Big 3 bailout needs strict terms

Daniel Sims, Staff Columnist
Published On: 11/17/2008

The U.S. auto industry is in trouble. If you’ve missed the news from the past month, both Ford and GM are on the verge of insolvency. GM especially has posted record losses in the billions of dollars.
The declining fortunes of the auto industry are nothing new though. For the past 20 years, the market share of American car makers has been gradually declining. American automakers close plants and lay off workers while foreign manufacturers are opening new plants here.
I heard an economic analyst discussing General Motors, and he posed the question is GM a health insurance company that happens to sell cars or a car company that happens to provide health insurance?
His point was that the amount of money GM spent providing health insurance for some 780,000 individuals outstripped the amount of money spent on what is its primary business — making cars.
Of course if GM was rolling in cash, it wouldn’t really matter how many people they were providing health insurance for, but they aren’t rolling in cash, they are on the way to the poor house.
Curious about the actual product behind the controversy, I decided to talk to someone who works on the product; an automotive mechanic. I spoke with a mechanic who has 11 years of experience working as a general mechanic and as a specialist in both American-made and foreign-made exhaust systems. The question I asked was what difference exists, if there is one, between American-made and foreign-made cars?
His response was the difference lays in the materials used. In his experience, the materials used in the construction of American cars are not as high quality as those in foreign cars.
The example he gave was that an American-made car may have four engine mounts, a sufficient number to hold the engine, but if one fails the car will vibrate violently and it has to be taken to an auto shop immediately.
A foreign-made car of similar price may have as many as eight engine mounts. The mechanic told me this is a general example of the difference in quality between domestic and foreign cars.
After some thought, and recalling basic economic principles, we can imagine the business components of the automotive industry this way: Labor, materials, fixed costs, and profits are all things which take a slice of the auto sales “pie.”
Each car sold for a certain price has that money distributed back among those four things. Two of those things, materials and fixed costs, are what you can call quiet partners in the business. They are quiet because unless something really bad happens you never hear about the materials used in the car, and most of the fixed costs, like the physical factories, have been around for a long time and were long ago paid for.
Either way, neither of these two quiet partners has any real advocate out there trying to get automakers to spend more money on them.
The other two factors, labor and profit, are what might be called the special needs children of the auto industry.
Every year, unions and management struggle over how big a share each are going to take of the pie. Unions representing labor want their fair share and management representing profits want their fair share. The pulling by the unions at one end of the rope and the pulling by management at the other end leaves very little left over for the quiet partners of materials and fixed costs.
The result is that both the “special needs children” end up taking more and more from these quiet partners so that materials and fixed costs suffer.
Materials suffer as the barest minimum of materials are used to build American-made cars, and fixed costs suffer as aging factories and equipment are not replaced with newer more efficient facilities.
The answer, of course, from the automotive industry is to ask the government for a paltry $25 billion to help modernize their facilities.
The result of allowing domestic automakers to go under would be catastrophic, but to give them this money without requiring them to change the basic tenets of how they operate is a mistake as well.
The compensation to both workers and executives is excessive. The idea a high school graduate can work 30 years and retire before age 50 making $60,000 a year with health insurance for life for his entire family is absurd.
Equally absurd is the idea some business school graduate, who has good connections, can get a job making tens of millions of dollars for doing virtually nothing beyond attending meetings and issuing a few memos.
If we give $25 billion without requiring reform of these two obvious deficiencies the crisis isn’t averted, only delayed.
A better use of the $25 billion would be to buy us all a Toyota.

Email: drake7@uab.edu