Thoughts On The Big Three

Last updated on: December 8, 2008 at 10:58 am by M.Z.

Thoughts On The Big Three 2008-12-08T10:58:29-05:00 M.Z.

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Listening to commentary on the Big Three and the Auto industry has been somewhat frustrating. For example, a lot of opinion has been offered that the Big Three need to have their management replaced. Mulally took over Ford about two years ago and by all accounts has been doing a good job. Then we get people saying that the unions are the issue. Many of these same people can never conceive of a situation where unions are part of the solution, so arguing with them is like spitting in the wind. Those that don’t have an animus against unions have recognized that the unions haven’t entered negotiations in a strong position for over a decade. Many of the numbers thrown around are simply dated regarding how much the union employees cost.

Then there is the whole matter of SUVs and green vehicles. The story goes that the domestics put all their money into SUVs while the Japanese specifically put their money in green technology. Those that have followed my writing know my style is to put these myths to rest, and I will do so. There have been a dozen or so hybrid vehicles: Toyota’s Prius, Highlander Hybrid and Camry Hybrid, Honda’s Insight, Civic Hybrid, and Accord Hybrid, and the Ford Escape Hybrid. Of those, the Insight and Accord are no longer produced. The Prius is the only one considered to be a commercial success. Both Toyota and Honda subsidized their hybrid power plants, so I’m not even sure they have recouped their R&D costs yet. With Ford having bought Toyota’s hybrid technology, Toyota is probably the closest to having their hybrid experience be a net positive.

Oh, but Detroit put all their money into SUVs. Yes, I’ve seen the Ridgeline, Pilot, Odyssey, CR-V, Highlander, Sequoia, FJ Cruiser, 4Runner, Tacoma, Tundra, and Sienna. Each of these vehicles is on a design under 3 years old. The Accord just got a redesign in 2008 after languishing for years. The Civic barely got a redesign in 2006 after having the same style for 5 years. Likewise the Corolla and Camry have not seen major investments in their nameplates. The dirty secret was that the Japanese don’t make a lot of money in cars either. If Detroit is going to be accused of shortsightedness, then the Japanese are shortsighted as well. But of course they’re not. Much of this talk is like saying North Carolina needs to be “build” more plain white cotton tees. The margins simply aren’t there.

The bigger question at this point is whether Detroit should be bailed out. It’s a good question. Whoever claims the answer is easy is a fool, most likely an ideological tool. (And please don’t mention buggy whip factories. There were never buggy whip factories. The point of that story is that you can’t save antiquated technology. All car companies have the same basic technology, and the car isn’t going anywhere.) Perhaps understanding how we got here would help with the answer. Car dealerships have for some time now been glorified subprime debt dealers. It has been nearly 5 years since I sold a vehicle (Toyota if you must know), and whatever money was made was made on the backend in financing. (The front end is the difference between the sales price and the dealer purchase price. My days were short as a car salesman for this reason.) Electronics and furniture sales have also been built on the backs of the subprime debt. I don’t believe the days of easily available subprime (or prime) debt are coming back anytime soon. People aren’t going to stop driving though. Our society is built for driving, and it will take 10 years before changes in development patterns would start having an impact. If people however keep their vehicles 2 years longer, that would have a major impact. It would reduce demand by near 20%. This would mean a car company would probably have to go based on production.

So should we spend $15 billion? I would say yes. If this turns out to be a temporary blip, we will be paid back in full. If this affords us two years to send signaling to third tier suppliers, we would avoid shocks that a sudden bankruptcy would cause. The automotive industry has a cascading effect like the financial industry. Defaults are very disruptive economically. Non-renewals and reduced purchasing can be handled. If the $15 billion does nothing and that is always possible, we can feel sorry for ourselves as our social service infrastructure assumes the responsibilities the Big Three used to handle. As politicians happily exhort every 4 years, we can make us that $15 billion by cutting out the waste, fraud, and abuse the assumed liabilities will create.

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