Ump on a Blog

The Big Three automakers in the United States (General Motors, Ford, and Chrysler) have asked for a government infusion of cash to the tune of $25 billion. They are projecting that they will run out of cash in early 2009 due to declining sales, huge outstanding pension and health benefits costs, and the increasing need for R&D to become competitive with overseas automakers.

At first blush this looks like a no-brainer: between manufacturing and dealership jobs — solely at Big Three firms — we’re looking at over one million jobs lost overnight if these companies go down. Beyond that, there are hundreds of thousands of jobs at parts manufacturers that will also disappear. And of course the economic ripple-effects will be staggering. So coughing up $25 billion, especially when we just dropped $700 billion on the financial services sector, seems like a drop in the bucket.

But the equation isn’t that simple. The argument being tossed around Capitol Hill is the concept of the “slippery slope”. If we bail out the auto makers, who’s next? Airlines again? Building materials? Textiles? Additionally, they are worried about what appears to be the lack of a plan to revitalize an industry that has been plagued by sluggish and wasteful management for the last 50 years. Why reward that behavior, and essentially fund the next 50 years of the same?

However, there needs to be some investigation under the sheets of this relationship. We have, for the first time in a long time, a viable non-Big Three automaker beginning production on a consumer automobile. Its name is Tesla Motors, and it produces a $100,000+ all-electric two-seat sports car that smokes Chargers, Mustangs, and even Corvettes in the quarter-mile. They have sold out production for at least the first year, so be prepared to wait for your new Tesla to arrive if you’ve got the coin.

Why is this relevant? What’s the rub? The question that needs to be asked is, why has it been so long since a private American company launched a new car? The answer is, the Big Three haven’t allowed it.

There are several major parts manufacturers in the country. Most specialize in a given category of parts types, though some are whatever-you-need operations. The common threads are these: they all produce parts for the Big Three, and they all play ball.

When it appears that a new or existing company might make a foray into the automobile industry, shortly thereafter each parts manufacturer gets a visit from one of the Big Three. Though the Big Three and the parts manufacturers will deny it, the message being delivered is always this: if you sell parts to this new company, we will cancel our contract and give the business to somebody else. Because the Big Three are always the biggest customer for any of these parts manufacturers, they agree without question. It’s to the point now where the message doesn’t even have to be delivered to be understood: exclusivity is a condition of getting the business. Violate that rule, and the Big Three will ruin you.

That is why new car companies never get off the ground. Whatever innovations the company may have attempted to implement are lost; whatever patents they may have registered are eventually sold to the Big Three (since the idea will never get used anyway); and the Big Three continue to coast along as the dinosaurs they have always been: lazy, lacking innovation, and relying on big gas-guzzling trucks and fleet sales to stay in business.

So why haven’t the Big Three done a better job of developing innovations themselves? Innovations are risky and they cost money. The people who are making the decisions about what cars to produce for the consumer market today are the ones who came up through the ranks in the ’70’s and ’80’s — the days of three-ton, 15mpg boats and the era when pickup trucks out-sold passenger cars for the first time in history. All these guys know is size and volume. To them these pesky micro-hybrid compact electric roller skates are just a fad, and the glory days of 50-cent gasoline are just around the corner again. They can’t innovate: they don’t know how.

But wait, you say, Toyota and Honda are just as big as GM and Ford. Why are they producing these innovations and we aren’t? The Japanese have a totally different business model from U.S. corporations. American firms have a contentious relationship with the United Auto Workers union. The Japanese have a collaborative one with their unions, providing more benefits and better wages yet extracting more hours and leaner manufacturing processes in the bargain. The American firms are looking to beat the union, whereas the Japanese realize that if they work together both the union and the company can win. The result is lower costs and better quality products for Japanese car companies, and innovative new products that get to market faster. U.S. automakers can’t get past the UAW bargaining table.

So where does that leave us? We have a behemoth industry employing millions of Americans that is unable to compete in the global marketplace with products that are 30 years out of date, blackmailing parts manufacturers into shutting the door on new entries to the marketplace, and begging for money. U.S. plants producing Japanese and Korean cars — Toyota, Honda, Subaru, and Hyundai to name a few — are thriving and adding more workers to expand production, so successful auto manufacturing in the United States is not just possible but happening right under our noses. And the most vital part of any industry, the innovation to develop new products and create new markets, is being stymied to the point where few are even attempting to create new entries to the American automotive market.

Normally I am eager to jump in and propose a solution to these types of quagmires, but in this case I honestly don’t know what the best course of action is. We can’t just let over a million people move from high-wage jobs to the unemployment line just to teach the Big Three executives a lesson. What’s the lesson? That we’ll let you close all of your plants, take your diamond-encrusted golden parachute and retire in style? While you destroy the livelihoods of over three million families all over the country?

Similarly, placing restrictions on U.S. automakers as a condition of the bailout is equally ineffective. Once the lobbyists get through with the legislation it will look like a slap on the wrist, and the Big Three will chuckle all the way to the bank while meeting the bare minimum of most requirements and finding loopholes to avoid the rest entirely. Look at federal minimum gas mileage requirements and how the Big Three thwart the intention of the law, then tell me I’m wrong.

No, anything that the government does has to do the following: protect American workers’ jobs, stop the strong-arm tactics used by the Big Three to protect their turf, change the way the Big Three approach new product development and innovation, encourage and provide assistance to new corporations developing and producing competitive and innovative cars and trucks for the U.S. and world markets, and ensure that the money spent by the government in these endeavors will be a worthwhile long-term investment.

How do you do that? I have no idea. But as you see, the question isn’t merely whether to spend the $25 billion or not. If we treat it as a simple problem, we will get simple (and ineffective) results. This requires a lot more careful consideration, and perhaps a long-term strategy to facilitate America’s return to the number one spot on the list of car producing countries.