By JOHN CAMPBELL
With the rescue/bailout of the Detroit three automakers, I would like to give my views on what has been said and is still being said about this industry, its problems and its prospects.
Because of my 25 years experience in this industry, I know a few things that many of those talking heads on TV don’t.
First, the myths:
– Myth No. 1: Domestic automakers are in trouble because they build poor quality cars.
They used to. So did Japanese manufacturers in the 1960s. But now quality in the auto business is a price of admission. There is near quality parity among all manufacturers selling in the U.S. market.
While J.D. Power and Associates always ranks a first and last place, the difference between those is much less than it used to be. In most cases, the difference between 60 defects per 100 cars and 100 defects per 100 cars is imperceptible.
Sure, you may have a horror story about some car you had. But you are as likely to have had that horror story with a Honda as you are with a Chevrolet. And, occasionally, some manufacturer has a bad patch of quality due to a new plant, new model or labor problems (as with Volkswagen and Mercedes recently).
The fact is that a Hyundai, a Toyota and a Ford all are good quality cars these days.
– Myth No. 2: Domestic automakers are failing because they don’t build cars anyone wants to buy.
If General Motors doesn’t build cars anyone wants to buy, then why are they first in sales in North America? Why are they also first in the fast growing markets of China and Russia?
GM and Ford are first, second or third in sales in almost every market except Japan. The true problem is that their cost structures are geared to selling even more cars than they actually do.
– Myth No. 3: Domestic automakers have problems because they build too many big trucks and SUVs and not enough hybrids.
In fact, almost the reverse is true. No manufacturer is making a dime on hybrids. They are money losers. Toyota sells a lot of the Prius but loses money on every single one.
Where does Toyota make its money in North America? With the full-size Tundra truck, big Sequoia SUV and Lexus. Toyota makes the same money on one Sequoia as they do on four Corollas.
Hybrids are expensive because they require two power trains (electric and gas), expensive batteries and a complicated control mechanism. The consumer won’t pay for all that. So, they are sold at a loss because all manufacturers want to seem environmentally friendly.
– Myth No. 4: GM can declare Chapter 11 bankruptcy, stay in business and work things out.
Not in this environment. A company that declares Chapter 11 must be able to secure debtor in possession financing while they reorganize. Such financing isn’t available in today’s credit markets at the volume necessary for a company the size of GM.
The bottom line is that GM and Chrysler, without the federal aid, would have quickly fallen into Chapter 7 liquidation and many if not most of their dealers would have followed.
– Myth No. 5: The United Auto Workers contract is the whole reason that GM, Ford and Chrysler can’t make money because autoworkers make too much money.
The problem is not that current UAW workers make too much money. In fact, newly hired UAW workers in a number of jobs will make less money at a Ford plant than their non-union equivalents at a U.S. Honda or Nissan plant.
The problem is that back in the 1980s, Detroit three executives made deals with their unions to pay for all kinds of costs after retirement, and to continue paying workers who had been laid off. The executives preserved earnings by not incurring large increases in wages. But they left the next generation of executives holding the bag. (By the way, local governments are doing the same thing with their public employee union workers right now.)
The problem is not that the people working on the line today are paid too much. With robots and just-in-time suppliers, assembly line labor only makes up about 10% of the cost of a vehicle now. The problem is that for every current assembly line worker getting paid, the Detroit three are paying six laid-off employees nearly full wages or are paying unsustainable retirement and healthcare benefits.
The $78 per hour figure you hear spreads the legacy costs over the existing workforce. They do not make anywhere near that much money today.
– Myth No. 6: Only the American automakers are having problems.
Sales worldwide are running down about 40% from two years ago. In an industry like this with big expensive plants and low margins, no one could survive if this level holds.
Toyota just posted its first loss in its 70-year history. It shut down all of its plants in Japan for part of January, idled three U.S. plants and canceled future product programs.
Honda just canceled four major product programs and will discontinue some models. It also shut down its Formula 1 racing team.
The president of Fiat (which also owns Maserati, Alfa Romeo and Ferrari) said his company cannot survive alone and must merge or be acquired.
Nissan/Renault also is in a precarious condition. The Swedish government is likely to bail out Saab (owned by GM) and Volvo (owned by Ford). The Japanese and German governments may provide bailouts to some of their automakers.
In the car world, this is not a recession but a full-blown depression. You will have Japanese and European automakers in bankruptcy if the current sales levels continue for another year or more and their governments don’t provide assistance.
– Myth No. 7: The Detroit three are all in the same condition.
Not true. Ford has the most cash and has not yet taken any federal money. But it will be in the same condition by summer unless the market improves.
Ford has mortgaged a bunch of its assets (which GM hasn’t done). But Ford kept its finance arm, Ford Motor Credit, which will help in the future. It also has the most new cars coming out.
GM has the biggest sales and lots of unmortgaged assets. But it lost GMAC, which now is an independent entity. GM has the best international operations, particularly in emerging markets. But it also has the biggest bureaucracy to downsize.
Chrysler is in the worst position. It has no international operations to speak of and fewer strong brands. It is hard to see how Chrysler survives this, even with assistance.
So, what is the problem with the Detroit three?
They have made some bad management decisions, of course. They have been chasing market share for decades as their stakes have steadily declined. They have never been able to accept the idea that they could be smaller and more profitable and instead have spent like they were bigger than they actually are.
That is an oversimplification. But if you spend $100 thinking you can sell $120 and only sell $80,and keep doing it because you have access to the cash flow and believe that $120 is right around the corner,you eventually will run out of money. And they have.
Campbell is a Republican congressman representing the 48th District covering Newport Beach, Irvine and other cities. He used to own Saab dealerships in Orange County.
