An Adversarial Culture: Auto Industry Bailouts (December 4, 2008)
I received a thoughtful commentary on the auto industry crisis from knowledgeable reader Joe H., who works in the industry.
Since I have no deep knowledge of the auto industry to share, I'll try to add some perspective. Before we get to Joe's astute comments, I would note:
1. It's easy to be cavalier about the situation--no bailout, etc.--but since hundreds of thousands of jobs are at stake I think it behooves us to consider matters carefully before announcing "what's best for the country."
As someone who suffered from the huge swings in construction spending/employment 1973-1993, I have experienced the sinking feeling one gets when one's livelihood vanishes. There will be a lot of suffering regardless of bailout or not, and we need to be aware that this is not just dollars and cents but people's lives.
2. It seems abundantly clear that there is massive over-capacity in the global auto industry; the industry can make millions more autos than there is demand for. All the major manufacturers are global companies, and there is some truth in the observation that Ford and GM could shutter their entire North American operations and go on as non-U.S. global manufacturers.
My longtime friend G.F.B. sent me this link about the new high-tech Ford plant in Brazil--a market Ford clearly sees as growing: Ford's most advanced assembly plant operates in rural Brazil (video). A related story reads, "Special report: South of the equator, Ford and GM prosper." (from 2007)
From a global perspective the manufacturers have little choice but to cut capacity in the weakest markets for their products. If that happens to be North America, then it is simply prudent management to cut capacity to match demand. Borrowing billions from the government, or receiving a "gift" of billions will not change this business reality.
While it's easy to demonize globalization, it is undeniable that all auto manufacturers build factories near their markets for a variety of reasons both financial and political. So to blame "globalization" is somewhat specious when the entire industry is globalized. If you cannot make a car for X cost and sell it profitably in another country for a profit, then it makes no sense to make cars for that market.
In other words, we want all the benefits of globalization--low cost goods, cheap international airfares, and so on--but we want all the jobs to stay in the U.S. It doesn't work like that. If you want to maintain domestic industries with trade barriers, you cannot expect to get the low prices of globalization.
3. The American consumer is highly indebted and therefore a poor credit risk. To the degree that autos are sold with little money down, high-interest loans, then we can foresee a large and long-lasting decline in auto sales regardless of the quality of the vehicles or the wishes of consumers for new vehicles. This is reflected by Nissan sales dropping as much or more as GM's sales. Honda and Toyota sales also declined by over 30%.
4. As the Wall Street Journal noted, not all domestic manufacturers are on the edge of insolvency: America's Other Auto Industry : There is such a thing as a profitable car maker in this country.
The comments from readers are also of interest: Readers Forum: America's Other Auto Industry.
5. The American public rallied against the first $700 billion TARP bailout of the banking industry 100-to-1; supposedly the sharp decline in the stock market changed many minds. In any event, Congress passed a $700 billion giveaway with few if any actual dividends to the U.S. taxpaying public. Now a bailout of about 5% of the TARP bailout (number one of what, five? Six? Twelve? I've lost count of the banking/mortgage bailouts) is proposed for the Big 3 and the uproar exceeds the one surrounding the TARP bailout which blew away 20 times more taxpayer funds. This is not to say I agree with the auto bailout, but it's a good idea to place it in proper context.
6. The Japanese, Korean and German auto manufacturers with plants in the U.S. buy most of their parts from U.S. suppliers, and their factories are staffed by U.S. workers. This begs the question of why Big 3 autos are losing favor with consumers.
OK, here are Joe's comments:
I am torn regarding the US auto industry bailout. Full disclosure is in order. I work for General Motors.Thank you, Joe, for a thought-provoking essay on the situation.
Reading Joe's comments made me wonder just how much a role our adversarial culture plays in this crisis. After all, unions and management fighting it out in bloody screaming combat is considered "normal" or as Joe suggests, even required.
Our entire legal structure is based not so much on justice (though it's a good principle to establish) but on adversaries duking it out in court. The truth is never the goal--winning the case by convincing the jury or the judge that your position is stronger than your adversaries' position is the goal.
Just how culturally bound this adversarial perspective truly is can be revealed by comparing the Japanese auto industry with the U.S. industry. I think executives and workers alike at Toyota in Japan would be quite confused by the management and union behavior in the U.S. It would literally make no sense to either group in Japan to strangle the company's competitive advantages. I suspect the Japanese might view this adversarial approach as a form of slow seppuku--ritual suicide.
The results of this adversarial approach are now painfully visible. I've engaged in a spirited debate over various auto-industry issues with my friend G.F.B., and I will mention one point on which we disagree--a point which I think illustrates just the sort of cultural divide I am exploring.
I proposed to G.F.B. that the UAW might have done better to focus on improving the quality of the vehicles they make rather than squeeze more benefits from management via negotiations. G.F.B. disagreed:
The union is not in charge of quality control, design, marketing nor direction of the company. The union does not control the design of the cars, and the build quality tolerances that are set by the manufacturers. The guy on the assembly lines job is do his job well. The UAW's job is to protect and try to improve the life of the guy working on the assembly line. The company management's job is to focus their energy on making cars which will last 20 years. Clearly, they don't think that it important as you do.(I had suggested that Detroit would be in a better position if they made cars which lasted as long as the Japanese nameplates made in the U.S.)
G.F.B.'s position is perfectly reasonable in the context of standard U.S. labor/management relations, and indeed many analysts see virtually all the problems as managerial; but for context, read this excerpt from: How Detroit Drove Into a Ditch: The financial crisis has brought the U.S. auto industry to a breaking point, but the trouble began long ago. Paul Ingrassia on disastrous decisions, flawed leadership and what the Motor City needs to do to survive.
On Aug. 20, 1979, 18-year-old Brad Alty, fresh out of high school in Mechanicsburg, Ohio, was driving his Gremlin to work when the car broke down. He was two-and-a-half hours late to his first day on the job at a new motorcycle factory that Honda Motor was opening in central Ohio.Perhaps the UAW leadership tried to influence management to pursue smarter planning and to focus on higher quality as a long-term strategy to retain UAW jobs; it would probably take an insider's information to know all that transpired over the past 20 years in the industry.
But I still wonder if some measure of Detroit's structural woes--and perhaps of the U.S. economy's structural woes--are not linked to the adversarial model of our society.
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Operation SERF, Part I
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