Taxpayers Choking on Detroit's Free Market Malarkey

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Taxpayers Choking on Detroit's Free Market Malarkey

By letterhead | November 17, 2008

So Detroit wants a bailout. Wonderful. The question is, why?

Yeah, they’re waving the red flag of economic catastrophe to blackmail taxpayers and steamroll Congress. But let’s take a quick trip down memory lane and review the industry’s recalcitrance over the past few decades before we bite off a big chunk of what they’re now selling.

Detroit is on a PR tear, using the latest tools like web-based video, and old-fashioned media outreach. It was amusing to see a recent NY Times piece on the Chevy Volt, and how GM is trying to pump up the car’s mileage to 100 mpg. Presumably we should assume that Detroit has turned over a new leaf spring and is committed to a new way of doing business.

Um. Not so fast. Here is what the Volt article made me think of: the “Supercar.”

All Hail The Supercar

Back in 1993 Al Gore pushed Detroit into participating in a Federally sponsored program to build an 80 mpg passenger car and get it to market within 10 years (which would have been 5 years ago if the car companies had not killed the program.)

Gore offered to back off higher CAFE standards in exchange for a Supercar commitment. The Feds ended up spending more than $1.5 billion on the program. But in the end the car companies dragged their feet and Bush 43 killed the program in 2001.

The Chicago Tribune has an EXCELLENT three-part series on the life and death of the program… here.

It’s an eerie foreshadowing of today’s situation… optimistic liberal minded president takes office… amid energy chaos and sliding domestic auto sales… car companies resist and then capitulate to an aggressive technology program…politicians fail to keep Detroit’s feet to the fire… Detroit moans about how hard it is and then sticks in the shiv.

It’s even interesting, and a bit infuriating, to note that one of the main areas of technological development for the Supercar program was regenerative braking. It’s the exact same technology that Toyota uses in its category-winning Prius… technology Toyota is now licensing to Ford, among others.

1989 — Taking Credit While Killing CAFE

Following 10 years of success in raising mileage standards, Detroit was quick to claim credit for itself, denying that CAFE had anything to do with it, and at the same time pushing back on any further demands on their technological and managerial prowess… (NY Times):

Those car makers that oppose mandated mileage requirements contend that it was largely market forces in the form of high gasoline prices that led to their production of more efficient vehicles. But Clarence M. Ditlow 3d, executive director of the Center for Auto Safety, a Washington-based consumer advocacy group, insisted that the Government standards were ”a spectacular success” and were responsible for two-thirds of the improvement.

General Motors and Ford contend that satisfying a demand for bigger cars will make it very difficult to meet higher efficiency standards. William Nowack, a spokesman for General Motors, said that the efficiency standards ”restrict the production of full-size cars and that makes a buyer hang on to an older, less efficient car or maybe buy a truck or van.”

This is the “free market” position that Detroit will use for nearly two decades to fight any steps to force them to produce more efficient cars and trucks.

1996 — Killing Zero-Emission Vehicles (ZEVs)

California and other states (NY and MA) once had in place requirements for a certain percentage of cars to be zero-emission vehicles. What happened? California backed off its plans in 1996 (NYT). Oil and car companies killed it. They said that car companies needed more time to develop technologies. (Like, um, the exact same ones they were in the process of undermining in the Supercar program.)

And they claimed that consumers would not want the limited range vehicles. For an alternate take, watch “Who Killed the Electric Car.” Actual living breathing people who drove them loved them. (As opposed to the brain-dead auto CEO’s who bad-mouthed them.)

Industry claimed that the product just would not be competitive in its current state. By the way… this is the same year that Toyota begins road testing the Prius.

1997 — Killing CAFE… Again

In 1997 the Clinton Administration tried to force a foot-dragging Detroit to boost mileage on trucks. Domestic automakers were increasingly reliant on trucks for sales and profits, but selling more trucks lowered the companies’ overall mileage figures. In response Detroit howled…(from NYT):

The auto makers argue that Americans like their trucks sturdy and powerful, and that it would be too expensive to make engines for such vehicles burn less fuel. Further, the Big Three auto makers say, any stiffening in the regulations would hand a chunk of the light-truck market, which they dominate, to Japanese companies, which make more efficient truck engines.

Instead, the auto companies’ own research shows, it has become a nation of overprepared commuters, as millions of Americans use the rugged vehicles only to drive to work and haul youngsters and groceries.

“It’s utterly outrageous,” said Daniel F. Becker, director of the global warming and energy program at the Sierra Club. Because of the lower standard for trucks, he said, “we have more pollution, more oil consumption and a higher trade deficit in oil.”

The Big Three say that strengthening the truck mileage standard would benefit the Japanese auto makers, just as they contend that strengthening the car standard did in the late 1970’s. Then, the Japanese sold a higher proportion of fuel-efficient small cars, just as they now sell a higher proportion of fuel-efficient compact trucks.

In the end the industry killed higher CAFE standards with the argument that it would hurt competitiveness and kill jobs.

2002 — Killing CAFE… Again and Again
Detroit mounted a huge advertising campaign to defeat a Senate proposal to increase CAFE standards. As usual, Detroit won. But what was interesting was the position adopted by Honda, which refused to take part in the campaign. Honda told Senators that mileage standards should indeed be higher.

Detroit, as usual, howled about the Fed’s job killing, anti-competitive regulation. But the truth is not quite so neat … (SF Chronicle):

General Motors, Ford and Chrysler say they can remain profitable only by selling sport utilities and pickups because they lose money on their cars. By contrast, Honda is making money in the United States and elsewhere by selling mostly passenger cars.

Indeed, the company’s profit was four times that of GM, the most successful among the Big Three, even though its revenue last year was less than a third of GM’s.

The average new vehicle sold by Honda in model year 2000 got nearly 30 miles per gallon, about 6 miles more than the average American automobile and more than any other automaker.

2004 — Killing John Kerry

One of John Kerry’s campaign promises was a $10 billion program of incentives for Detroit to improve fuel efficiency of cars. In gratitude, the auto industry fought tooth and nail to keep him out of the White House. Why? Because the money came with strings attached: higher mileage requirements.

Only this time, Detroit had two friends in the White House. Once again Detroit trotted out the job-killing anti-competitive ruse, enlisting the help of the Bush Adminstration to come up with lots of scary numbers about how much Kerry’s plan would cost in jobs and lost productivity. (NY Times).

2007 — Still Whining, and Still Trying to Kill CAFE

I know… this is getting boring. But just last year Detroit was up to it all over again… (Ward’s Auto):

… fuel-efficiency improvement contained in the EPA report shows the gains are “incremental” and “hard-fought.” The clear suggestion, the GM spokesman adds, is that the Senate’s CAFE proposal is unreasonable.

“The standards proposed in the Senate far exceed what auto makers can attain in their timetable,” he says.

Meanwhile, The Whole Entire Time…

The entire time that Detroit has been fuming, fussing, and fighting any and all attempts from outsiders to push them toward new markets and new technologies, their market share has been in free fall. And now they are broke, can’t sell so much as a damn spark plug, and are about to take the whole economy down with them. Just look at these numbers from The Wall Street Journal.

The top three lines (from top down) are GM, Ford and Chrylser:

For years they have ignored the writing on the wall, designed uncompetitive products, weighted their product lines toward a vulnerable segment, and crushed anyone who dared challenge their wisdom. Now… tell me again who are the job-killing, anti-competitive zealots?

Over a Cliff, Without a Barrel

Every step of the way… for decades… Detroit failed to see market trends, failed to pay attention to their falling market share, made bogus claims about customer preferences, floated bogus free-market arguments to defend their misguided strategies, failed to see new product niches, failed to see new competition (e.g., Kia, Hyundai), stymied every attempt to increase efficiency, stomped all over those who would help them…

And now the rabid free-market loving Detroit CEO’s don’t think that government intervention is such a bad thing. But should we?

The blog The Truth About Cars put it this way:

“Detroit wants a re-do after chasing SUV profits off a cliff… clearly we haven’t lost our ability to create or manufacture things. After all, auto factories in America build competitive products for profitable companies every day. They just happen to have names like Toyota, Honda and BMW.

“The American ‘automotive sector’ has not failed. Nor have Americans forgotten how to make stuff. The Big 2.8’s plight is the simple, inevitable result of tragic mismanagement. Using tax money to enable them, promoting this policy, is not patriotic. It’s a complete betrayal of the principles of hard work and fair competition, and the necessary balance of risk and reward, that made this country great.”

Another choice quote:

“As anyone who’s ever worked for a company with its head up its ass will tell you, giving copious amounts of fresh capital to execs in charge of a dysfunctional corporate culture to ‘fix’ their business is like trying to extinguish a log fire with gasoline.”

From ABC News:

“Ford and GM really haven’t done a very good job of understanding what consumers want,” said Global Insight auto analyst Rebecca Lindland

And from the Cleveland Plain Dealer:

“They handed that market over to the competition. The Big Three really put no resources in the passenger car side of the market,” Merkle said.
Erich Merkle, an analyst with IRN in Grand Rapids, Mich.

Detroit Needs To Fail

The irony should not be lost on us that the free-market GOP is hanging their one-time ally out to dry. It appears that the labor friendly Dems — long the nemesis of Detroit’s freewheeling free-market-obsessed CEO’s — are offering the only friendly ear in Washington right now. Also no surprise that the unions are making no consessions. (Though they are far from innocents in this debacle.)

So we are faced with two questions:

#1) What happens if we don’t bail them out? They file chapter 11. They lay off hundreds of thousands. Retirees get dumped on the PBGC and other federal agencies. The companies stay in business, in smaller, leaner form. They limp along, probably with help from the taxpayer, until they have a competitive product to sell. And then the resurgence can begin. Likely cost is in the billions… but one day we just might see the return of American power in the auto industry.

#2) What happens if we give these chumps $25 billion? They limp along until next year when they comeback for $25 billion more. Then they file Chapter 11 in 2010 or 2011, and then we are back to option #1, above, $50 or $100 billion the poorer. And in the meantime we are treated to wonderful new products from the executive geniuses who brought all this down on our collective heads.

If past is prologue, then our taxpayer investment will bring all-new American vehicles that the world market will gobble up… more of the auto industry equivalent of spam we’ve been seeing for the last 20 years… behold America’s newest SUV:

The Spam Utility Vehicle!

How is this all relevant to PR pros?… More on that to come…

Spin has consequences…

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Taxpayers Choking on Detroit's Free Market Malarkey