Frank Bernheisel: The View From Here
Frank Bernheisel
Frank Bernheisel
Posted 11.18.08
Just Outside Washington


Whither Detroit: To bail or not to bail, that is the question

November 18, 2008

Everyone seems to be down on the American car industry. The industry is to blame for making cars that no one wants to buy, etc. etc. Until last spring, everyone seemed to want large pickups and SUVs (categorized as Light Trucks).

Yes, I know about the Prius, which sold about 45,000 units in the first quarter of 2008. However, light trucks sold 7.8 million units during that time. The first quarter also saw sales of five million domestic and 2.4 million imported automobiles.

The third quarter saw a decline in sales to 6.3, 4.4, and 2.2 million units, respectively. Light trucks took the biggest sales hit but almost every kind of vehicle declined in sales.

Quality is an issue many claim as the reason Detroit is in trouble and there was a time when the Japanese had a lock on quality. However, according to J. D. Powers, Mercury, Ford, Chevrolet, Cadillac, Pontiac, Lincoln, and Buick all rate above average for cars sold in America for defects and design issues.

Then there is the old saw: "Detroit is building cars that nobody wants to buy."

How can that be, given the sales figures? Besides, look at the variety in addition to pickups and SUVs:

  • Medium-sized sedans: Chevy Impala (nice cars when I rented them), which competes with Honda Accord, Toyota Camry, Nissan Maxim,etc;

  • Small sedans: Chrysler PT Cruiser (also nice cars, turbo is best), Ford Fusion, and the Chevy Malibu at a lower price level.

  • Little cheap cars under $15,000.

  • Sports and sporty cars: Mustang, Pontiac Solstice, and Corvette, And there are many more models -- GM alone makes six hybrids. The Greenies say the public is holding out for greener, more fuel-efficient cars. Given what is available, that looks like BS.

    So what is the issue?

    The car business is tough and competitive and has been ever since the pent-up demand after WWII was satisfied. Since then, many overseas competitors have entered the US market. In addition, the world-wide industry has excess capacity-- even India is making cars -- especially with the current economic downturn (see sales figures above).

    Detroit has had a problem of competing on a price basis because it has legacy costs in every car that contribute nothing to current production.

    GM alone has 450,000 retirees whose health care costs alone adds $1500 to every GM vehicle sold. And then there are the pension costs.

    Well of course; it is all because of those damn unions! Get rid of them and all will be well. If I have it right, the average Detroit union wage is about $56,000. Outrageous!

    The new union agreement is supposed to move the legacy costs to a union foundation and lower Detroit's health care and retirement costs so that Detroit's labor cost is competitive with US non-union factories. But that will take a couple of years and a few billion dollars.

    All very interesting, you say, but do we bail out Detroit or not? Chapter 11 bankruptcy has been proposed as the solution by some. However, others think that sales would plummet, wrecking both suppliers and dealer networks.

    The Wall Street Journal says that we should put GM into receivership and fire all the executives. This avoids bankruptcy, which looks like it would be a disaster.

    OK, who would be the Receiver? Thomas Freidman says Steve Jobs but I do not think I could stand the iCar. My vote is for Elliot Spitzer.