Regnat Populus

The people rule.

Posts Tagged ‘Big 3’

Roots of Auto Makers’ failure..

Posted by Max Barron on December 27, 2008

With the beggary of the auto makers and subsequent bailout using TARP funds, courtesy of Pres. Bush, the auto makers have drawn a considerable amount of public attention.  With that a lot of public ire as well.  The question is, is that ire pointed in the right direction?  I have heard a lot of belly-aching over the mismanagement of the companies by the the executives.  Are they to blame?  They certainly played a roll.  Though I am of the opinion that they may have been able to fix their own mistakes if there were no other factors involved.  I’ve seen many in the pundit circles heave the lion’s share of blame on the UAW.  I can’t say that I totally disagree there.  However, the UAW with all of its faults, is not the root cause.  I am the type of person that always looks for the underlying root cause of things.  You can treat symptoms until your blue in the face and they’ll keep coming back.  If you find the illness and treat it… the symptoms go away by proxy.  The same thing applies here with the auto industry.  The root cause needs to be identified and fixed.  Or no amount of bailouts or concessions will return these companies to full viability.  So, what is the root cause, you ask?

Like almost everything else that goes awry in the free market world… The Government!  That’s right, the U.S. Government is the underlying illness of the auto industry.  While this particular side of the Auto Maker’s problem has been spoken of, it hasn’t gotten nearly enough attention.  Ironically, those that have given it the publicity it deserves have been in favor of bailing them out.  Citing that since the government caused the problem they should pony up the dough. (The inherent barrier to this particular argument is that the government has NO money.  They use our money.  We didn’t cause the problem, why should WE pay for it?).  I know, I know, but but but the evil UAW!!  While they certainly are to blame for their fair (and rather large share) of the problem, again, they are not the root cause.  They could not have inflicted the damage that they have, through their own greed, if they didn’t have the backing of members in Congress.  I won’t be going into too much detail regarding the relationship between UAW and Congress.  As I will be covering the relationship between Congress and unions in another post.

Instead I will be focusing the majority of my attention, in this post, on the stifling mandates that were crammed down our auto industry’s throat.  There are so many convoluted and ridiculous mandates that it would take forever and 20 pages to go through them all.  So instead, I will talk about the most inflammatory, ridiculous, obnoxious, fool-hearty, anti-free market mandate of them all.  CAFE standards.  The standards celebrated by our tree-hugging global warming fanatics.  The standards lumped onto the camel’s back with no care for the fact that it left but a straw’s worth of weight in the camel’s carrying capacity.  Now I know the arguments in favor of CAFE.  I know that people think it reduces the amount of pollution we expel into our environment.  It helps save us from ourselves.  If you want to know what I think about that, read here.  But before I move on allow me to dispel a myth here.  CAFE reduces nothing in the way of pollution.  I know, I know, “those standards increase fuel economy and therefore we use less fuel and pollute less”.  While CAFE may FORCE companies to increase fuel economy it does not actually reduce the amount of fuel consumed or pollution expelled from vehicles.  Studies have shown that since our vehicles get better mileage… we simply drive more and drive them further than before.  Thus using MORE fuel and pushing more pollution out of our exhaust pipes.  Essentially CAFE does more harm than good for the environment.

Moving on.  What happened here is once again Congress, in their infinite ignorance, dipped their hands into the free market and muddled things up.  How are CAFE standards and mandates tinkering with the free market?  Simple.  In a free market the consumer decides the fate of a company.  We do this with our purchasing power by purchasing the items that we want or need.  If enough people purchase an item from a company… that company’s competitors will most likely begin producing that product (or they likely will fail).  Other companies will begin trying to improve upon the products that their competitors are producing in order to gain market share.  That is how free market works (yes I am over simplifying it a bit).  You and I, the consumer, control what products and companies succeed or fail.  What Congress did, in essence, was decide by mandate what you and I get to buy.  They did this by forcing our auto manufacturers to change not just their product lines, but also the way that they are produced.  Aside from the initial cost of retooling all of their plants they also had the added cost of redesigning their fleets.  In order to keep the already rising cost (thanks, UAW) to purchase their products down they had to start skimping on the quality materials.  They had to make vehicles lighter or heavier to meet the fuel efficiency marks set by CAFE.  The extra costs from this are also rolled into the price.  (Keep in mind that none of this was due to consumer demand.  We were still demanding what they already made.)

Price is tertiary to my main point though.  To illustrate my main point let’s look at GM.  When you think GM, what do you (or did you – pre-bailout) think of?  TRUCKS, big-freakin’-trucks & SUVs.  That is what they are known for because that is what they do best.  What’s the number one stolen vehicle in the US? The Hummer and the Escalade.  Both GM SUVs.  Their failure has nothing to do with people not wanting their products.  Clearly they do.  While GM makes a few good cars (most notably the Corvette and Impala) that isn’t their strong suit. People don’t want GM cars.  People want GM trucks… but they want them to be GM trucks.  Not Tonka toys.  They want that quality steel-frame, the metal paneling, the high-torque engine.  People want big safe SUVs and trucks.  GM can’t make those anymore.  They’ve had to trim that out to meet government mandates.  No more fully metal body on that pickup.  No more overhaul engines.  GM is being forced to make crap that we don’t actually want.  Why would I buy a GM truck that looks and feels like a Honda, when I can buy the Honda truck for less?

Many people are also not aware that cars cost about as much as a truck to make.  However, people expect cars to cheap.  Trucks have the luxury of having a much higher purchase price ceiling than the econoboxes. Anyone who has ever traded in upside down before knows that the higher the price of the car being traded on, the more wiggle room you have to hide the negative balance of your trade-in.  The same rule holds true for production costs.  GM can hide a lot more of the production costs in a truck than it can in a car.  Due to the higher cost of production for GM (versus, say, Honda) they have to essentially sell their cars at a loss.  So GM rolls that cost into their trucks.  So the trucks and SUVs get the roll-up from higher production costs and the negative selling of their cars.  On top of the fact that in order to cut production costs they have had trim back on the features in their vehicles. Don’t get me wrong.  GM has done some great things with their features considering the little room that they have to play.

Couple this with the political pressure to cut out GM’s bread and butter products (trucks and SUVs) and the exorbitant gas prices for the last few years and you have a failure stew simmering.  The last few years of extremely high gas prices have sent would be buyers of trucks over to the Prius.  It was the final straw.  However, I maintain that this would not have been a problem if the government had stayed out of the mix.  You see, if people wanted nothing but cheap and fuel efficient cars, GM & Chrysler would have killed off their other programs and gone over to cars on their own… or have simply perished.  The companies follow our demands as long as the government isn’t forcing them down a different path.  We demand big, safe, quality trucks and SUVs.  Let the company meet the laws of supply and demand… instead of perverting the supply in order to shift demand.  The political powers that be want us all driving econoboxes so that they can feel better about themselves.  So they force companies like GM to only make the junk that we don’t want (little POS econoboxes).  This in turn kills off viable supply of what we want, therefore; demand shifts to other products.  The trouble is that there are no products that we demand.  We are forced to purchase what we don’t “want”.  If I have to buy an econobox, chances are high that I will go with a company that makes them better than the others at a price that I like.  None of the Big 3 are on that list and due to mandates and the UAW simply they can’t be.

So there you have it.  If you want to point fingers… make sure they are aimed at Capitol Hill.  While there may be many factors that have contributed to the downfall of our auto industry, the government is the source of the biggest ones.  From their undying affection for the UAW to their blitheful machinating against the free market.  From head to toe they wreak from the stench of guilt.  So bend over America.  They stuck it to the Big 3 with their screw-ups.  Now their going to stick it to us for the bill.


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