In defense (kind of) of Detroit
|Peter Brown is publisher of Automotive News|
In their almost gleeful calls for the death of the domestic auto industry, some U.S. senators and other critics of the Detroit 3 have suggested rampant incompetence and utterly failed business models.
"They're not building the right products," Sen. Richard Shelby, the Alabama Republican, said on NBC's "Meet the Press."
"I don't believe they've got good management. They don't innovate. They're a dinosaur, in a sense."
Let them go bankrupt, say Shelby, Mitt Romney and others.
From time to time, I've been very critical of Detroit 3 management. But as their very survival hangs in the balance, I ask a question: Is it coincidence that every domestic U.S. car manufacturer is in exactly the same leaky boat?
Whose fault is this?
Imagine that your home market is a large country whose energy policy can be summed up in two words: "cheap gasoline." Would your vehicles reflect that?
Then suppose that your government tried to regulate fuel economy amid this sea of cheap gasoline, and the regulations established a high fuel economy standard for one type of vehicle (say "cars"), and a very low standard for another (for example, "trucks").
Would your fleet reflect that?
Then imagine that your foreign competitors received huge subsidies to build greenfield plants in America to augment their imports to the United States. They have no retirees to take care of, and you have millions in the only major country where employers have to provide health care benefits.
Then imagine that your home country's financial system collapsed under essentially a huge pyramid scheme by banks and investors, drying up credit and sending the nation into a deep recession.
Can we acknowledge that many of the problems of the Detroit 3 were not entirely their fault? Let's look at one main criticism: Detroit stupidly became reliant on gas-guzzling SUVs and pickup trucks.
Well, that's true. But the Detroit 3 didn't lead us to SUVs. The consumer, driven by cheap fuel and corporate average fuel economy regulations, pulled them there. In the early 1990s, after a huge investment in mid-sized cars, General Motors scrambled to convert car plants to truck plants to catch up to the American consumer.
In those days, Toyota, Nissan, Honda and other competitors found themselves with inferior or no SUVs. But they did just fine in America with cars that worked for them elsewhere around the world.
Meanwhile, they developed lots of trucks themselves. Alas, Toyota and Nissan developed huge pickup trucks and SUVs just at the end of the truck party and built huge Southern plants to make lots of them. Even Japanese automakers can make mistakes. But it's a rounding error for Toyota, not core as it was for the North American automakers.
Certainly, Detroit should not have battled increases in fuel economy regulation. And GM's creation of the Hummer brand was almost criminal in its shortsightedness.
$126,500 vs. $100,000
So Sen. Shelby says these knuckleheads should die, die, die. Detroit's failed companies don't deserve any help.
Remember, he's from Alabama, a manufacturing backwater until Daimler-Benz opened a Mercedes plant there in 1997.
Why did the auto industry go to Alabama? Alabama recognized that a local auto industry was a huge generator of jobs, taxes and prosperity.
So the state gave Daimler $253 million in incentives to build a Mercedes-Benz plant. Daimler invested $300 million and created 2,000 direct jobs. The state's cost per automaker job: $126,500.
The investment was so successful that Sen. Shelby's Alabama has since given more than $400 million to Honda and Hyundai.
Now Congress is being asked to lend $25 billion to keep the Detroit 3 and their 260,000 U.S. employees, plus their suppliers and dealers, alive. "It's a road to nowhere, and it's a big burden on the American taxpayer," Shelby said. Even if, after a couple of years, the companies default, the investment would be less than $100,000 per Detroit 3 employee in the United States, and much less if you amortize it over the millions of people who depend on the Detroit and would have remained employed and insured.
Bailout's a bargain
Is Shelby right that the Detroit 3 business model can't work?
Chrysler was the world's most profitable mass-market automaker in the 1990s — until Daimler bought it and ran it into the ground.
Let's acknowledge that there are reasons that each of the Detroit 3 faces the same catastrophe. What are the odds that every Detroit 3 exec of last 35 years has been an idiot?
You don't have to forgive them all their errors to say that our government's policies have helped lead them to where we are, and that millions of Americans workers deserve a chance.
Anyway, compared to subsidies from Alabama, Tennessee and other states, the proposed bailout is a heck of a bargain.
If we didn't have a domestic industry, we'd say, gee, for $25 billion, we can earn more than that in taxes in the first year, even if they don't live forever. It's a pretty good deal in a pretty bad situation.