Detroit Blues

Posted: Jun 19, 2007 8:37 PM
Detroit Blues

There are three ways to find yourself in a deep hole: One is to jump in; another is to fall in. The third is to get pushed.

By an amazing trifecta of bad luck, bad decision-making and bad public policy, the U.S. auto industry finds itself in a deep pit -- with no ladder in sight.

Bad luck came with the first energy shocks of the early 1970s, when cheap and readily-available fuel suddenly became expensive and hard to get. Detroit was unprepared.

Unfortunately for GM, Ford and Chrysler, their models had been designed when fuel was cheap and plentiful - so they tended to be large and heavy. But when gas prices suddenly shot upward, and people found themselves in queues for fill-ups, such cars became almost instantly unpopular.

Drooping sales were just the leading edge of a much larger problem, however.

Enormous sums had been committed to suddenly unsalable vehicles, including capital investment for tooling and manufacturing facilities. Normally, these costs are amortized over the production life of a vehicle, typically 6-10+ years. But when the market changes suddenly, an automaker can be left with hundreds of millions in liabilities.

It was a wholesale slaughter affecting virtually the entire model lineups of GM, Ford and Chrysler.

The diminished resources for research and development into more efficient engine types, updated car "platforms" and emerging technologies put domestic automakers at a tremendous disadvantage. It's no accident Toyota pioneered the first hybrid car brought to market, the Prius, while Honda was the first to develop a viable fuel-cell vehicle.

Tight budgets made it very difficult for U.S. automakers to update their designs as often as the Japanese, so the domestics fell behind in both customer perception and nuts and bolts reality.

Customers, predictably, fled.

Meanwhile, the Japanese got an unexpected wind at their back. The small, efficient cars they specialized at building were suddenly hugely popular, and they did not have to amortize new investment. Their profits and market share increased. Much of their profit was reinvested in even better designs, expanded manufacturing facilities and so on, enabling the mainline Japanese brands to grow into full-line, major manufacturers in a decade.

The Japanese never looked back. GM, Ford and Chrysler have never fully recovered.

In 1975 Congress created another right hook at the jaw of an already hurting domestic auto industry: Fuel efficiency mandates. Under Corporate Average Fuel Economy (CAFE) requirements, each automaker's combined fleet of vehicles have to meet an average MPG figure or be slapped with "gas guzzler" penalties. The current CAFE standard for passenger cars is 27.5 mpg; for light trucks and SUVs, 20.7 mpg.

Most Japanese cars had no trouble meeting CAFE, as they tended to be smaller and lighter, but American cars had to be downsized, forcing yet another wholesale change in the U.S. automaker's product lineup.

It was also during this era that unions began demanding higher wages and benefits when the domestics, already weakened by the events of the '70s, were least in a position to accede. It became increasingly difficult for GM, Ford or Chrysler to make changes such as closing money-losing assembly lines.

In addition, both the Japanese and European brands enjoyed the artificial leg up provided by their home countries' single-payer health insurance programs, including generous old age/retirement and pension benefits. These "legacy costs" alone add approximately $1,500 to the cost of every new American-brand car, placing U.S. automakers at an enormous disadvantage.

It's true, of course, that the overall quality of domestic brand vehicles was not quite as good as that of the mainline imports from the mid-late '70s through the late 1990s - and that at least some of the blame for that rests with the managers and workers who allowed it to become a problem. Certain lapses in judgment (for example, Ford's failure to update the once-popular Taurus, allowing it to slide into irrelevance) are inexcusable.

On other hand, it's arguable that the disastrous effects of CAFE, the unions and legacy costs triggered these problems -- or made them much worse.

If competitive shackles had not been fixed around the ankles of Detroit's Big Three, it's entirely likely that Ford would not be reeling from the biggest losses in its entire corporate history, that Chrysler would not be in "financial rehab" under the wings of a privately-held equity firm, and GM would not have dropped to a 24 percent market share and second fiddle to Toyota - which just became the world's largest automaker.

This tragedy of events -- and of almost suicidal policy-making -- is still playing out. The Senate is considering increasing CAFE standards to 52 mpg. Senators Mark Pryor (D-AR),Kit Bond (R-MO), Carl Levin (D-MI),and George Voinovich (R-OH) have proposed an alternative -- a 36-mpg standard for cars and 30-mpg for light trucks, a more than 30 percent increase over present levels.

Many -- including the Big Three domestic automakers themselves -- believe a 52-mpg standard could be one blow too many for our beleaguered domestic auto industry to survive. The automakers -- and their union -- support the Pryor- Bond-Levin-Voinovich alternative.

In Detroit these days, all eyes are fixed on Congress.

Trending Townhall Video