Reading Thomas L. Friedman in the New York Times, he blames the GM, Ford, and Chrysler along with the Michigan congressional delegations for their situation today. My question is pretty simple, why are GM, Ford, and Chrysler in the situation they are in today?
It seems that people blame the Big 3 and the Michigan congressional delegations for the situation they are in today because they do not support improved fuel efficiency standards that would be for their own good. How much has that contributed to the downfall of this industry and what role has government played in this. It seems to me that the Big 3 have suffered from inferior management, poor quality standards, and burdensome labor contracts that have led to their downfall in comparison with the foreign automakers. I remember reading that Toyota opposes increased fuel efficiency standards as well. There seems to be an argument that central planning could better run these companies than private management…is there any truth to this?
No truth whatsoever, it’s central planning that is ruining the great american auto industry, that was once the considered the great champion of american industry.
Subsidies reward and provide welfare for bad decisions.
Tariffs on foreign cars reduce to need for the BIg 3 to be competitive.
Unions and minimum wage laws greatly increase the costs of labor and greatly decrease the quality of the produced vehicles.
Bailouts provide an income to companies that no longer service their customers.
The only significant customer of american cars is the government. I believe there’s a good article on the subject but I can’t quite find or remember what it’s called.
One funny thing many Americans forget is this: foreign automakers have been “smarter” than their US counterpart. While GM and Ford were paying billions in benefits to their workers Toyota, BMW and all the rest have simply skipped that part and jumped on the socialdemocratic wagon. If a BMW worker is ill he won’t need health insurance because the German taxpayer will foot the bill; when a Toyota worker retires the Japanese taxpayer will pay his pension. If you want to go one step further these comapnies will get generous incentives: it’s not a secret that the Japanese government directly funded a good part of Toyota’s hybrid drive. That’s as easy as it gets: socialize losses and privatize profits. One day the system will crack and go under but until then it’s a win-win situation for the automakers.
About the fuel efficiency part: the problem is that internal combustion engines can only be that efficient (applied Carnot’s cycle) and the closer you get to the maximum theoretical efficiency of a powerplant the more expensive it becomes in both research and manufacturing costs. And don’t forget that present day cars are getting heavier by the year: more weight requires more power, hence more fuel. Why are cars getting heavier? Partly because the market is favoring large cars (often with minuscule engines), parly because of the equipment required by buyers and, ironically, to make the car more enviromental friendly, partly because of safety legislation. This last part is particulary lamentable: by using race derived technology you could manufacture a very safe and very light car but it would be immensely expensive to manufacture and hence it would be less palatable to buyers. An example of the too-advanced-and-too-expensive car was the Volkswagen Lupo 3L, a small, diesel engined car which was supposed to be able to average around 80 mpg (Imperial Gallons). It was horrifically priced (it was much lighter than a stock Lupo but built to the same safety standards), required very extensive maintenance to be fuel efficient and in normal traffic conditions it wasn’t much more economical than a normal, much cheaper Lupo. In short it was too higly priced for its own market segment and quickly became a collector’s item. Oh, and I forgot to mention that buyers weren’t too thrilled about the stock Lupo anyway…
And another thing: I’ve never understood this. If a large company risks going belly up everybody will start crying about the thousands of jobs lost, but when a small comapny goes bankrupt nobody will shed a tear. At which point does a company become eligible for a bailout: 10 employees? 100? 10.000? Maybe it has something to do with the fact that large companies are often in cahoots with large trade unions?
One final word: want to see how efficient is the State at taking over automakers and building cars? British Leyland, enough said.
Is central planning better than non? Well, the answer to that is no, but to explain you have to think about how living systems on Earth do their work.
In this case, think about a flock of birds like starlings that go through evening flights together that are complex and very hard to understand from the outside perspective. Namely, how do they all know how not to collide with each other while they perform their complex flights? The answer is that they don’t know what other birds out of line of sight are doing at all in their flight paths, instead they focus on their neighbors to get cues when to speed up or slow down and to move toward a certain direction in flight. This locality of their pool of information is how they are able to build up complex flight patterns in these evening flocks. If one were to attempt the same feat with a central system storing, sorting, and computing the flight paths of the entire flock in real time then one would have a hard time producing an algorithm able to capture that behavior, even cellular automations don’t capture the features of complex systems in their fullest form. Instead, it’s been found that the locality of the information itself as it happens in Nature allows for seemingly unconnected entities (or sets of entities) to interact in an organized (almost concerted) manner since each entity (or set thereof) focuses on capturing their own actions as information to its fullest for which neighboring entities (or sets thereof) can respond accurately in kind. Hayek called this behavior Spontaneous Order. It’s this spontaneous order that has been the foundation of the actions of the starlings, or schools of fish, the neural firing in your own brains, and the economy itself.
In turn, the attempt to declare efficiency standards from the top-down as Congress has done hasn’t spurred the search for better combustion systems or systems that are combustion free (electric-batteries or fuel cells), rather they’ve spurred a hostile reactionary response in kind. Oddly, though, Honda has decided to bite the bullet not due to efficiency standards, but in spite of them, and focus on their future lines of cars (2010 I believe is the deadline they’ve set for themselves) to be totally non-petrol based engine systems (totally electric-battery based). And the reasoning for this deadline is simple: petrol is costing more on average for their customers than the car itself, so if they can pass on savings by the use of alternative engine systems, then that improves their sales in turn (as people will buy their electric-battery only cars on the view that they’re more valuable due to fueling costs being much lower than their petrol counterparts). Thus, top-down (central planning) controls on any economy cannot work out to predict the individual wants and needs of customers as the same issue with attempting the same action with a flock of starlings in flight arises: how do you compute constantly varying information for the whole of a system in real time and with accuracy? The answer is obvious, you can’t, so allowing others to focus on segments of the market place allows for diversity of solutions to arise, some being more inefficient than others, thus dying out from lack of adoption or simply being too expensive to continue on, and this diversity also streamlines the methods to produce the ‘right’ goods/services at the ‘right’ times/places conversely (due to locality of the information in each segment of the market place).
I hope my answer helps you understand the situation more so. shrugs
In the 1950’s, a lot of European infrastructure was still in ruins and there were trade barriers for imported cars. The Big 3 were happy to sign ultra-generous CBA’s with their unions at that point since they could just pass their inflated costs on to consumers. Now that they’re no longer the only game in town, the labor and legacy costs are just too high but the companies are still run as if it’s the 1950’s.
Re: fuel efficiency, it’s not so much that they opposed the standards. They just assumed consumers would keep on demanding the huge boats their engineers loved designing and when gas prices soared, they opposed the government’s attempts to impose standards. But the standards themselves were irrelevant. If fuel prices go up, the market will demand fuel efficient cars. Consumer demand changed, and the Big 3 were still designing huge, boxy sedans and, later, SUV’s and those awful Hummers.
Another factor was their horrible management of their finances. Basically, they engaged in a bunch of LBO’s of their competition (Saab, Volvo, Jaguar) so they have competing product lines and US cars just don’t have the cachet they once had. So they’ve got languishing product lines with all these idle employees and plants to support.
Again, failed business model, not lack of central planning.
If the federal government had strengthened fuel efficiency standards even more so five or so years ago, would the Big 3 be in the same situation they are now? Many in favor for more regulation feel that improved environmental standards would have pushed the American automakers away from the big SUVs that they cannot sell now and towards highbrids? Is there something to be said for this?
They need to go out of business (or change their business plan) as soon as they are no longer supported by their profits or customers. Its common sense. Its one of the most basic and essential functions of the market