After watching the congressional testimony and reading the journalist commentary our congressmen have what appears to be a very tough call to make. There are really two considerations as far as I am concerned, what is best in the short term given the troubled economy and what is best for the US auto industry in the long term. Paul Krugman makes the argument that in better times letting GM slide into bankruptcy might be the best move but that at this time the ripple effects would be too destructive. GM makes the argument that consumers don't buy cars from bankrupt companies making Chapter 11 effectively a death sentence. Perhaps, but I wonder about the extent to which the current perception of weakness is having the same effect.
Ultimately I come down pretty hard on the side of giving the automakers whatever help they need, but with big strings attached, perhaps even outright nationalization. There are some seldom discussed realities that lead me to this conclusion. Unfortunately much of the current debate is based on misperceptions and delusion. Few understand just how costly the failure of the "Big 3" could be.
Delusion #1: "It doesn't matter who builds the cars, as long as they are built here. Toyota makes cars here too." While it is true that Toyota, BMW, Honda etc. assemble autos here and source parts from U.S. suppliers, a win for the transplants is still a big net loss for the US auto industry. Remember the early 90’s trade friction between the US and Japan. In 1992 the total automotive trade deficit with Japan stood at 31 billion dollars, by 2007 despite the presence of the transplants this figure had almost doubled to 55 billion dollars (
http://trade.gov/static/Japan.pdf). Moreover, this latter figure does not include Japanese vehicles and parts manufactured in Mexico and elsewhere from Japanese made components. More critically, this figure does not the include machine tools (molds, painting robots, etc.) that sadly even Detroit must import these days.
Why does this not get more attention? First, it is an old story – the press and the political establishment effectively ceded this ground a long time ago. Journalists and talking heads are usually just satisfied to know that BMW has an assembly plant in Alabama. Second, despite the size of the automotive deficit, domestic manufacturing has been dwindling across the board and now,sadly, there are even bigger fish to fry. Lastly we misunderstand the way Japanese and other foreign makers operate. We place them in the frame of the typical American multinational and assume that the American experience and perception of globalization is universal. The sad reality is that American corporations’ disregard for its own citizens is extreme and far from universal. The Japanese government in particular makes sure that Japan’s national champions would never stray too far from the national interest, and to a lesser extent this is true in Germany as well. As we have seen, the transplants don’t source from American manufacturers nearly as much as is generally perceived and with the “Big 3” out of the way this is hardly going change for the better. In any case you can always count on the choice production tasks in the supply chain -- the highest paid and most sophisticated -- taking place in Japan (or Germany, or Korea).
Delusion #2: "The Big 3 have failed because of Mismanagement" There have certainly been some strategic blunders on the part of the management in Detroit, but this hardly makes Detroit unique. There are very few manufacturing industries that haven’t suffered similar “mismanagement” in the face of strong and relentless foreign competition. Most of Detroit’s strategic blunders (gas guzzlers to the neglect of compacts) are explained by the fact that American Corporations are set up for maximizing short-term profit at the expense of long-term planning and investment. The competition on the other hand faces a set of incentives that encourage them to do the opposite. For example, the Lexus was initially sold at a significant loss in a bid for market share.
A second factor is that the US automakers have been forced to play the game with one hand tied behind their back. Most obviously, the US’s relatively open markets put the automakers constantly on the defensive. By contrast, as a matter of policy, foreign makers are all but shut out of Japanese markets, giving Toyota, Honda, etc. a reliable home base from which to go on the offensive. Foreign makers are given ample opportunity to gain a foothold in niche markets and expand from there, as the Germans did with luxury cars, and the Japanese (and now Koreans) did with compacts.
Similar factors are at play in other industries. The Detroit automakers shouldn’t be singled out when virtually every manufacturing industry from steel to consumer electronics to aerospace have similarly wilted in the face of foreign competition. To the extent it was the management, ask yourself why such managers come to power virtually everywhere with similar results. The “blame the management” meme is a dangerous cop out that disguises much bigger systemic issues.
Delusion #3: “The culture of Detroit is the problem. If Detroit goes down, new fresh-faced American entrepreneurs will rise in their place, that’s what “Creative Destruction” is all about. I wonder if Steve Jobs would be interested in starting a car company.” This is the ultimate wishful thinking. Rome was not built in a day and neither is an auto industry. The barriers for entry make it extremely difficult for a “startup” to compete in an industry with well established players. The Big 3 may have problems, but what they do have is the institutional know-how and the infrastructure that are necessary to even begin to compete.
Look at it this way, since the collapse of the domestic consumer electronics industry how may American startups have risen to compete with the likes of Sony, Samsung, Canon, Toshiba, etc?
Granted no-one knows the future, it is always possible that someone will develop a flying car that gets 200mpg in their garage but in the real world this doesn’t happen. The established players sitting on billions of profits are going to be the first to innovate more often than not, as they can afford to hire the best minds and give them the resources they need.
For all of these reasons, preserving Detroit is necessary and by any means possible. If we want a domestic auto industry in any meaningful sense our lot is with Detroit. The much harder question then is how to make Detroit successful. Another way of asking this question is “What will it take to revitalize American manufacturing?”. That's for another post.
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