Do the Big 3 have too much auto production capacity?

Great Debates
1

Consider: The Big 3 are closing production lines and laying off workers. There are lots of unsold new cars sitting around. Those cars are being sold at considerably lower prices than a year or two ago. There is no shortage of cars-anybody with the money can get the vehicle they want. The ‘foreign’ auto plants are not laying people off or cutting production, to my knowledge.

So why does it make sense to give government backed loans or other aid to the Big 3? The US market is well supplied with autos, why is it in our national interest to continue to overproduce? If the goal is to continue to employ the current number of auto workers, wouldn’t it make just as much sense to stimulate demand by giving government backed car loans to individuals? Not that I’m suggesting we should do that. By helping companies to produce more goods than the market has any interest in buying, aren’t we setting up the system for another crisis in the future?

For that matter, if guaranteed employment for auto workers and the rest of the people in the supply chain is so important, why not loan them the money to retool to produce something completely different, something that people want to buy? Windmills maybe? Again, not that I’m saying we should do so.

2

If the government can cut the cost of American produced cars (i.e. go union busting or offload the cost onto the taxpayers as a whole), then they’ll be able to produce cheaper cars and sell more. No surplus.

3

You would be incorrect.

http://www.cbc.ca/canada/story/2008/10/21/f-autolayoffs.html

http://www.autoblog.com/2007/04/25/toyotas-indiana-plant-shedding-370-temp-workers/

http://www.usnews.com/blogs/the-inside-job/2008/8/26/toyota-refuses-to-lay-off-workers.html

http://www.forbes.com/afxnewslimited/feeds/afx/2007/02/20/afx3445303.html

Here are the sales figures for the last quarter:

http://online.wsj.com/mdc/public/page/2_3022autosales.html?mod=topnav_2_3000#autosalesD

New article about recent upspike in SUVs

http://www.wftv.com/news/17945476/detail.html

Basically, of all the automotive markets in the world, the US has been the most hard hit because of the over reliance on larger, less efficient vehicles AND because the US was the epicenter of the credit crunch. ALL the car makers have been suffering, but the level of their suffering is mostly just correlated with how much they are involved in the US market and its preference for heavier vehicles. The Detroit 3 are suffering the most simply because they own the lion’s share of the market. Of the imports, Toyota is suffering the most because they own the lion’s share of the market amongst imports. Of all car companies in the world, the ones in the best shape are arguably Honda and the French (PSA Peugeot Citroen and the Renault half of Renault Nissan), simply because they were less invested in the US market and Honda has no stake in the market for heavier vehicles. GM and Ford are not worse companies than Toyota, they were simply in the wrong place at the wrong time.

I heard a fairly succinct recounting of the reasons why they are in trouble at the NPR Planet Money podcast

http://www.npr.org/blogs/money/

Scroll Down.

Basically in a nut shell, your “production of cars” argument doesn’t hold water. The problems with the US automakers have very little to do with their core business of making cars, which they have been more than competent at. The problem is with their legacy costs, namely health care, pensions and unionized workers. It is arguable whether these are things that the managers at GM really had much control over (The Detroit 3 don’t operate on a level playing field WRT to health care, for example) but essentially, I think the optimal solution would be some kind of public solution to their legacy problems to allow them to continue concentrating on their core business of making cars.

4

Missed the edit window. To continue that thought, I think the best way forward would be some kind of nationalization of GM and Chrysler, to somehow shift the burden of the legacy costs somewhat to the public, while the government also taking up an equity stake in the companies, and leave the actual manufacturing operations as they are now.

5

Wow, it’s worse than I thought. For the record, by foreign, I meant foreign owned plants that operate in the US, although I see more than a few of those on the lists you give. Which raises the question of why only the Detroit companies are worth helping. Your plan makes more sense than letting them continue to founder.

6

Here’s an article detailing Toyota’s problems:

Note that again, the only thing that they have really done “wrong” is that they were too heavily invested in the US market.

There was another article, which I cannot now locate, detailing about Toyota putting out feelers towards the Japanese government for some kind of aid, not a bailout obviously but something a bit milder. I guess the main point is that Japan and Germany are Social Democratic countries, and that it would be unthinkable for their governments not to extend some sort of support to their national champions, but it may be in a more subtle form than what the US government can manage, since European/Japanese governments have ALWAYS been more involved in their national industries than the US government has. For example, All the German companies have union representatives on their boards, and the relationship with organized labour has always been more co-operative than confrontational, as is the case in the US. The same could probably be said for the governments.
The newly nationalized GM/Chrysler behemoth also needs to have a totally ironically hip name, something like American Leyland. So we can all talk about it and have a secret giggle.

Vision of the future

7

We hopefully will convince them to build the cars of the future. They love to make steel whales and get huge profits on each unit. That attitude helped put them in trouble. But they are capable of building small and competitive cars. They just did not want to.

8

I’ll throw this out there as something I’ve believed for a long time.

Nationalized health care has been something promoted for years as a cause of the “liberals” or the “socialists”. In fact, it will be the large corporations, small businesses and other “capitalist” interests in America that will cause it to happen. The idea of health care being the burden of business is crippling to business. Why is every company in America in the health care business? GM should be making cars, not running HMO’s. Maybe if we spent the bailout money to nationalize health care and relieve business from the burden we could correct a lot of the competitiveness problems that we have in the global economy.

We need nationalized health care (as distasteful as that may seem) to save corporate America.

9

FYI, China automotive production is being scaled back significantly. Sales have dropped off since June. 2008 may end up showing more cars sold that 2007, but that’s owing to strong growth in the 1H making up for the declines in 2H.

10

I wonder how much of that is due to the reduction in fuel subsidies mid year?

Also, will SAIC snap up the rest of their JV if GM goes under?

11

Nothing really to do with the fuel subsidies. The price of fuel had really gone up long before the drop off in sales.

Not sure how much money SAIC has these days? They bought Rover waaaaay to early in the game.

Actually, SGM and GM China should have a lot of cash (although this is just a WAG from what I know). Because of currency controls, I believe but am not positive that GM China actually has a fair amount of money. IIRC, Standard Chinese government policy is that only 10% profit can be taken outside of the country per year.

12

I have no actual numbers, but inevitably, any industry making reasonably enduring goods will encounter what I dub Moschino’s Law, after fashion designer Franco Moschino, who said (paraphrased), “We’re in a ridiculous industry. We have enough clothes for 100 years.”

We certainly don’t need, for our standard of living, all the cars we make. For crying out loud, the USA crushes junked cars by the thousands, presumably to take them off the used-car market & keep new production viable. But throw in rising gas prices, depression-level unemployment, & a global credit crisis, & of course an overwhelming portion of “potential costumers” will put off getting a new car this year.

13

I normally keep a car until it is no longer economic to repair it. That’s been roughly 10 years for the cars that I’ve owned. Most of the people that I know have the same practice. Replacing a decent used car with a new car is nice if someone else is paying the bills.

14

For years, I’ve been wondering why the Big 3 weren’t the first people in line for nationalized healthcare for exactly these reasons.

15

It is necessary to have flexible manufacturing capability. To tailor their production to the present market makes the assumption that auto sales will never go up. That would be a foolish bet for them to make.

16

Ford started the Henry Ford Hospital to handle the cost of health in their operations. They had a closed hospital system which was originally staffed by John Hopkins doctors. It became so successful that is spun off and became a very important Detroit Area hospital.
There are companies that have attempted to solve the health costs in business. Some hire doctors and create clinics for their workers.
For a long time American business made so much money they could afford it. Now that the whole world in competitive, the cost puts them on unequal footing. We will have to take the cost from business . They finally realize it themselves. Their political power will help make the change happen.