Ten Things The Taxpayer Should Know About The U.S. Auto Industry Now That They Own It

As of the New Year, taxpayers will pretty much own General Motors, as well as Chrysler until that automaker is stripped or its assets flipped into GM. That’s because the market value of the two companies is less than the total amount the government is lending them to stay afloat, and because taxpayers are getting stock warrants in the companies equal to 20% of the loans.

During the hearings for an auto bailout, there was plenty said about America’s carmakers and the United Auto Workers. Some criticism was dead on, but much of it was either way off base or exaggerated. As is most often the case when rhetoric and politics rule the day, the truth really lies in nuance. Here’s our Detroit team, David Kiley and David Welch, to sort out the fact from the hot air:

Detroit is not a lost cause There was plenty of rhetoric on TV cable shows during the last several weeks saying that “nobody is buying Detroit’s products now.” This is not true at all. General Motors, Chrysler and Ford have around 45% of the U.S. auto market today. In a typical year, that’s more than 8 million vehicles bought by Americans. Sixteen other companies make up the remaining market. The market share of GM, Chrysler and Ford is much lower in urban media centers like New York, Los Angeles and Washington DC than it is nationally. That may help account for why some TV anchors and pundits, most of whom live in those markets, characterize the Big Three as hopeless.

It’s worth noting here that Ford is trying hard not to take the loans, and is hoping that it will emerge from 2009 as the company that did not need the tax-payer’s help to stay afloat in the Recession. Good Luck.

Detroit has not been devoid of innovation on technology that boosts fuel economy But it is the fault of the companies that they have that reputation. The Detroit-3 were slower to embrace gas-electric hybrid cars than Toyota and Honda. They did not believe the technology was a cost-effective way to address fuel economy. In truth, however, any company building electric cars or gas-electric hybrids today is going to run into patents held by either Toyota or GM. That is due in part to GM’s electric car development program—the EV1 electric car (made famous in the documentary film, “Who Killed The Electric Car”). They now have hybrid technology. But the problem is that they are two generations behind Toyota, which has a decade head start on GM when it comes to dropping the cost of the new hardware.

GM actually pioneered hybrid technology for use in city buses. That technology has been leveraged for use in SUVs and trucks, such as the current Chevy Tahoe and Cadillac Escalade hybrids.

Today, when you compare the cars, trucks and SUVs Detroit sells against their direct competitors at Toyota and Nissan, the Detroit product is practically equal or in many cases surpasses the fuel economy of the Asian products. The Chevy Malibu, for example, achieves 22/32 mpg, while the Toyota Camry gets 21/31. The Malibu hybrid, though, gets about 33 mpg, according to drivers who answer surveys compiled by U.S. government, compared with 37 mpg for the Camry hybrid according to the same surveys. GM has put a hybrid powertrain into its big SUVs, while Toyota hasn’t yet. The new Ford Fusion hybrid beats the government certified fuel economy of the Camry hybrid by 6 mpg.

Having said that, executives at GM and Chrysler (as well as Nissan) said hybrids were a loser for years. All of the Big Three fought tougher fuel economy rules tooth and nail. And they plowed cash into new gas guzzlers while their passenger cars went years without a remake. It was a crime, for example, that GM sold the Chevy Cavalier and Pontiac Sunfire as long as they did into the new century. These cars, which competed against cars like Hyundai Elantra, Honda Civic and Toyota Corolla were rattly engineering fossiles by the time GM stopped turning them out. So when consumers think efficiency, they think Toyota and Honda, not Ford or Chevy.

The Management In Detroit Is Not All Out To Lunch GM CEO Rick Wagoner has caught alot of criticism. We won’t argue for or against his ouster. It is true that he is a GM lifer, and has been at the helm for eight years. But at Ford, CEO Alan Mulally has been in the CEO chair for two years. He came from Boeing, and has accomplished more reform than his predecessors even attempted in the previous decade. At Chrysler, which likely won’t survive as an independent company, CEO Bob Nardelli has been in the seat for 17 months during which time he has done nothing but cut, slash and fix. And as he came from Home Depot and GE, it’s tough to call him a fixture of Detroit.

The UAW is taking too much of the blame and vitriol The UAW has some responsibility for the state of the auto companies. But consider that after bonuses, Toyota workers make $30 an hour. That’s $1 more than UAW workers. Since Toyota mints money, it can’t be hourly pay that is to blame.

It’s the benefits. Most of the $20 an hour cost difference is in retiree healthcare. UAW workers and retirees pay 5% to 10% of their medical costs. Nationwide, most workers pay closer to 30%. Plus, GM has 3 retirees for every worker. Those retiree costs are the reason Detroit hasn’t been able to make real money on anything but suvs for a long time. But dealing with retirees is a national problem. To address it, the Big Three agreed to give the UAW a huge slug of cash that the union can invest to set up a trust that manages retiree and employee healthcare. But before they could fund it, the economy took a dive and they all ran low on dough. The companies either need to cut benefits back to reduce the cost, or fund it with stock in the carmakers. The Treasury loan plan has them doing the latter. It could reduce their costs by billions of dollars a year.

Having said that, the UAW often makes concessions, but they come too late. In 2005 when GM and Ford were reeling after the fuel price spike that followed Hurricane Katrina, the UAW took months to decide to make healthcare concessions. By then it was too late. GM was en route to losing $10.5 billion.

We sometimes get the feeling that the union doesn't care if the automakers make any profit, so long as they generate enough cash to cover the enormous benefits they have won over the decades. That structure is coming to an end this year. These are companies that must make profit to reinvest in product, and to set aside for rainy days. They are no longer ATM machines for workers and retirees. The dealers are a big problem It’s not the dealers themselves. It’s state franchise laws that won’t let the carmakers shut dealers down without buyouts or costly lawsuits. That means you can’t kill off a weak brand like Saturn or Saab without huge costs of getting rid of their dealers. Some of Detroit’s weak brands lose money every year, but getting rid of the dealers is so expensive that they haven't done it.

An effective, competitive GM, for example, would include Chevrolet, Cadillac, Buick and GMC. That's it. Period. And we're dubious that it needs GMC.

Detroit created many of their own problems through short-sighted management, but they had plenty of help from Congress Among the terrible decisions made by GM was buying Hummer, thus making itself the standard bearer for ugly Americans who don’t care about the environment. GM also waited a long time before it got serious about vehicle design. Before hiring current product chief Bob Lutz in 2001, the company turned out boring cookie cutter designs by committee. And there were no design experts on that committee. Pontiac Aztek, Chevy Cavalier, Buick Century, Chevy Malibu (not the current one), Saturn LS—these are all cars that were vanilla, short on creature comforts or design aesthetics. And many of GM vehicles lagged far being Japanese quality.

At Chrysler, the quality of the today’s vehicles and the state of the company’s lineup suffers from the fact that Daimler-Benz was trying to limit their investments in Chrysler the last two years it owned the company. Budgets were slashed, and designs suffered. But we aren't really talking about Chrysler surviving 2009 anyway.

At Ford, the company was a prisoner of a very insular management until CEO Alan Mulally arrived in 2006 to turn the company around. Before Mullaly, the company wasted billions a year in a very inefficient global structure. Ford and Lincoln product lineups suffered the last decade in large part because the company was too focused on pumping up brands like Jaguar, Land Rover, and Volvo, as well as relying too heavily on the SUV market.

But it is important to realize that auto companies in Japan and Europe have two big advantages. Japan and Europe have national healthcare. Companies pay taxes that support the systems. But the total costs to the companies are much lower than in the U.S. And because they have national healthcare, the total costs of healthcare per capita in those countries is much lower than in the U.S. Second, they have policies that keep gas prices high…above $5.00 per gallon, and sometimes as much as $10.00 last summer. That has created a very stable market in Europe and Japan for small, fuel efficient cars, and a very small, limited market for SUV and pickups. The Detroit Three are guilty of thinking that cheap gas would last far longer than it did. But Congress and The White House, including the Clinton White House, failed to pass energy or healthcare policy that would have created a level playing field for these companies.

Detroit product is not quite as inferior to Japanese and German quality as many people think It’s true that for the past 20 years Detroit has been playing catch-up to Japan in quality. And it is also true that there is still a gap. But it’s worth looking at the size of that gap to see how meaningful it is.

J.D. Power and Associates measures quality as reported by car buyers in the first three months of ownership. In this measure, Lexus (owned by Toyota) is a runaway leader. But look at how close Ford and Chevrolet are to Toyota and Honda. Ford owners report 112 problems per 100 cars, while Honda scores 112, Mercury (part of Ford) scores 109, Toyota scores 104, while Cadillac and Chevy score 113. Those are pretty close numbers to the point where it is statistically irrelevant.

Power also measures “vehicle dependability” over three years of ownership. Here, the gap is wider than in initial quality, but closing. Again, Lexus is a runaway leader at 120 problems reported per 100 cars. Toyota scores 159 and Honda scores 177. Ford scores 204 and Chevy scores 239.

No question that the Japanese have set the standard for fewest things gone wrong. That has been key to loyalty rates for Honda and Toyota and why people buy one Honda Accord after another. But today’s Ford Fusion, to name one vehicle, is so much better built and designed than, say, Ford Tauruses of the 1990s, that vehicle dependability scores between Ford and GM and the Japanese will continue to narrow to almost insignificant levels in the next few years.

There is a good chance that help to the auto companies is not throwing good money after bad There is a lot of criticism that the White House measure doesn’t go far enough to force the automakers to make the dramatic changes needed to bring the automakers into “financial viability.” It is true that the White House loan agreement does not force specific concessions on the United Auto Workers, except for a provision that they must take stock in the automakers in place of billions of dollars in future cash payments to their healthcare trust fund. It spells out “targets” for wage and work rule concessions that should be met. The loan parameters set forth today don’t carry the rule of law as the Congressional bill, which did not get passed this month, would have. The other criticism is that it leaves a lot of discretion and judgment to President Obama to determine the scope of the auto industry restructuring, how much the union has to give up and how long it has to bring wages and work rules in line with foreign automakers. The UAW raises huge sums of money for Democrats and has long been key to Democratic Get-Out-The-Vote programs. And the concern is that Democrats owe the union too much to wield a serious hammer.

Already the UAW is calling on Obama to lighten the conditions of the loans that are expected to me met by the UAW. The UAW is tone deaf when it comes to its own image. By calling for Obama to lighten the paramaters of the loan program the day it was announced, the union affirmed all the perception around the country that it is an obtuse body intent on sinking the industry it depends on.

Members of the Obama transition team say privately that the new President will be tougher on the union than they may expect. Expect the union to be required to match wages and work rules, they say, though wage parity could be extended beyond the December 31, 2009, schedule set forth by the Bush White House. As we are in a recession, the Obama Administration may let that schedule slide by a year. All the other provisions of the White House loan agreement today spell out that if the bond holders and union are not making concessions that will lead these companies to sure viability, they will be led by the hand to Chapter 11 Bankruptcy by the government in the Spring. That is a powerful motivation to stay within the spirit of the agreement.

Detroit Needs To Earn R-E-S-P-E-C-T Toyota commands at least $3,000 more per car in price than domestic brands do. That’s because consumers don’t respect the U.S. brands as much and American companies have long overproduced so they need to discount their cars. They also have higher marketing costs because they have more brands to support. GM in particular needs to kill off several of its brands so the company can plow its ad bucks behind a select few and start rebuilding brand image. As they close factories and the market bounces back, they can get better pricing and boost revenue.

But if we don’t see deliberate moves by GM to sell or shutter Hummer, Saturn, and Saab in 2009, it will be a sign that they are not as serious about reforming their ways as they lead us to believe.

The Auto Industry Would Not Be Better Off If Steve Jobs or Google Were Running GM and Ford Running an auto company is a complicated thing. The people behind the Tesla electric car in California are finding that out. They are not really close to scaling up their car. And they have turned to Detroit executives to help them figure out their business.

Building millions of cars a year that have to satisfy federal and state fuel economy and safety regulations is not the same as making a couple of hundred $90,000 cars that can go 50 miles per gallon or 300 miles on an electric charge.

It's tempting to think that Google or Apple would be a better manager of GM's auto business than GM. But we aren't going to find out. Let's deal in reality, and not theory and ideology. Perhaps now that the taxpayer has some skin in the game, we, as a country, will look seriously at what we need to do as voters and consumers to make the U.S. auto industry truly competitive with the rest of the world.

These government loans are a clumsy step toward having an industrial policy in the U.S., but they are a first step.

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