Sunday, November 23, 2008

The Illusion of a Green Auto Market

I keep hearing people proclaim the lack of foresight on the part of the Big Three in making more fuel efficient cars to meet market demand.

While this is, in part, true, it is not a prescription for saving them. Retooling to make more fuel efficient cars isn't going to drive up demand for Big Three autos. In fact, demand doesn't need to be driven up! Just look at the numbers. GM is outselling Toyota worldwide. Ford is outselling Nissan and Honda. So if the Big three are outselling the rest of the world, how are they going bankrupt?

The reason that Detroit has focussed on making pickups and SUVs is that it was the only place they were profitable per unit. Their operating costs are just so much higher than the Japanese, and the smaller, cheaper cars lose the profit margins necessary to keep the Detroit companies afloat. Take a look at the graph on this page.

So where do those operating costs come from? Here are places to look:

1) Union wages and benefits: GM's cost per hour of labor? $84. Toyota's cost per hour of labor? $48. This adds about $2000 to each car produced by the Big 3. This, in turn, drives them to push their pickup and SUV lines, as it's the only place with enough profit in it to cover that $2000 cost. ($2000 out of a $32,000 price tag, is a lot easier to deal with than $2000 out of a $14,000 price tag)

2) Healthcare and pension (union and non-union) costs for employees in America:

Surprising note: GM's pension fund is fully funded, and not a source of woe for them! Who knew?! But largely, the cost per labor hour above isn't just union wages, it's benefits, and that includes non-union employees too. Japanese plants benefit from having the government pick up the tab for healthcare.

3) Operations efficiency:

Another surprising note: Detroit's factories and suppliers seem to have caught up since the 90's, at least in labor hours/vehicle. But even assuming that labor hours per vehicle are equal, $84 x H > $48 x H, where H = hours to make a car. I think it's safe to assume that parity will exist between the Big Three and the Imports in this area for the time being.

4) Dealer Network:

This is a big problem. Domestic dealerships are trying to hang on from the days where 90% of cars on American Roads were American. It's under 50% now. They need to stomp some dealer contracts, and much like union contracts, they won't have any incentive to do it given a bailout.

4) Executive Salaries:

I don't have hard numbers on this, but even assuming that the Big Three is Millions of dollars above the Japanese on this front, it's still a drop in the bucket in operational cost. It's largely a symbolic thing, and I'm kind of tired of hearing about it. (However, if you have a source for hard numbers, please send it along!)

If you can think of any areas I've overlooked, please let me know. But as it stands here, I can't see a way out of this mess sort of massive retooling of Union contracts and Dealer contracts. Making smaller, cheaper, greener cars will expand the gap in profitability between the Big Three and Japan, not decrease it. And it doesn't matter how many small green cars you sell, when you lose money on every one, you just end up losing more money if you build more of them.

Since the Democrats are in control of everything right now, they are going to have to decide a winner and loser with this bailout. There is no middle ground between the Labor dems and the Green dems on this issue. The UAW has bled the Big Three out, and made them incapable of surviving while building green cars. So when people talk of the bailout, we need to realize that we're really bailing out the Unions, and not doing anything to help American auto companies survive in the long run. Giving the Big Three a check in order to "let the Big Three retool to meet the demand of a greener market" is a pipe dream. There is no panacea to be had on this front. If the Federal Government props up the Big Three, they are just kicking the can on further down the road. And given how they've treated Medicare and Social Security, I won't put it past them.