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Why GM, Ford and Chrysler left Washington empty handed

By Peter Morici
web posted November 20, 2006

U.S. President George W. Bush (R) meets with the big-three U.S. auto makers chief executives in the Oval Office of the White House in Washington November 14, 2006. From L-R are: Ford Motor Co. Alan R. Mulally, General Motors Corp. G. Richard Wagoner Jr., DaimlerChrysler AG's U.S.-based Chrysler Division Thomas LaSorda, Vice President Richard Cheney and Bush
U.S. President George W. Bush meets with the big-three U.S. auto makers chief executives in the Oval Office of the White House in Washington on November 14. From L-R are: Ford Motor Co. Alan R. Mulally, General Motors Corp. G. Richard Wagoner Jr., DaimlerChrysler AG's U.S.-based Chrysler Division Thomas LaSorda, Vice President Richard Cheney and Bush

The leaders of General Motors, Ford and Chrysler recently had their long awaited summit with U.S. President George W. Bush last week. Sensitive to public sentiment, auto leaders argued they were not looking for special treatment. Instead, they sought adjustments in public policy that would benefit both the country and their operating environment. A close look at their problems and actions indicates automakers are not willing to address tough issues and Washington cannot save them.

Importantly, the industry is healthy. About as many cars and trucks will be made in the United States and Canada in 2010 as were made in 2000. Toyota, Nissan and other foreign rivals are adding capacity and paying workers well. The Detroit Three are shuttering factories, because sloppy management, bloated executive pay and unrealistic labor contracts raise their cost per vehicle at least $2500 above other companies operating in North America.

The automakers spoke with President Bush about energy, health care, foreign exchange, and material costs. In doing so, they demonstrated the cognitive dissonance of an alcoholic arguing his high blood pressure is caused by his wife's cooking.

On energy, the Detroit Three proposed reducing U.S. dependence on imported oil by building more flexible fuel vehicles and having Washington guarantee the availability of gasohol and bio-diesel. The corn and soy beans necessary to make these fuels require a lot of oil-based fertilizer and very large subsidies to be viable on a meaningful scale. In contrast, hybrid vehicles save considerable oil directly, but Toyota and Honda have the jump on domestic automakers in perfecting and marketing this technology.

Instead of letting the market decide, the Detroit Three wrap themselves in the banner of national energy security, when they are really pleading for subsidies to compensate for their slow start in a popular, market-viable, energy-saving technology.

On health care, the Detroit Three spend at least $1000 per vehicle on gold-plated health benefits for their workers and blue collar retirees, and want Washington to nationalize elements of health care for everyone. The problem is that additional taxes would be needed and paid by all businesses, the benefits would look a lot like the benefits Toyota and other more prudent companies provide their U.S. workers, and the United Autoworkers would want the Domestic Three to provide gap coverage for the differences between national health care and what their members now receive. The Detroit Three would remain disadvantaged.

On trade, the Detroit Three harp that the cars and parts imported from Japan benefit from a dollar overvalued against the yen, thanks to Japanese government intervention in foreign exchange markets.

The dollar is overvalued against the Chinese yuan, Japanese yen and several other Asian currencies, which affects all domestic manufacturers competing with imports. Each year, China sells in currency markets yuan sufficient to buy more than $200 billion in U.S. dollars and other hard currencies to keep the yuan 40 percent undervalued and its exports artificially cheap. Japan and others cannot appreciably revalue their currencies until China stops this egregious violation of free trade principles, lest they disadvantage their exports vis-à-vis Chinese products.

Consistently, GM, Ford and Chrysler lobby for relief on the yen but are reticent on the Chinese yuan, because they are building factories and profiting from protection in China. They can't have it both ways: a stronger yen and a weaker yuan, free trade with Japan and protection in China.

On material costs, they complain about the price of metals and plastics, and are lobbying for the removal of antidumping duties on corrosive resistant steel from Japan, Korea, Germany and other countries. The total cost of this material composes only about $500 in a product whose price averages more than $25,000. A small reduction in that cost would benefit foreign factories in the United States as much or more than the Detroit Three, owing to their tight relationships with suppliers back home.

Moreover, since 1963, the Detroit Three have enjoyed a 25 percent tariff on trucks imported from Japan, Korea and other countries outside of the North American Free Trade area. That provides a margin of protection equal to more than $5000 per vehicle. They have strenuously defended this tariff through the Tokyo, Uruguay and Doha Round negotiations, making their pleadings on steel tariffs awfully hypocritical.

Toyota's hourly labor costs at U.S. plants are about $35. At the Detroit Three, it is about $80, thanks to cumbersome work rules, excessive sick leave, extra time off, and other benefits imposed by an arcane UAW contract. Meanwhile, UAW president Ron Gettlefinger tells his members national health insurance and government largesse are the answer.

The real problem facing the auto companies is the UAW contract, and GM, Ford and Chrysler managers do not have the ability or the courage to educate Mr. Gettelfinger, go directly to their workers with the facts, or both. If they did, then they would also have to explain why men like Rick Wagoner and Alan Mulally are paid $5 million a year to destroy billions of dollars in shareholder value.

No amount of government help short of massive subsidies could save a domestic industry whose leaders are so detached from reality and selfish.

Responding to their pleadings, President Bush gave the automakers a sympathetic ear and a polite "no." He should have given them what I offer my adolescent son when he is unreasonable: a figurative boot in the rear. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

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