Auto Bailout Or Corporate Welfare

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[The Financial Crises]

The debate is raging as to whether to bailout the big three auto companies or not.

The proper perspective for understanding the proposed automobile industry bailout is not as a manufacturing bailout, but as a union bailout.

General Motors and Ford suffer from a structural problem; that structural problem is the United Autoworkers' Union. I’ll focus on GM and Ford; Chrysler is a privately owned Limited Liability Corporation (LLC).

In the 1980s Lee Iacocca dared Japanese car manufacturers to open auto manufacturing plants in the United States-a step, which the Japanese automakers did not wish to take. Iacocca was hoping that had the Japanese responded the United Auto Workers (UAW) would end up unionizing these plants; he was hoping to lure them into a trap.

Challenging the manhood of Japanese manufacturing companies was a mistake. And they responded like samurai.

Honda and Toyota took up Iacocca’s challenge and opened automobile manufacturing plants in the United States. But Iacocca's vision of Japanese auto manufacturing plants being overrun by the United Autoworkers Union never occurred. Iacocca had forgotten the history of Japanese labor unions; namely, that during the American occupation of Japan the American government had assisted Japanese manufacturers in defeating Japanese unions, which had been overwhelmingly Leftist.

Honda and Toyota opened automobile manufacturing plants using lean production method and statistical quality control. My 1971 Toyota, which was manufactured in Japan, was more reliable than either my father's Lincoln or his Chevrolet station wagon. Honda and Toyota are not encumbered by inflated union salaries.

Salaries at Honda and Toyota are roughly 70% of salaries at GM and Ford. Auxiliary benefits are not as generous. Prospective employees of Honda and Toyota are required to take standard examinations that test their statistical ability. Honda and Toyota were able to choose their employees on the basis of their knowledge of mathematics, something that the UAW would protest. One disadvantage, which Toyota and Honda do not have, is legacy costs. General Motors and Ford are mandated to pay generous pensions and health care for their retirees. (Health care costs are to be assumed by the union in 2010 with assistance from GM and Ford under new arrangements.)

The major problems with General Motors and Ford are basically that these companies never addressed the issues of fuel efficiency and small cars. Due to the influence of the Michigan congressional delegation to DC, exceptions to the fuel economy were always made for American cars; fuel efficiency was not enforced for American cars. Example: The Chrysler PT Cruiser is technically considered a "car" for emissions purposes and a "truck" for fuel economy—trucks are allowed to get fewer miles per gallon. Or consider this: the Toyota Prius has a 55 mpg rating while a Ford Explorer has 17 mpg rating.

General Motors and Ford have visionless management. At the back of the minds, they remember Richard Nixon's bailout of Chrysler, so they believe someone will always have their backs. Instead of using profits for innovation, the profits were wastefully distributed in dividends.

The eventual cost of GM and Ford bailout will be $100 billion; the measure will only delay and increase the cost of the final reckoning. The ideal solution, is for General Motors and Ford to declare bankruptcy- with Federal guarantees so that their suppliers remain solvent and they will have the breathing space to re-negotiate the union contracts; suppliers account for billions of dollars in business and more than a million jobs. Only then can GM and Ford successfully address their problems.
If these problems are not addressed, General Motors and Ford will become a contemporary version of Bethlehem Steel, the former number two steel manufacturer in the world. Bethlehem Steel did not innovate while the Japanese invested heavily in new technology.

Who today remembers Bethlehem Steel?


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