spectrum of the automobile product line, but Detroit didn't, so it gambled - and lost.

One might think that the recent off-the-cliff decline in energy prices, considering its product line, would have been Detroit's godsend, but that has not proven to be the case. As soon as oil prices fell enough this autumn to make driving a gas guzzler not a proposition that would have made your children go hungry at night, Detroit was felled by its latest plague - the credit crisis. With the US financial system rapidly retreating within itself to extinction, it now appears that lenders are demanding much higher FICO credit scores - that vital measure of credit worthiness in the US - on the order if 750-780 (on the scale's 300-850 range) before approving an auto loan.

Of all the chronic problems I have elaborated above, this is the acute malady that has driven Detroit to the arms of Congress. America may be many things, but one thing it is not is a 780 credit-score nation. It is a nation of big dreamers dreaming big dreams of big things, namely, big cars, big plasma TVs, big home additions, big week-long shopping sprees at Minneapolis' Mall of America - none of which is likely any time soon to result in one having a 780 credit score. Even as gas prices continue to plummet, it is providing surprisingly little joy for Detroit, for it matters little if you can afford the gas if you can't afford the car.

Here is seen once again the vicious circle of deleveraging. Credit evaporates for cars, leading to car sales declines, auto worker layoffs, more delinquencies and subsequent foreclosures of auto-workers' houses, leading to more losses in mortgage-backed securities, and another round down.

Even considering the estimated $7 trillion in cash and credit spent and pledged by the US Treasury and Federal Reserve these past 15 months to try to counter this fearsome process, the catastrophe, to paraphrase NASA scientist Ronald Quincy (Jason Isaacs) explaining the inexorable approach of a planet-killing asteroid in 1998's Armageddon, of deleveraging just keeps smiling and heading towards us.

As this is being written, reports continue to leak out of Washington of an imminent deal to provide up to $15 billion in short-term loans to Chrysler and General Motors - supposedly, these two are in imminent need of rescue, with perhaps only hours to spare outside of bankruptcy court if they don't get it.

Ford has said that it does not need assistance immediately, but it still would like a government line of credit of about $10 billion - well, who wouldn't? GM is particularly in need of assistance due to the heavy burden of its legacy costs described above. Remarkably, GM is profitable in its non-North American operations, as newly rich arriviste all over the world crave the status and prestige of a big honkin' American yachtmobile way too big for the local roads it will drive on. However, GM loses money on every car it sells in its home market, North America.

In his testimony before Congress, GM chief executive Rick Waggoner has said that sales in North America are burdened by what he calls "the burden of the past", an obvious euphemism for consumers' memories of all the crappy products it has put out over the past 30 years. Chrysler is burdened by some of the worst current quality ratings of the Big Three, also, by all the debt service costs originating from the 2007 $7.4 billion buyout of the company from Daimler by its current owner, the private equity group Cerberus. Once again, corporate America is seemingly astounded to learn that, eventually, it has to pay back what it borrows.

I think that the companies should get the funds. The economic arguments alone are compelling; should either or both GM and Chrysler have to completely shut down operations (a real possibility should the companies' creditors force a bankruptcy liquidation) the prospect of possibly millions more unemployed workers, in a nation that has already lost 1.9 million jobs this year, could easily tip this severe recession into a depression.

The effects would spread out into the American economy like a cancer; for instance, even if only one of the big three failed, it is questionable whether the industries' generally shared parts suppliers could survive the subsequent 20-50% falloff in demand.

But there is also a moral argument in favor of assistance. In one sense, Detroit's failings are directly resultant from the society it was born from.

Detroit ignored the threat from foreign automakers. Well, why shouldn't it have, for ignoring things foreign is as central to the American lifestyle as another factor inhibiting American innovation - its students' poor test scores in math and science.

Barack Obama's election was front-page news all over the world; the only time a foreign political event makes news in the US is if a leader gets caught in a sex scandal. Indeed, the success of movies such as The Princess Diaries and TV shows such as How to Marry a Prince are indicative of the fact that a good part of the population still thinks that the rest of the world is ruled by romantic hereditary monarchies.

A very credible argument can be made that the auto industry bailout would be a violation of the World Trade Organization anti-government subsidy rules that America has always trumpeted for, and imposed on, foreign nations, but this, much like with the Kyoto global warming protocols, only illustrates the nation's continuing belief that foreign treaties can and should be abrogated should any American ever be inconvenienced by them.

The US has needed a comprehensive national health insurance system for years, but that issue has always been demagogued by those who claim it would mean inferior medical care that would benefit only those on the margins of society. It was low gas prices that enabled the SUV/light truck craze, but it is political suicide to advocate higher gas taxes in the US.

Detroit has been particularly successful in staving off Congressional initiatives for higher government-mandated Corporate Average Fuel Economy (CAFE) regulations that would have forced it to both put its behemoths on a diet and diversify its product line. The insistence on low gas prices as an inalienable right of Americans has cost the country its auto industry, along with, of course, a good portion of the 4,300 soldiers lost in Iraq.

Finally, the trouble in the credit markets currently preventing consumers from getting auto loans is emblematic of how the nation, in worshipping the fast cheap buck to be made through financial speculation rather than actually producing something, allowed the development of an over-leveraged financial system that currently acts more as the real economy's parasite than as its adjutant.

Psalm 86 of the Bible's Old Testament has David calling out to the Lord, "Save your servant, who trusts in you." Likewise, Detroit can plead to the nation, "Save your mediocre car companies, we're only just as mediocre as the rest of the society."