Wednesday, December 10, 2008

But does anyone want to buy their cars?

David Leonhardt has a great piece in today's New York Times, explaining why the Big 3 auto manufacturers are really in trouble (hint: it's not simply the labor costs)
"...here’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits. That’s roughly the gap between the Big Three’s retiree costs and those of the Japanese-owned plants in this country. Imagine, also, that the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour — the same as at Honda and Toyota.

Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800.

That’s because labor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say. Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler."
When you exclude the cost of pensions, GM, Chrysler and Ford offer compensation packages that are close to what foreign manufactures pay their American, non-unionized labor.

But the real point is that American's are being asked to bail out companies that don't make products people want to buy. That seems like a bad strategy to me. We can bail these companies out, we can subsidize their production and we can protect them from competition. But unless we require American's to buy their cars* (now there's a Patriot Act for you!) then these companies won't be profitable. I wish Congress would acknowledge that. The real problem is that the Big 3 make sub-par products in the US that are out of touch with consumers.

Until they fix that problem, we shouldn't be bailing them out. You can't help an addict until they admit they have a problem.

*Please note this is sarcasm. I don't think we should do this.

1 comment:

Tom said...

I'd like to point out that the govt could buy ford and GM for less than 10 bil at current market prices... of course, GM is a bargain at 4 bucks a share... they only lost ten times that much per share this past year...

if they do anything they need to wipe out the shareholders completely, but you know they won't.