Thursday, May 28, 2009

(Don't) Pity the Car Companies

As previously mentioned, I'm a huge nerd for Planet Money. So much so that I listened to it on my way to work today in an effort to catch up with back episodes. And yet, it was the newest one that caught my attention. It wasn't until hours after the fact that the little nudging feeling at the back of my brain actually morphed into a real, relatable sentiment. My problem stemmed from an interview/discussion Laura Conaway did with Frank Langfitt:
Frank Langfitt: Now, what the government says it what they always say: "We don't want to run this company, we want auto execs to do it". At the same time, let's take a look at that Fiat deal. One of the things they said to Fiat is, "If you want another five percent of a stake in Chrysler, you gotta deliver a 40 mile per gallon engine in the United States".

Laura Conaway: So the Obama Administration is directly saying to Fiat that "You can have some more of Chrysler, but you gotta give us a car that does like this on the road".

Frank Langfitt: Exactly. So you can say publicly, as the president has, "We're not going to dictate policy". But you already have the White House saying, "If you want X, you have to deliver Y". And "Y" is a very fuel efficient engine, which is what the government's policy is towards oil. It's part of its energy policy, part of its automotive policy. So, it's very hard to divide this up when you have a government that has other political agendas that are related to the car industry.

Up through here, I'm totally with them. I don't really want the government in my auto industry, just like I don't particularly like my auto industry in my government. I see the conflict of interest. I see the issues that may arise. 
Laura Conaway: And let's talk for a second about those agendas, because government comes with one set of goals - more fuel efficient cars, as you've talked about, certainly maintaining the employment rate, or trying to get the unemployment rate down in places like Michigan and Ohio. Nobody wants to see - in those places - the American auto industry go away. A profit making company like Chrysler comes at things with a very different set of goals. First and foremost among Chrysler's goals has to be - by law - maximizing profit.

Frank Langfitt: Absolutely.

Laura Conaway: How do you reconcile that?

Frank Langfitt: Well, I think it's going to be fascinating. This is going to be kind of one of the big meta stories of-of what's happening in the auto industry because if you talk to people in Michigan, they will say a lot of people in the auto industry, they smile. And when Mr. Obama says anything, they just nod their heads. They say, "Sure, boss, we'll do whatever you want". But they say that it has been traditionally very difficult traditionally for those companies to make much money on small cars. The profit margins are very narrow, people percieve - rightly - that Toyota and Honda are better at making them.

Here's where Frank Langfitt - and the American auto industry as a whole - loses me. Now, here's a couple of important points. I'm not a car person. I'm not a professional economist, or even an amature economist. I don't know much about business, or business models. I was a lit major, so I pretty much shunned anything businessy related - aside from Business Ethics, but that was simply because one of my favorite professors taught the course and I love philosophy. But -

But even with all of that, I can look at what has happened to the American auto industry in the past decade - or more - and tell that maybe, just maybe, their business model of making huge, cumbersome fuel inefficient cars really doesn't work as well as they think it does. Sure, there will probably always be some schmuck buying Hummers. But there is a reason the American auto industry is in the crapper. It is pretty much the same reason the newspaper industry is in the crapper, and yet it also manages to share some similarities with what ails the financial industry. The American auto industry not only thought it didn't need to innovate, but it was arrogant enough and short-sighted enough to focus on what cars were selling best in the moment, instead of developing cars that would fare well in future trends. There is a reason Chrysler and GM need government bailouts. There is a reason why Honda and Toyota are seen as more reliable cars. It is because of a bullheadedness on the part of the American auto industry and a refusal to take into account the fact that people actually (a) like spending their money other places than the gas station, and (b) like reliable things.

So, I don't want to hear about how smaller cars have narrower profit margins. Because if Chrysler or GM had any profit margin to speak of, they wouldn't need a bailout, they wouldn't be either in or nearing bankruptcy, and they wouldn't be closing down dealerships and auto plants. The fact of the matter is, changing the way the American auto industry does business will be painful. It would have been difficult at any point in time, but it will be more painful now when there is almost no revenue coming in to keep the companies afloat. That doesn't mean we should pity them, or worry about how they could possibly survive with the demand for a 40 mile per gallon car. If the American auto industry wants to prove it should be saved, that it can be a viable industry, then it is going to have to make some fundamental corrections, corrections that should have and could have been made while the companies were solvent. And it can start with making smaller cars that are more fuel efficient, that are reliable, and that - ideally - have ceilings that don't fall down after a couple of years.

No more whining about how Toyota and Honda do it better. They haven't always done it better. And it is so uncouth to give up without a fight. It makes the American auto industry look like it was never supposed to be on top at all.

7 comments:

John said...

[rant]
The first law of corporate management is indeed, "maximize shareholder wealth," loyalty be damned. These companies didn't worry about the negative effect on America that outsourcing so many of their plants and assorted services to cheaper nations would have. Why should we, the American people, worry how our buying decisions will affect them? Just as a company's loyalty is to its shareholders, a consumer's first loyalty is to him- or herself. If a company isn't making the product you want, don't buy whatever they are making just because you like the company. Market researchers can't tell the difference between those two buying motives, and will interpret a purchase as a sign to stay on their current path. If you feel bad for all the soon-to-be-out-of-work people in Detroit and elsewhere, donate to an actual charity that will help them, rather than a sinking company that will do anything to raise its bottom line. In short, rewarding bad behavior only leads to more bad behavior. Buy the best product for you, regardless of brand.
[/rant]

petpluto said...

"The first law of corporate management is indeed, "maximize shareholder wealth," loyalty be damned. These companies didn't worry about the negative effect on America that outsourcing so many of their plants and assorted services to cheaper nations would have. Why should we, the American people, worry how our buying decisions will affect them?"

Exactly.

My other problem is that - clearly - their idea of "maximizing profits" hasn't exactly done so. I mean, there is a reason why these companies are in financial straits, and it isn't because the government was a mean bully who made them go against their own self-interests and make *gasp* fuel efficient cars. They made huge gas guzzlers - the kind of cars that they presume maximizes profits - with no plan for the future when those cars would no longer sell, and they have the gall to insist that they should continue to make the cars that sit on the lots?! Where the hell is the businessy logic of that?

That's what pisses me off.

mikhailbakunin said...

A couple thoughts:

1) The U.S. government could have done what many European governments have done and imposed huge excise taxes on petroleum. By keeping gas prices low and insulating the U.S. auto industry from foreign competition, we encouraged the production of huge gas guzzlers. We also bought huge gas guzzlers like they were going out of style.

2) Did the Big Three ever make smaller, more fuel-efficient cars better than Honda and Toyota? You'd have to check Consumer Reports over the past few decades, but I don't think we've ever really been able to compete with Japan when it came to smaller cars - that's why we tried to use anti-competitive means to reduce their market share.

petpluto said...

"By keeping gas prices low and insulating the U.S. auto industry from foreign competition, we encouraged the production of huge gas guzzlers."

Sure, but the auto industry - or at least the people being paid millions of dollars to run the auto industry - should have recognized that this wasn't a viable long term business plan, that after making large short term profits on gas sucking cars it would make good economic sense to plan for the long term development of cars that could compete against foreign cars and rising fuel prices. The fact that they - like many other industries - focused all of their attention on the short term and neglected the larger picture, they shot themselves in the foot. They shouldn't be huge multimillion versions of toddlers who need the federal government to point them in the right direction. As a capitalist venture, they should have been looking to future profits as they shored up short term gains.

"Did the Big Three ever make smaller, more fuel-efficient cars better than Honda and Toyota? You'd have to check Consumer Reports over the past few decades"

Two things: The Big Three used to make better cars; not necessarily in comparison to Toyota or Honda, but the actual car itself used to be a better product. Now, Chrysler hasn't been on anyone's buy list for about a decade. And Honda's declared milage and actual milage tend to be off by a couple of miles per gallon. Like, if they say you're supposed to get 30 miles to the gallon (like I am), you'll really only get 26 miles to the gallon.

Maybe a third thing: Honda especially is starting to lose in the milage race in some of their models; like, their caravan used to get a stated 19.6 or so miles to the gallon, and now only gets 16.something miles to the gallon. There are ways and areas in which the Big Three could make headway in the auto market.

petpluto said...

*By Caravan, I obviously mean Odyssey. My brain does weird stuff when I have to think about insurance.

And Jer, I should clarify is that isn't that I have a problem with the car companies maximizing profits by making Hummers and the like when Hummers and the like were profitable. I could understand that, even as I loathed the environmental implications and the overall cost.

What I have a huge problem with is the idea that these companies are now suffering from a dire lack of selling those Hummer-type cars, and yet still seem to insist that smaller fuel efficient cars aren't the way to go and that the way to maximize their profits is to continue making the same cars that led them to bankcruptcy court.

mikhailbakunin said...

No, I think you’re right. I agree that the U.S. auto companies bear much of the responsibility. And they're being extremely pigheaded.

But the federal government – under both Republicans and Democrats – encouraged the production of large trucks and SUVs. The feds held U.S. automakers afloat for decades, kept gas prices low, and beat back foreign competition. They also failed to create meaningful fuel efficiency standards until fairly recently. Gerald Ford (along with a Democratic Congress) introduced CAFE standards in 1975, but the standards for trucks and SUVs remained remarkably lenient for the next two decades. Even the so-called “gas guzzler tax” explicitly exempted vehicles that weighed over 6000 pounds, which only encouraged U.S. automakers to build more mid-sized trucks and SUVs.

So, I think it’s ridiculous for lawmakers to now complain that U.S. auto companies have failed to “adapt” when the lawmakers really created these absurd market conditions by failing to make tough decisions, encouraging protectionism, and offering backward incentives.

I’m not contradicting you, though. I think you’re right that the Big Three deserve much of the blame for their own short-term profit-seeking. Just because politicians helped them implode doesn’t mean they get a free pass.

But I’m just sick of hearing self-righteous lawmakers leveling these criticisms.

P.S. I don’t drive a Honda, but I know that Michelle’s Honda Civic gets excellent gas mileage – well over 30 mpg. My Toyota Corolla also gets consistently good gas mileage (and it’s already nine years old).

Honestly, I’ve never seen any statistics on this, but my perception has always been that Japanese cars are a lot more fuel-efficient than equivalently-sized American cars. I do know that Chrysler and GM had really terrible reviews in Consumer Reports for quite some time, and I’m sure that reliability and fuel economy have something to do with that.

petpluto said...

"They also failed to create meaningful fuel efficiency standards until fairly recently. Gerald Ford (along with a Democratic Congress) introduced CAFE standards in 1975, but the standards for trucks and SUVs remained remarkably lenient for the next two decades."

I think the worst decision would be to exempt vehicles built on light-truck chassis from fuel efficiency standards.

"But I’m just sick of hearing self-righteous lawmakers leveling these criticisms."

Sure. Personally, I'm pretty sick of the entire thing, but I'm overloading now on the sheer stupidity of the auto makers.

"I don’t drive a Honda, but I know that Michelle’s Honda Civic gets excellent gas mileage – well over 30 mpg. My Toyota Corolla also gets consistently good gas mileage (and it’s already nine years old)."

We're an all Japanese car family here, and they do get good gas mileage. My only issue with Honda is that although they say they get extremely excellent gas mileage, they really only get excellent gas mileage. The padding of the stats sort of rubs me the wrong way.