Can America Survive Without Detroit?
America thinks it's debating the logic of bailing out Detroit, but what we are actually talking about is the future of American manufacturing.
In the current financial mess, General Motors (GM), Ford Motor (F), and Chrysler find themselves unable to sell enough cars to survive into a potentially brighter future. Judging by what's being said in the press, in Congress, and by some of the most respected names in American business, the nation's response so far is a big "who cares?" I hate to point out distressing realities, but we ought to care. And yet, as is true of most of these national crises that seem to be cropping up far more often than they should be, the reporting and explaining of Detroit's jam seem to demonstrate both a profound disregard for facts and little understanding of the interconnected macroeconomics that empower or destroy our civilized world.
Let me ask you two questions:
1. Do you believe we should lend Detroit $50 billion to save itself from this economic turmoil?
2. Do you believe that we should lend the American economy $50 billion to save it for you and your children?
Not incidentally, those two questions might actually be the same.
Comparing Apples to Squid
Some heavy hitters in business and politics have weighed in recently on whether or not Detroit should be helped through this critical period. Jack and Suzy Welch were given column space in BusinessWeek, and the argument they laid out was both intelligent and thoughtful. Still, the Welches judge that Detroit's companies would be best served by reorganizing in federal bankruptcy courts, one day to emerge as lean, mean fighting machines. They say this would be the only way to "galvanize real change."
The Welches point out that many Americans fly on bankrupt airlines without giving it a second thought. To their point of logic, a Detroit bankruptcy would not harm consumer demand for their products and wouldn't lead to sales falling faster than the companies could be downsized.
But there is a huge difference between buying a $300 ticket on a bankrupt airline and signing a five- or six-year note on a new car for $25,000. If the bankrupt airline is flying that day, you can be fairly sure you'll reach your destination—as has in fact been the case with carriers such as Delta Air Lines (DAL), United Airlines (UAUA), and others while they were in bankruptcy. But not knowing whether a major repair would be possible, or covered, on an automobile years in the future would certainly send most potential buyers looking elsewhere for their next ride.
Detroit has it right: If its automakers declare bankruptcy, the likelihood of their emerging as viable businesses is near zero. Their sales will fall faster than they can reorganize.
Look for the Hand
A more vocal critic of Detroit has turned out to be failed Presidential candidate Mitt Romney. The former businessman has strong ties to Detroit, being the son of former Michigan Governor and American Motors Chairman George W. Romney, but his opinion piece in The New York Times on Nov. 19 was so factually challenged that you almost couldn't read it without feeling sorry for him. Romney talks of "insurmountable labor and retiree burdens, technology atrophy and product inferiority." Of course, setting aside money for the retirees' benefit packages should have been taken care of years ago, but apparently he missed the fact that a new contract was drawn up with the United Auto Workers last year that allows new hires in many positions to be paid as little as $14 an hour.
The significance of that was lost on most, but for the first time since World War I we will have people building automobiles in America who won't be able to afford the vehicles they build. Somehow we are led to believe that's real progress.
Romney goes on to discuss how Detroit's labor costs keep it from matching Japanese quality and automotive value one-on-one, comparing a Ford Taurus with a Toyota Avalon. Discussing the labor cost burden for Ford, Romney speculates that there is a $2,000 cost disadvantage for Ford. He says this lets Toyota (TM) add $2,000 worth of quality and features to its Avalon, making it the far more appealing purchase and the better value. Again, there's a fundamental flaw in his premise that five minutes' research could have corrected: In spite of the $2,000 "labor burden" he mentions on the Taurus, its list price is still $3,720 less than the Avalon's.
Using his logic, it's Ford that could add that unknown extra $2,000 worth of features and quality to the Taurus and still sell it for $1,720 less than the Avalon. Both get 28 miles to the gallon on the highway; the Avalon gets 1 mpg more in city driving.
One other important thing: So far this year, 46,167 Tauruses have been sold, down 20.2% from a year ago, while Toyota has sold 37,852 of the Avalon—down 37.9%. So, if he really understood what he was saying, Romney's position should have been: Why is the Avalon not selling better?
He also asserts: "[Detroit] management as is must go. New faces should be recruited from unrelated industries." Great idea, Mitt. Let's pick two of the best-known and most respected American corporations from which to pull the new leaders for Detroit. Say, Boeing (BA) and General Electric (GE)? While you were out campaigning, Ford and Chrysler already did that.
Imagine No Amber Waves
The media make much of the fact that Detroit's dealerships so greatly outnumber Toyota's. This extremely inefficient distribution chain, they say, weakens the average dealer, which in turn damages Detroit. To some degree that may be true, but what the media fail to take into account is how urban-centric that argument is.
One of the key reasons the Big Three have so many dealerships is that they have outlets in cities where Nissan (NSANY), Honda (HMC), or Toyota can't claim any type of business. Detroit's trucks may be taking a pounding right now in the press, but let Detroit go away and see what happens to American agribusiness.
That's right: Detroit has a strong presence across the Great American Midwest. In states like Kansas you will find GM dealers in no fewer than 54 counties, while Toyota dealerships can be found in only eight. The reality is that after a few planting seasons, given reasonable crop prices on the commodities market, one day sales of new pickup trucks will again make more money for Detroit than all of the Chevy Volts they may or may not make.
And are you really suggesting that American farmers be given the choice of Tundras or Titans in the future? What a wonderful parting gift for Japan.
One would think the media might be a bit more sympathetic to this crisis, given how many of that industry's jobs hinge on the outcome. After all, there are years when total automotive advertising can reach upwards of $15 billion annually. But not this year; and already we are seeing jobs melting away in the media—from radio stations to TV and with print publications—because of this automotive downturn. Let Detroit go away, and you're talking about a decade-long drought for the Fourth Estate.
Not to mention the impact it would have on professional sports. GM has already pulled sponsorships at some Nascar tracks and dropped the Super Bowl. In Dallas, Cowboys owner Jerry Jones is finishing up a $1 billion stadium; the almost $5 million he receives annually to make the Ford F-Series the official truck of the Dallas Cowboys could be critical income lost.
Why We Must Care
Additionally, if Detroit fails, the impact on the American psyche in tough economic times could be devastating. Letting Detroit fail will cost us far more than saving it—and the collateral damage will be far worse than anyone has yet imagined. If we are in the last days of Detroit, we will pay for it anyhow—with no chance of getting any of our money, or any of America's pride, back.
Detroit's pensions will go under the government-backed Pension Benefit Guaranty Corp., which will in time overwhelm that agency. Retired auto workers' health care will become a huge drain on our Medicare system, further straining its meager resources, while Detroit's displaced workers will start collecting unemployment. We will lose the income tax revenue from their workers, not to mention the tax revenue from their suppliers' workers, and so on down the line as they all become unemployed. And they won't have much if anything besides food stamps to spend, so there goes all that sales tax and interest income, too.
Cutting Off Our Nose to Spite Our Face
Let me make something perfectly clear: Detroit did not cause this current problem to happen. The automakers are as much victims of this period of financial deleveraging as you and I are. We were led here by 28 years of new government rules moving us toward "anything goes" capitalism—and that brand should never have been confused with American capitalism, in which laws protect buyer and seller and whose dealings are characterized by integrity, honesty, and sanity. I am an American capitalist, and I believe ours is the best economic system in the world—when its rules are not being bypassed for private gain and the public's loss.
But I'll give it to you straight: Let Detroit fail and we may not be able to stop the avalanche that has been burying people and businesses all year long. If you don't want to save Detroit, that's your ideology. But are you willing to risk America?
Americans love underdogs but hate losers. Bankruptcy would move Detroit into the latter column, and America wouldn't be far behind.