We see in the news that the American auto industry is having difficult times, but we need to be careful about that generalization. While it is true that the three major US-based companies are in dire financial straits, that is by no means the entire American auto industry. Many other companies have production facilities in the United States. We do not see Toyota and Honda asking for bailouts. Why?
The “Big-3” automakers have poorer management, less flexible production facilities, and higher labor costs.
The news stories exaggerate the effect of bankruptcies. We see fear-mongering sayings about how bankruptcies would affect employment, suppliers, etc. There are a couple of reasons why these reports are wrong:
- Bankruptcy does not mean that production stops. A chapter 7 bankruptcy would mean that operations stop and assets are sold off to pay creditors, and that would have some of the consequences feared. Much more likely would be a Chapter 11 bankruptcy, in which the company continues to operate under the supervision of a court. Many companies have gone through that process, and emerged as better operations.
- If one company did stop operating, that would not significantly affect the number of cars produced. Other companies would pick up that production fairly quickly. This would have the effect of concentrating the pain of lower new car sales on those associated with that one company, but would not significantly change the number of employees required to build the cars, or the amount of sales of suppliers.
This is not to say that there are not problems associated with the current downturn in sales, just that bankruptcies do not necessarily increase that pain.
Solutions
The ComingTogether Plan provides a partial solution to one of the major issues for the US production of automobiles. A major portion of the difference in labor cost is associated with health benefits for both employees and retirees. Including the health benefit in those paid for by the government relieves a major burden from the auto industry, and puts the US auto production on a level playing field with competitors in other countries that already have health benefits paid for by the government for all citizens. (Note that this idea applies to all US employment, so it would be make it more attractive for other auto companies to move production to this country, as well as improving the employment picture in other industries.)
The ComingTogether Planprovides long-term help, which makes the US-based companies more viable long term, but there is an immediate concern for the survival of at least two of the US-based companies during the current slowdown in sales. There have been many requests and proposals for a federal bailout of these companies. Central to most of these proposals is uneven-handed treatment of American workers. Not only are we asked as taxpayers to support failing companies when we are not responsible for their failure, but even those American workers at Toyota, Honda, etc. are being asked to support their competitors.
Any real short-term solution should look a lot like bankruptcy, even if we do not call it that (for psychological and political reasons). That means new management for the companies receiving help (similar to a bankruptcy court trustee) and lower labor costs (such as voiding or renegotiating labor contracts, as has been done in past corporate bankruptcies). This may involve short-term financing (similar to debtor-in-possession financing commonly used in bankruptcies, as well as temporary relief from other obligations normally provided by bankruptcy).
What do the US-based auto companies themselves need to do, whether under current or new management? It will be a difficult task, requiring the cooperation of labor and government, but the following should be considered:
- Streamline the product line – There are too many products that look too similar coming from the three US-based companies. GM probably needs to eliminate two or three nameplates, as they did with Oldsmobile in the recent past. Ford should drop the Mercury line. And Chrysler is too small to survive, although it has been the source of several innovative products recently. It needs to be absorbed into another company, maybe as a specialty division or nameplate, but stop trying to go head-to-head with other companies on the standard products.
- Improve the cost effectiveness of production operations – The first suggestion above will contribute to this idea, but the production also needs to be more flexible, and a greater percentage of the production needs to be in states politically friendly to manufacturers (right-to-work laws, taxes issues, etc.). This last idea may be accomplished in two ways: 1) by changing the mix of the physical locations, or 2) by changing the political atmosphere in states where current production facilities are located. The second method is cheaper if the politicians will agree.
- Lower labor costs – Again, the first idea above will help on this goal, but much of this will be up to labor. The workers need to decide whether it is better to have a job with lower total compensation or to have no job at all. Again, implementing the ComingTogether Plan would make this decision easier, since it provides alternative resources to those currently tied to employment.
Conclusion
The US can be a great place to manufacture autos and many other products. The pain caused by lower auto sales will not go away by government actions; it can be transferred by government action, and the government can create a friendlier environment for productive and responsible behavior. We tend to discourage the big bailout, because as a “pain transfer” it is unfair, temporary, and rewards irresponsibility. Instead we look for solutions that are long-term and beneficial to all.