Monday, December 8, 2008

Let 'em dangle


Businesses come and go. Some thrive. Others die. It's the nature of capitalism. Those that make goods or provide services that people want, while maintaining sound business practices, will thrive. Those that don't, well, they fail. The Big Three automakers are on the brink of failure, and I'm tempted to say we should let them do so, rather than give them billions to stay afloat. The only thing that gives me pause is the number of good jobs that will be lost, but the United Auto Workers union has to bear some responsibility for the current mess, and if GM, Ford and Chrysler were to be relegated to the dustbin of history, somebody else will make cars in the United States, and will need the skilled labor to do so. The UAW negotiated itself a jobs bank program in which, at last count, about 3,500 workers for the Big Three automakers were being paid up to 95 percent of their salaries for NOT working. At the same time, the bigwigs of the auto companies have been pulling down millions in salaries while running their businesses into the ground. Last week, Fritz Henderson, president and chief operating officer of GM, said bankruptcy reorganization was not a viable option for his company, because GM would lose consumer confidence, "and we want (consumers) to be confident in their ability to buy our cars and trucks." Number one, why shouldn't we just allow consumers to have confidence in buying Toyotas, Hondas and BMWs? They make good cars and trucks, many of them right here in the United States. Number two, many companies have gone into bankruptcy reorganization and emerged to become successful again. That suggests that consumers didn't abandon them just because they needed to get their houses in order. If the hardware store down the street from you goes under, nobody's going to come running from the government to cut them a check. Why should GM, Ford and Chrysler be any different?

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13 Comments:

Anonymous Anonymous said...

The big misconception about the auto makers going bankrupt is that the millions of workers will be out of work forever. That's a fear tactic by the UAW and the ownership of the the Big 3. Someone will step into the void and resurect the auto industry, this time at realistic wages and with a better product.

December 8, 2008 at 12:17 PM  
Blogger PRIguy said...

I just don't see why the taxpayers have to bail out the big three auto makers simply because their unions have priced themselves out of business. The average assembly line worker for a UAW member is $32.32 per hour (http://www.uaw.org/barg/07fact/fact02.php).

Lately, the car makers are offering deals, rebates, employee pricing and so on in order to move inventory. Some of them, with employee pricing and rebate, come to a discount of almost $10,000. Since we all know that these companies aren't going to do anything to affect the profit they earn, and they're able to take ten grand off the top of the price, that just tells me that the vehicle in question is priced just about ten grand too much.

And how many people earn $32 per hour? I certainly don't, and I have a wonderful job.

My solution to the problem isn't a bailout. It's very, very simple: if a car costs $20,000 to make, sell it for $25,000 for a profit of 25%, a substantial amount. Since most of the work on the assembly lines is done by robots, cut the ridiculous $32 per hour wage down to about $20 per hour. Then you have employees earning a fair salary and a product that is priced fairly yet still producing a 25% profit.

Yes, I know it's not a perfect plan. I'm speaking in bare-bones terms. The point is that the UAW members make too damned much money and the vehicles they manufacture are grossly overpriced. You don't need a degree in economics to know that if a product is priced such that a person can afford it, then it will sell. It's just that simple.

December 8, 2008 at 12:46 PM  
Anonymous Anonymous said...

As a native of Toledo, Ohio, I would really prefer not to see the Big Three go under. It would be absolutely devastating to Toledo, which has a manufacturing plant and several off-shoot industries, along with Detroit, Windsor, etc.

Blaming unions and assembly-line worker salaries for this I think is misguided. In the same way that I want to fly on a plane with a pilot who is well-rested, I'd also like him or her to be well-compensated. Would you want your pilot to be earning only, let's say, $30,000 a year? The same goes for the makers of the car that carries me at 65 MPH down 279.

Auto worker salaries built solid middle class communities in places like Detroit and Windsor for a lot of years. And it's not the most pleasant work. You inhale a lot of fumes, you're on your feet for close to 8 hours, many auto workers get repetitive stress injuries, etc. Bringing down their salaries would also hurt salaries in other sectors of manufacturing.

While we're talking about salaries, benefits, etc., one thing that is hurting the Big Three are legacy costs, which include paying for the health care of their retirees. This isn't a problem in Japan or Germany, where they have a national health care system.

--Brad Hundt

December 8, 2008 at 1:12 PM  
Anonymous Anonymous said...

The UAW IS to blame for this, at least in part. Look, an economy like ours operates at its best when a fair wage is paid to its workers. Underpaying them is senseless because then they don't buy anything. Overpaying them is senseless because it's too expensive to remain competitive.

When someone is making $35 an hour at a job that is being done somewhere else for $20, guess which company is going to survive.

Also, negotiating a contract that allows retirees to make nearly the amount that they made when working is insane.

GM cars suck, Ford is barely better, and Chrysler is irrelevant. That didn't happen by accident. It happened because of the greed of the union and the archaic leadership of the industry.

And there is no better example than the Hummer.

December 8, 2008 at 1:25 PM  
Blogger Roger said...

Brad says, "Auto worker salaries built solid middle class communities in places like Detroit and Windsor for a lot of years. ..."

Have you ever been to Detroit, especially the days leading up to Halloween? I have been there many times, and on those days (on business, never pleasure). One could hardly get the impression about anything very solid communities.

A couple of thoughts come to mind on this topic that I'll share/ask questions. First, why aren't the Big Three and the UAW willing to make massive restructuring changes? When the head of GM was asked at the hearing the other day, he said "I think we have the best team in place ... best ... " In other words, he believed that no structural changes are necessary.

Jennifer Grandholm, the Michigan governor, was interviewed on CNBC the other day. She said that both the automakers and the UAW have undergone massive restructuring, and therefore refuting any notion about making changes. I think two changes were suggested by the UAW the day before the execs showed up to Washington. One was something about legacy contributions, and the other was a willingness to consider changes to the Job Bank program. These are hardly "massive changes" that are required. Why would any lawmaker consider providing money to them with very much the same model in place as the past few years? To provide cash seems like just putting more money into a bad model, one that has shown itself as having failed? Why would anybody think that adding cash to the coffers will make changes, and not just prolong the inevitable?

However, having said that, how can Congress dictate how a recipient runs their business? This form of management seems to be emerging. In other words, "... we give you the money, then we have rights to tell you how to manage your business." This may be true for an equity partner in a business ownership plan, but is this possible for the US Congress? Would we feel like our taxpayer money is going to be wisely used if the lawmakers have their hand in the management process? I don't think so.

This weekend, Christopher Dodd said that the GM CEO "must go." Is he going to cast his vote on GM getting the loan on whether the CEO has been replaced?

My point is that why aren't the companies, and unions, much more willing to make significant changes, in order to make sure that an infusion of cash will make this thing work? Neither of them seem to willingly accept the fact that their former model has failed.

One major area for restructuring is the consolidation of models. GM having Chevrolet, Pontiac, etc. offering nearly the same vehicles is just plain stupid. They did well to eliminate the Oldsmobile line, but there are other very large changes that could happen.

The model of sales and service could also undergo massive changes. They do not need sales opportunities within a few miles of one another. I think about 80% of the new car buyer has done extensive online research before they go to the showroom. The buying experience has changed. Service is another matter. Perhaps there are needs of more centers only doing service, or perhaps independent operators can do this work. This part of the industry does need to be close to the customer, in some form. But, not so for the buyer.

Secondly, the language being used by the lawmakers, commentators, and media is misleading. The implication by those saying "we can't let this happen," always suggests that if the Big Three go down, there will be no cars being built. That is simply not true. There is supply by other manufacturers that will fill the void, at least in part. Over time, the expansion of those who have shown themselves to work well, can fill the void.

I agree with the comment made above about the unemployed people. It is not that other employment opportunities will not exist. Just think of the entrepreneurial start ups that will have a supply of labor. Just think of the kinds of other voids that might be filled with those who formerly worked at these companies. Further, the companies may not disappear, but rather be rebuilt into something more efficient and productive (e.g. airlines).

Sorry for the length. I only got started.

December 8, 2008 at 1:58 PM  
Blogger PRIguy said...

Thanks for bolstering my point on the unions, Anonymous. If you don't believe that the UAW has a major role in the crumbling auto industry now, then consider the steel mills. Again, the unions priced the companies right out of the competitive market.

December 8, 2008 at 2:01 PM  
Anonymous Anonymous said...

Sure I've been to Detroit. I lived in the Detroit area from 1995 to 1998. The city of Detroit and some of its first-ring suburbs are in abysmal shape, no question. That's due to losses in manufacturing, but also due to the exodus out of Detroit following the '67 riot and its eroding tax base.

If the Big Three collapse, that "big supply of labor" will almost certainly not be paid wages comparable to what they earned on the assembly line.

Also, keep in mind that the UAW has already made concessions and give-backs. From what I gather, employees of Honda plants in Alabama have wage and benefit packages that are comparable to what they make in Detroit, and no one is suggesting that they're hurting Honda.

--Brad Hundt

December 8, 2008 at 2:50 PM  
Anonymous Anonymous said...

I can't believe that I agree with Mr. Hundt. But you are dead on. In addition, this loan (not giveaway like the money to Wall Street) makes more sense, has a bigger impact on actual American citizens and has the potential to make a difference.
BTW the Hummer was a commercial success BEFORE the gas increases. You might not like it, you might disagree with it for a variety or reasons, but it was making money as were those big SUV's. The problem was we could not retool fast enough to a short term gas increase.
Fan of the WR

December 9, 2008 at 8:43 AM  
Blogger Roger said...

In a different situation, but also a company in financial trouble, what about Republic Window and Door? The situation has evolved with sit-in by employees, politicians making statements and laying blame, and Bank of American being made the scapegoat.

Who is right in this situation? The employees believed they were getting certain monies, but now are being denied those monies. The company is apparently out of money, unable to make the payments. Bank of American makes choices on where to make loans, and are now on the short end of the PR stick.

Employees: Promised money that they are not getting. Now, they are crying foul attempting to "squeeze blood from a turnip" and will not take "no" for an answer.

Republic: Apparently were working on a very narrow margin in cash flow, only able to maintain operations from loans. Now, they have no money, so cannot pay. Or, are they holding back on their accounting practices, attempting to lay blame elsewhere?

Bank of America: The were given huge money from the US Government coffers. The money was provided without much guideline. They made choices, but did not include Republic in their list. Despite making their own decisions (which they have every right to do so), they are now vilified by nearly everybody who has something to say on the matter.

Who is right? Who is wrong? How can Bank of America be forced to make loans against their own decisions, when they were provided government loans without distribution provisions?

December 9, 2008 at 9:07 AM  
Anonymous dg said...

Why not give a huge tax credit to anyone willing to buy a vehicle from the “Big Three”? At least we’d have new vehicles for our money.

December 10, 2008 at 6:46 PM  
Blogger Brant said...

Can you imagine how much good that $800 billion bailout would do if they spread it among us - the people - and let us stimulate the economy directly? I can just see these big banking and insurance companies that are sucking up the bailout money turning around and giving big dividends to their stockholders. The rich get richer.

December 11, 2008 at 10:12 AM  
Blogger Ellipses said...

2,600 bucks per person... not a bad stimulus package...

"people will get a check for money they didn't earn" yells Sean Hannity...

You think the CEO of AIG earned it?

December 11, 2008 at 3:47 PM  
Blogger Roger said...

Republic Window and Door has now filed for chap 7 bankruptcy (See post of Dec 9). The action is being done at the request of Bank of America.

B of A was the target of the workers and politicians for not paying them as needed. Now, the workers have zero opportunity of working there again. Their short-term gain in getting some concession has resulted in a long-term collapse.

I am not saying one side is right, the other wrong (as stated my earlier post). But, when the well is dry and there is no money, the finality of the situation is pretty clear. In this case, the worker's demands appears to have spelled the demise of the company. Maybe it was inevitable anyway, we won't know for sure. Th media never pursues the facts for the total picture, rather just focuses on the emotion of these stories.

December 16, 2008 at 7:01 AM  

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