Economics

Detroit as the Prodigal Son

Why is the government rewarding failure?

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In the New Testament story, a man has two sons. One of them demands his inheritance, runs off and squanders it all having a wild time, and ends up penniless.

At that point, he slinks home in disgrace, assuming he will have to beg forgiveness. But his father is so thrilled to have him back that he kills a fatted calf and throws a party to celebrate the prodigal son's return.

Not a bad deal, huh? Unless you're the other son, who worked hard for his father and avoided loose women but never got the big fiesta. He felt cheated, and it's hard to blame him.

People employed by automakers other than General Motors and Chrysler would be justified in feeling the same way. Last fall, facing bankruptcy, those companies sought and received some $17 billion in federal loans intended to keep them in business. Now they are back asking for more—$16.6 billion for GM and $5 billion for Chrysler.

That doesn't count the $7.7 billion GM wants to improve fuel economy or the $5 billion its financial arm got from the Treasury Department. Nor does it exclude the possibility that they will demand more help in the future.

And what about the automakers that have not run themselves into the ground? They get nothing. Actually, they get worse than nothing: They get the privilege of competing not just against GM and Chrysler but against the federal government, which has unlimited resources and is now in full partnership with the two.

It's not just Ford, Toyota, Honda, Nissan, Volkswagen, and all the other companies that sell (and often build) cars here that are seeing their wisdom and restraint punished. It's also the American people—most of whom voted with their pocketbooks not to support GM and Chrysler but now see their money forcibly diverted to those automakers anyway.

For years, Detroit has been relentlessly driving customers away. In 1985, the Big Three accounted for 80 percent of all the cars sold in this country. Today, their share of the market is just 43 percent.

Their high costs and inferior reputation for quality have hindered them in competition for some 30 years. So in good times and bad, they lag behind more efficient rivals.

The financial losses they've compiled recently convey an unmistakable message from consumers: We are no longer willing to buy your vehicles at a price that pays you to make them—if we are willing to buy them at all. The Big Three had a fat inheritance, and they managed to blow it.

Their overseas competitors, by contrast, had to start from zero selling cars in the United States, find customers, prove the worthiness of their vehicles and dealers—even, in many cases, build factories here and train American workers to meet their standards.

Some companies, foreign and domestic, couldn't hack it. You don't see dealers selling Ramblers, Fiats, or Renaults anymore. But many did exactly what our capitalist system requires them to do, only to be rudely informed that the requirements have changed. Instead of being rewarded for their achievements, they now watch as the government rewards failure.

Helping these two automakers means harming the rest. The market for new cars has shrunk and it's not going to regain its old size anytime soon. By rescuing GM and Chrysler, the government is taking future sales away from competitors. If one automaker gets the fatted calf, another one will have to do without.

In a normal market economy, things would proceed differently. The weak firms would file for bankruptcy and be forced to take drastic measures to cut their costs. They would shrink even more than they proposed last week and might even shut down.

These developments would be a bad thing for their shareholders and employees but a good thing for consumers. Competing carmakers would have the chance to hire their workers, purchase their factories, take over their dealerships, and attract their customers. The economy would also benefit, because resources Chrysler and GM were wasting would be used more productively.

Instead, the government has impeded this process—managing a neat combination of bad economics and blatant unfairness. In 21st-century America, it's good to be the prodigal son.

COPYRIGHT 2009 CREATORS SYNDICATE, INC.

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  1. The biggest issue that the Bailout Two face is inertia. In fact they have been working for several years to downsize, economize, and win back a reputation for quality.

    But they’re massive, and memories are long. The article notes that outsiders have ‘started from zero’ and still managed to do well, as if that were wholly a burden.

    In fact, being able to start from zero makes many inertial issues go away: pensions, retiree health, union rules, etc — the very things that add (it’s said) $2000 to the cost of every GM car.

    More inertia: we still hear how Detroit makes ‘crap cars’, many years after that problem has largely been solved. There’s no real difference now in quality, among cars at the same price point. But reputation lingers.

    Plus, to say as many have that Detroit was making cars ‘that no one wanted’ is rubbish: the market wanted all the SUVs they could produce, until it didn’t. But changing product mix to meet consumer demand is also an inertial problem. Even the very best take upwards of two years to bring a new model to market, and the parts and manufacturing pipeline is just as long.

    Detroit has made, and continues to make, mistakes. But in large part, they aren’t the mistakes that they’re accused of. BK might be the ultimate answer, but it’s not entirely unreasonable, given the situation in the larger economy (which of course GM didn’t cause), to offer loans that can keep the wheel turning until the good effects of inertia can take hold again.

  2. “Inertia” seems like a convenient way to excuse legitimate failures in the market.

    we still hear how Detroit makes ‘crap cars’, many years after that problem has largely been solved.

    This is whose fault? They do have advertising budgets, I believe.

    to say as many have that Detroit was making cars ‘that no one wanted’ is rubbish: the market wanted all the SUVs they could produce, until it didn’t.

    Lack of diversification in their product mix was a business decision that went horribly wrong. Inertia is not the culprit – corporate strategy so bad that a first year MBA student could avoid it is.

  3. Government “green” mandates will ensure that the State-owned auto companies make more cars that Americans don’t want.Barney Smith in Marion Indiana is still waiting for Obama to re-open the CRT plant he used to work in.

  4. One can cry all day about how unfair it is that they have a lousy reputation that is undeserved and that they are much better now if we would only give them a chance, but the fact of the matter is they have been unable to compete and should be allowed to go under. The public has given them their chance, and they failed to capitalize on it.

  5. Whether to bail or not to bail is mostly semantics at this point – we’ll be picking up the tab for all the “inertia” anyway. No way DC lets the UAW pensioners fail nor takes away their health benefits. This notwithstanding, let ’em fail. It forces management to make the hardest decisions, let’s the market do what markets are supposed to do, and keeps gov’t involvement in free enterprise to a minimum.

    By the way, the only people who get to legitimately argue for bail out better have Detroit products in their driveway, otherwise, talk to the hand.

  6. Stop sending people my way, please. I’ve had enough. Let the feet talk to idiots for a while so I can focus on my primary duties: Typing and masturbation.

  7. I’m a little on the fence here but not as much as last fall.

    Today I would second what Tbone just said. If we have to put cash, I’d rather put it in some relief program for the employees rather than going on like this.

    Who knows, investors could be interested by some assets and brands if they can start from zero.

  8. I wouldn’t be so quick to include Ford in the list of non-moochers, if for no other reason then because of the long-standing “buy American” policy of both the federal government and just about every state and local government (e.g., police cars).

  9. 1st of all, the era of huge car sales is approaching an end. Both quality and cost is closing in on a point of market saturation. The more cars made, the more depreciation hits the cars that exist already. That was the first problem. The second is initial cost, accounting for inflation, has been creeping up for years, resulting in new cars becoming more and more a luxury item than a need. Even if the economy were still on its feet, this would drive sales down (albeit at a slower rate). The slowdown in new car sales was inevitable, the financial bust just made it more apparent in a shorter period of time. At that point, car manufacturers are just fighting for market share, a smaller and smaller version of the pie. GM wasn’t shrinking fast enough or becoming nimble enough to meet this and I feel their collapse was inevitable. Manufacturing of cars was on its way down in the first place, now its demise is merely hastened. Eventually an equilibrium will be reached again, but at a much lower level in the future.

  10. I can understand “buy American”… but just what is American at this point? The ford that was built in Canada with parts from Mexico? Or is it the BMW assembled in states like Georgia and South Carolina? Or is it the Toyota built in Indiana? I’d rather buy a car MADE in America then one marketed by an American car company. The Detroit automakers failed. There is no other way to put it. You should not get a shiny medal for failure.

  11. Reward failure, and penalize success.

    That’s what Congress does.

    GM should not get a penny as long as that fucking moron Wagoner (and his pet Board of Directors) is still there.

  12. To clarify my position- GM and Chrysler shouldn’t be getting federal bailouts no matter who is running them into the ground. There *is* a case to be made for regulatory relief.

    But if I were a GM shareholder, I’d probably be sending Wagoner thinly veiled death threats on a daily basis.

  13. As a case of stupid black-and-white “reasoning” this takes the cake. A fair examination of the situation would include taking into account all the help foreign car makers have received from their home governments plus the billions in bribes given by states to entice production here. Not to mention Detroit being stuck with the pension and health care costs of retirees because, you know, these things should be left to the private sector.

  14. So why is the government rewarding failure by bailing Detroit out?

    Nonsense. The government isn’t rewarding economic failure by bailing Detroit out, the government is rewarding political success by bailing the UAW out.

    The persistent failure to comprehend that the automakers are merely the conduit through which the auto bailout funds are channelled to the UAW is getting really annoying.

  15. I wouldn’t be so quick to include Ford in the list of non-moochers, if for no other reason then because of the long-standing “buy American” policy of both the federal government and just about every state and local government (e.g., police cars).

    It’s true the government has a buy American policy. Police cars may be the worst example of it though. Cops love them full size Impalas and Crown Vics for completely practical reasons.

  16. domoarrigato | February 23, 2009, 7:57am |
    “Inertia” seems like a convenient way to excuse legitimate failures in the market.

    we still hear how Detroit makes ‘crap cars’, many years after that problem has largely been solved.

    This is whose fault? They do have advertising budgets, I believe.

    to say as many have that Detroit was making cars ‘that no one wanted’ is rubbish: the market wanted all the SUVs they could produce, until it didn’t.

    Lack of diversification in their product mix was a business decision that went horribly wrong. Inertia is not the culprit – corporate strategy so bad that a first year MBA student could avoid it is.

    Advertising: yes, because all it takes to alter a deep cultural meme is to throw dollars at it. Since we all implicitly believe advertisements.

    Diversification: there were, and are, car models for every taste in the product lines of the Bailout Two. If demand had shifted from SUVs to gas-sippers in the same time frame that it takes to alter the manufacturing mix and empty the pipelines, the story would be different. But a behemoth is by definition not agile. When a shock hits the system, consumers can react 10x faster than suppliers.

    This is, IMO, the place where the best changes can be made, in reducing friction and improving agility. It would be wrong to assume that the car companies don’t realize that.

    As I said, there were mistakes enough made. I don’t believe this post articulated them, though. It’s mainly repeating tired catchphrases, and simplifying beyond reasonableness.

    Maybe BK is the answer, in the long run. But I don’t think it ought to be the first thing tried.

  17. Maybe BK is the answer, in the long run. But I don’t think it ought to be the first thing tried.

    Why not? EVERY other industry(unless you’re a financial services company) has to deal with change this way. If you’re too big and unwieldy to change with the market, you don’t deserve to be around. You didn’t plan well enough.

    The Big 3 went with SUVs because everyone wanted them. They did not have a plan in place for when the winds shifted. Things change. They were blind-sided by it and don’t deserve a pass just because they’re too big.

    And maybe, just maybe, that’s part of the problem. When things get too consolidated, too big, it’s bad for us in an unstable economy such as we are facing right now.

    Essentially a lot of people are now classifying the Big 3 as ‘niche’ companies. They do SUVs and that’s their focus. When society’s desires change, niche markets disappear. Buggy whips anyone?

  18. Jim Mack,

    Your points illustrate how hard the task of “fixing” the Big three is. This is the “inertia” you describe. What you don’t do, is explain why you think this:

    but it’s not entirely unreasonable, given the situation in the larger economy (which of course GM didn’t cause), to offer loans that can keep the wheel turning until the good effects of inertia can take hold again.

    I think it is entirely unreasonable, because they had plenty of time to reform their business, change their product mix, and convey why potential customers should want to buy the cars they make. This is 100% a union payola scheme – why do you think making them interminable loans and giving away taxpayer dollars will incentivize the company to be better?

  19. In other news; the CEO of Honda (a car company which is actually profitable) is stepping down.

  20. It’s all primarily about the UAW pensioners and their gold-plated benefits. Current autoworkers don’t actually make much, if any, more than workers at the Japanese-owned plants. But retired autoworkers also vote in UAW elections and are represented by them, and therefore the “dead hand” of people who retired 30 years ago is working to suck up taxpayer dollars. The ongoing car-manufacturing capability of GM and Chrysler has little to do with it, other than as methods of paying off the retirees.

  21. Can you imagine an “American” car company’s CEO from GM or Ford saying something like this: “”It is very important to have a generational change in management every few years,” said Fukui”?

  22. ChrisO is right about the UAW.

    The average cost per hour for total compensation for GM is around $80 versus about $50 or so for Toyota, here in the U.S.
    (I am rounding off, don’t have the figures with me)even though the hourly wage is roughly the same.

    Basically, the tax payer is forced to make up the difference between a more efficient operation and a less efficient one.

    Something’s wrong with this picture.


  23. The average cost per hour for total compensation for GM is around $80 versus about $50 or so for Toyota, here in the U.S.

    Basically, the tax payer is forced to make up the difference between a more efficient operation and a less efficient one.

    Malcome Gladwell made a good observation about pension funds in one of his books. It ran along the lines of: Productivity increases over time allow fewer workers to make more goods. Pension funds get funded by current workers. Therefore the larger cohort of retirees must be funded by ever smaller groups of current workers. His solution was guvmint pensions for all (that way new industries would pay into the plan as well as old ones). The internal logic is consistent – but of course it’s complete crap – even if his initial observation is prescient.

  24. Easy answer: Don’t ever buy a GM or Chrysler vehicle again.

    Even though you are going to be paying for them, at least this way we can minimize the extortion.

  25. The average cost per hour for total compensation for GM is around $80 versus about $50 or so for Toyota, here in the U.S.
    (I am rounding off, don’t have the figures with me)even though the hourly wage is roughly the same.

    And even despite that difference, GM has slashed its hourly work force so dramatically that current labor costs are not the biggest problem it faces. If GM could make its crazy pension liability go away, it would be on more or less level footing with Toyota and Honda, AFAIK. At least in terms of costs. Whether they can actually design a competitive vehicle is another matter. I test drove just about everything a couple of years ago when I was looking for a car, and the Big Three came up short in every instance.

  26. No one here moaning about the 1 Trillion the banking industry got. Btw – my 07 Fusion is a fine ride.

  27. Buying a car is not only a major financial decision, but also a major personal decision. Do you want your son or daughter driving a GM car that may break down in the middle of a bad neighborhood at night? The country’s rejection of the Detroit automakers is clear as a bell. I’m afraid Obama might look at GM / Chrysler as Bush looked at Iraq. Bush honestly thought he had enough money and power to make Iraq work. Similarly, Obama may honestly believe he can make GM / Chrysler better. And, like Bush in Iraq, Obama may be willing to spend literally a trillion dollars on this “pet project”. I happen to like Obama a lot, and I admire him for honestly caring about the current economic situation. But if he continues to prop up the Detroit automakers, I’m afraid he’ll be wasting money that the country can’t afford to spend right now.

  28. Mr. Chapman,

    Great article, but I have one quibble. As most people do when they read the story of the prodigal son, they miss the important point that the father makes to the oldest son. “Son, you are always with me, and all that is mine is yours.” Luke 18:31. The youngest son had already received his portion of the inheritance and had forfeited his right to demand anymore. At this point in the story all he was able to do was to throw himself on the mercy of his father and adopt an attitude that such mercy requires. How does this apply to American car companies? I don’t know, but I don’t see the car companies or their unions being very humble at this point.

  29. I’m not sure that the parable of the prodigal son is analogous. First, the message of the parable is dependant on the father-son relationships, and the state is not in a father-son relationship with automakers (yet) and thank God for that. Second, the prodigal son was prepared to say “I have sinned against heaven and against you; I am not worthy to be called your son. Accept me as one of your hired servants,” not “I can’t stay competetive in the marketplace, so give me a bailout.”

  30. Detroit is not our prodigal son for many reasons – one of which is that it is not truly repentant. They are not now prepared to turn from their bad behavior and get into line. They just want to be bailed out. And if they don’t change – they will just be back for more.

    I would be happy to assist people who were truly determined to change. But people just want relief from their pain. If we are not careful – we will just continue to enable foolish and ruinous behavior.

  31. With respect to “irreverent” products… while the environment zealots may have you brainwashed, the fact is that for every product GM makes, Toyota has a matching product. Toyota makes big trucks, SUVs, and luxury cars with horrific gas mileage. Now that Toyota is producing vehicles at the same volume as GM, it is suffering from quality issues. Last year, Toyota recalled more vehicles than GM, Ford, and Chrysler combined. The Prius is a great product, but its technology is nothing compared to the Chevy Volt.

    As a libertarian working in the auto business, let me propose a thought or two:

    For all intents and purposes, the government has been running the automotive industry for years. The government is the root of nearly every ‘bad’ decisions that the auto industry has made over the past 40 years (state-by-state dealer franchisee agreements, the labor and environmental lobby, etc.). The trouble being experienced by the automakers is a natural culmanation of an overbearing Federal Government.

    The US auto industry created the middle class. It established the system by which private companies – not the government – provided competitive wages, health care insurance and a retirement plan. Conversely, every foreign car maker is subsidized by its government – be it direct subsides, socialized health care systems and/or retirement programs. It is the legacy costs that puts the US auto makers at a disadvantage to foreign competition.

    So let me pose a question to all you free-market libertarians… If the US is to compete globally with socialist countries, how do we maintain a manufacturing base in America? Do we just forfeit all our manufacturing capabilities and rely on other countries to build everything for us? We could take a protectionist position, but it doesn’t sound like you are willing to give up your Corrollas and Civics. What is the free-market solution?

  32. Yeah, it’s all about the moral hazard, as we wrote a while back.

    And now we’re going to be treated to another inning of “beggar thy neighbor,” in a literal sense, via the president’s HASP program to bail out some homeowners.

    No wonder the new Tea Parties are starting!

  33. It is very easy to criticize the Detroit 3 but remember their workers are paid about what Michigan state government workers got. Michigan is evidently eternal, GM is not. The US taxpayer also transfered funds from the Detroit 3 to the military industrial complex allowing other countries to develop their industries at the expense of the Detroit 3. I have never understood Michigan politics, it seems delusional.

    One solution is to bail out the Detroit 3 by combining their pensions and healthcare plans with those of the workers for the state of Michigan. that’ll fix’em. It is possible that state benefit cuts, existing auto worker pension assets and some fed money might make it possible. Good luck.

    A second solution, reduce pay and benefits to Michigan government workers, and use the money to buy shares in the Detroit 3. The need to get a return on those shares will realign the interests of the state workes with the auto workers.

  34. I plan to boycott any company which receives a government handout. That includes especially the big 3, their crappy products and their financing arms.

    F-em.

  35. tim – you mean GM and Chrysler. Ford is not part of the bailout

    Ming – I trust my life to a Chryco product and I have never been stranded. My girlfriend trusts hers to a Malibu, and she has put 50,000 miles on it in two years without issue…and she bought it with 67,000 miles and as a SALVAGE title.

    Yes. I would have my son or daughter drive GM or Chryco (or Ford). I would trust them far more than Nissan, Suzuki, Kia, Hyundai, Volkswagen, etc, all of which actually have WORSE reliability ratings according to JD Powers. Mercedes is less reliable than Chrysler. Just because you or the majority of Americans have the INCORRECT perception that American cars are worse doesn’t make it true.

  36. PC, you are on to something here. I am also a libertarian who works in the auto industry. I currently work for an Asian manufacturer, used to work for one of the big 3 and as a supplier I worked with all of them at one point. I see that they all have strengths and weaknesses. For one thing although the Big 3 have lost a lot of market share, selling 43% of America’s vehicles does not constitute total rejection by Americans.

    I’d really like to see a good libertarian analysis of all the ways government policy has contributed to this. Think about this for a moment – if one of the big three were failing right now, you could argue that it is just creative destruction, the market working properly, etc., but for all three American car companies to be in the same boat at the same time (Ford is only marginally better than GM and Chrysler right now), seems to indicate some larger common cause or causes. Does it really make sense to argue that all the American manufacturers are in trouble at the same time because they are too stupid to figure out how to sell cars to customers in their own home market, while the foreign car companies outsmarted them?

    I don’t like the bailouts, even though it has indirect benefit to my own personal situation. My fear is that as the government gets more involved it will in its usual manner drive these companies to ruin, and spend enormous amounts of taxpayer dollars in the process (this is what happened to the British auto industry).

  37. It is true that GM, Ford, and Chrysler failed to differentiate their product line, but this was done for fairly solid reasons, actually. Obviously, demand for large vehicles was high ten years ago, but also the profit margin on large cars is much higher than small cars: The amount of labor required to produce a truck or SUV is actually not much more per employee than producing a small efficient car, so yields much higher profit per vehicle sold. So with higher labor costs than, say Honda, they simply had to make big cars. There is no way in hell they could have competed with foreigners’ small cars at equal price points. Their labor costs are simply too high to even allow them to make smaller cars profitably.

    The fact that GM is profitable outside of the USA and does well in foreign markets is telling of the destructive effect the UAW has had on the company. It is the managements’ fault for not effectively dealing with this.

    What I do not understand is why the CEO’s of these companies are even asking to be bailed out. They should warmly welcome bankruptcy so that a judge can rip the UAW contracts to shreds and allow the companies to be profitable again. They know the situation, yet seem to want to continue the status quo and to allow the UAW to continue strangling the company. Why?

    Get the fucking unions out, and I will happily support aid. The best choice, however, is bankruptcy.

  38. ….There’s no real difference now in quality, among cars at the same price point….

    Nonsense.

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