Friday, November 7, 2008

The Coming Apocalypse

It is the fall of 2008, and the inevitable now seems upon us.

The auto industry is burning rubber, headed straight to insolvency. It may not happen tomorrow, or even the next day, but news sources are reporting that at least two of the big three have less than a year of cash left. GM and Chrysler are in deep trouble. Ford, luckily, seems to have quite a bit of cash, and thus has more time to work things out.

There will be much gnashing of teeth in the Obama administration this winter as it takes the reigns of the world’s largest economy and realizes that the largest sector in that economy is essentially moribund. There will be an almost unquenchable desire on the part of the new administration, and the complicit press, to blame it all on George Bush, who by that time will be riding into the Texas sunset.

This desire willfully ignores 75 years of history.

Those in the know have seen this state of affairs coming since Walter Reuther dramatically increased the scale and power of the UAW in the 1930s and 40s. Put simply, US auto OEMs cannot compete with their existing cost structures. It is that simple. This was a disaster in the making for 75 years. That it took so long is a small miracle.

If you want a graphic illustration of why the industry is going bankrupt, just stare at this timeline of the UAW for a moment. Look at all those accomplishments. All in one place, it is a truly remarkable list of benefits that the UAW has secured for the American worker.

Now, consider that there are something like 700 million Chinese people who are willing – nay, begging – to work for under $1/hour.

In a truly global economy, how could a company possibly pay someone over $40/hour to sit at a press and push a button every five seconds?

It can’t. End of story.

I would bet bundles of money that, in every single one of the contract negotiating sessions which the big three have had with the UAW over the last 75 years – there have probably been hundreds of them – someone from management has looked in the eye of the UAW rep and said something like this: “You know you are going to bankrupt this industry… Maybe not today or next week. And maybe not because of the specific concessions we are granting today… But add them all up, and, bit by bit, you’re stealing the future of this industry by creating an artificially high wage structure.”

Now, in the coming years you will read all sorts of stories which purport to explain why the US auto industry caused its own demise. People will say that Detroit bet too heavily on trucks and SUVs while the world was shifting to smaller cars. This ignores the fact that those trucks and SUVs were enormously profitable to Detroit, while Toyota loses money on every Prius it ships. If the industry had done what these pundits proposed, the day of reckoning would only have come sooner. This argument also ignores the fact that the US OEMs have always had very full product lines, including smaller, fuel efficient cars. For some reason, Americans bought big cars from Americans and small cars from foreigners. It was a problem of the marketplace, not management.

You will also hear that management in Detroit was inept – they could not design their way out of a box. This argument ignores the fact that foreign automakers have something like a $5,000 cost advantage on every car that it builds and sells. The US auto industry sells something like 8 million cars. Multiply those two numbers together, and that’s $40 billion worth of profit for R&D which the US auto industry did not have. It’s a little easier to develop snappy, highly engineered cars when you have a practically unlimited R&D budget compared to your largest competitors. No, Detroit’s management was not the problem.

Now, I do not hold any grudges against the UAW. It did what it was designed to do, and it did it well. I honestly believe that every local rep who ever negotiated with management on behalf of a plant’s employees had those very employee’s best interests in mind.

Unfortunately, imputing honorable intentions to 75 years worth of UAW negotiators does not get us out of our current mess. And what a mess indeed.

I am not hopeful.

This is a topic for another post on another day, but essentially I believe that the US economy will be under pressure of some sort – waxing and waning but nevertheless constant – until the average hourly wage for those 700 million Chinese equals the average wage for our own hourly workers.

How long will that take? 100 years? Maybe less? In any event, it’s depressing.

1 comment:

mfinlay said...

Surprise, surprise! The Washington Post has just run a very sensible Editorial on this topic today. Find it here:

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/07/AR2008110703484.html