Will Detroit’s Loss be Japan’s Gain?
Posted on: December 5, 2008 - Email Article - Printable Version
As anyone who has picked up a newspaper recently can tell you, Detroit’s “Big Three” auto makers are in trouble. So much trouble, in fact, that they might soon be known as the “Bankrupt Three.” On December 2, the three crippled American car producers issued a report to Congress essentially showing that General Motors [GM: 0.75, 0.00 (0.00%)] and Chrysler could collapse before the end of the year, barring massive emergency loans from the government.
Last month the Big Three asked Congress for $25 billion in loans to carry them through the difficult economic environment. Legislators, however, declined the proposal due to doubts over the ability of the companies to return to profitability and subsequently pay back the borrowed money. GM, Ford [F: 11.70, +0.09 (+0.78%)] and Chrysler were asked to put together a report (to be presented on December 2) specifying how the loans would enable them to “become viable.” Unlike GM and Chrysler, Ford said it doesn’t require federal funds immediately, although the company did ask for a $9 billion credit line.
A reorganization through bankruptcy is an idea tossed around by many banking and financial experts. The companies could emerge as smaller, slimmer auto producers able to stand on their own two feet. GM and Chrysler, the two that would most likely need to file for bankruptcy, do not believe it is a viable option for any auto maker. They claim the stigma of a bankruptcy would cause consumers to stop buying their vehicles, further exasperating the main issue of plummeting sales.
No matter what Congress decides, the death of the Big Three dynasty seems imminent. Gone are the days of U.S. market share dominance and “Buy American” mantras. According to a recent Gallup poll, nearly 50% of Americans oppose a federal bail-out of the U.S. auto makers. The misguided mentality of “what’s good for the U.S. auto makers is good for the U.S.” is fading, as people realize any protectionist economic policy hinders the international free markets and hurts the consumer.
If Honda [HMC: 33.8606, +0.0606 (+0.18%)] and Toyota [TM: 68.05, -0.78 (-1.13%)] can make inexpensive, quality and energy efficient cars while Detroit can not, then let GM, Ford and Chrysler fail, taking their bloated union pension plans health-care benefits with them.
Land of the Rising Market Share
The Japanese auto makers have been building a presence in the U.S. for decades. Honda and Toyota’s market share steadily rise, and both companies have multiple production facilities in the States. The companies’ newer and more advanced factories are one of the reasons for their success over Detroit. While plants run by GM, Ford and Chrysler may take weeks
to switch assembly lines to produce a different model, the newer foreign-owned plants can do so within a day. This enables the factories to maneuver quickly in the face of changing demand outlooks and model profitability.
Another huge factor in Toyota’s and Honda’s profitability is labor costs. According to the Center for Automotive Research, wages for workers at U.S. car manufacturers average around $28 an hour, compared to $26 for Toyota and $24 at Honda. The more significant cost difference stems from the grossly generous pension and health-care packages granted to members of the United Auto Workers labor union. When including benefits, the average Detroit auto worker makes approximately $73 an hour, while non-Detroit producers pay around $44. With Honda and Toyota paying 40% less for labor, it is no wonder they can remain viable even during economic downturns.
The question remains: Will Detroit’s failures help Honda and Toyota? For the past few years, Detroit’s inability to produce quality vehicles outside the SUV and truck space has enabled foreign auto makers to quietly, but steadily, accumulate loyal customers for its small and mid-size cars. Now that SUVs have lost their popularity, the U.S. auto producers must rely on the rest of their line-up, which have razor-thin profit margins due to massive labor costs.
Falling sales, tiny margins and a damaged public image will have a long-lasting effect on GM, Ford, and Chrysler, no matter what Congress decides. Billions of dollars in loans may keep the companies afloat, but eventually the holes in the boat need to be fixed. Repairing the holes of the USS Detroit (i.e. lack of innovation, too powerful unions, and poor public perception) will takes years, if not decades to accomplish.
Some argue that the rising market share of the Japanese autos is insignificant as overall sales fall. However, the recession will not last forever, and eventually the American consumer will return. When he does, he will need transportation. After this public debacle with the U.S. autos, odds are he will be going to a dealership bearing a Japanese brand name.
-Harry Lacheen
Disclosure: None.
The Following Stocks Were Mentioned In This Article: F, GM, HMC, TM
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Interesting article. I think the ultimate problem in this matter is that the domestic auto companies have a toxic product. A bailout loan will only buy time, but if these companies fail to use this time to improve their product then it will prove to be a waste of taxpayer money(if they do get bailout money). An interesting idea, probably unrealistic and very unamerican would be for the governement to broker the sale of the Big 3 to the Japanese auto makers at a discounted price with minimum US employee quotas and benefit packages. This will insure the underlying problem in the US with the hundreds of thousands of employees that the Big 3 have, while giving the Japanese automakers with their superior product a chance to capture and secure this precious market share and eliminate the possible return of the American auto maker.
In the retail end of this whole debacle, the reality in the auto industry is that American cunsumers are purchacing Japenese automobiles more than ever before! The perception is that there is a substantial difference in quality, and resale cannot be matched by detriot’s product. I see this day in and day out – the only exception being the full size truck – Suv market. Ive been the Used Car Manager(Ford) for the largest dealer group in wisconsin for 4 years and have been in the buiz for 13years. In that time I’ve sold new: Toyota, Honda, Nisssan, VW, Chevrolet, Buick, Pontiac, GMC and Mazda vehicles.
I can say confidently that ford motor company’s product has achieved excellence on par with any of the foriegn products. So then, why are sales so tough to come by these days? The simple but factually accurate answer is perception. However, perception isin’t necessarily reality, but reality(slumping sales)is truely perception’s child. I think that detroit would do well to rid itself of socialistic tendencies, especially given that the competition more closely adhers to free market ideals and pays almost half for labor. At the turn of the century – industrial revolution times, when 12 year olds were chained to dangerous textile machinery, labor union’s had at least one worthwile purpose, but today they serve they’re own needs, lineing the pockets of few, and influencing many. Most people are unaware that the father of Communism karl Marks visited our nation for a time, and his critique was that once the people realize that they can vote themselves the money the system will bankrupt itself. Detroit is a victim of these time tested, failed ideologies.
Well said, you seem to be one of the few who understands the situation. If Ford can find a way to overcome the perception with reality, they can own the market with a combination of their more recent new products ( Fusion, new Focus, Taurus ) and their market dominating products such as F Series, Econoline, and even Explorer which still leads the pack even if it is a much smaller pack. They must overcome the perceptions to regain the market share that their products deserve.