Six Myths about the Big Three

As part of our on-going conversation about a potentail bailout for the big three automakers, US News offers six myths about these companies. Their list:

• They don't build small cars.
• They don't build any desirable cars.
• The same guys asking for handouts are the ones who caused the problems.
• The CEOs should fly coach.
• It's all the unions' fault.
• They've done nothing to help themselves.

Interesting read.

Comments

[matt @ Thrive]

Whenever someone asks for help, our first inclination is to blame the victim. There are plenty of reasons for this, but one simple one is that we want to believe in a just world: if carmakers are in trouble, they must have done something wrong to get themselves there. Otherwise, we too could be struck down by misfortune that is entirely unrelated to our behaviors (and it is worth noting that when we are struck, we tend to make that exact argument: it wasn't me).

I'm not sure that blame for the carmakers should actually even be part of this conversation. The question is whether it is a good use of our money and whether we feel like carmakers are "worth" saving. We've made the same decision about the small farmer dozens of times throughout the history of our country, with varying results. Are we content to let car construction go entirely abroad and focus on other US strengths, like technology? That's an open question...I'd be interested in hearing what people think.

[Mr. ToughMoneyLove]

As the article points out, domestic automakers have "some" desirable cars but their brands in general are not. One problem not mentioned is that for the domestic makers to keep prices in line with the Japanese competition (which have substantially lower labor costs), the domestics have to cut costs in other areas, such as engineering and materials. This shows up eventually and U.S. consumers know that. A few flagship high quality, well designed vehicles are not enough. The quality and design must be reflected across the entire product line and brand.

[Traciatim]

@Mr. ToughMoneyLove: So what your saying is that in order to remain in with the import cars (to the USA) we should allow the standards for workers to match that of the other countries?

If you buy foreign goods, you hate America. Plain and simple.

[Mark B.]

FMF,

Thanks for posting this. There are several misconceptions about the auto industry out there, and it is certainly hurting their public opinion.

@ Tough,

Very deep labor costs cuts have occured in the last few years. By 2010 the labor costs for the Big 3 will be nearly equal to those of the Japanese companies. This is why the Big 3 is so short on cash, they have basically bought themselves out of all of the legacy retirement costs. For example, they have shifted all union retiree health care to a trust fund that they funded with cash this year. Huge hit now, but no future obligations for retiree healthcare.

[Kevin M]

Myth #1 - so they do make small cars, they just suck according to the author. Not a very convincing argument to debunk this myth.

Myth #2 - clearly the Big 3 were too heavily tilted towards big trucks & especially SUVs. Aren't we constantly preaching diversification around here?

Myth #3 - they took the jobs (and lots of money to go along with it) so I see no problem in asking tough questions of them

Myth #4 - yes, they should have. Is the author arguing for or against this? I can't tell.

Myth #5 - I don't know enough to comment, but clearly it's everybody's fault here.

Myth #6 - I've never understood why Ford has Mercury and GM has GMC, Pontiac, Chevy, Buick, etc. They're all the same cars with different names! Pick one and move forward! You're not fooling anyone.

[Mark B.]

Kevin,

Studies by Ford have shown that Mercury customers would NOT buy Ford vehicles if Mercury went away, they would be more likely to buy another brand completely. This is why they keep Mercury around. Plus, it costs them next to nothing to maintain the Mercury brand, so that is why they keep it around. Killing Mercury would not be a big cost savings for Ford.

[MP]

The Big 3 should look to the Oil Companies for a bailout.....it's a nexus that caused this problem to come to such a head now when we've had warning signes for decades. Congress should let the oil guys know that if the big 3 fail, so do they.

[BV]

This whole "They should have flown commercial" is such a "pot calling the kettle black" argument. Remember how Nancy Pelosi argued that she needed a larger plane for her and her staff? Do you know how many people in Congress fly on private jets? If we are to consider them the "board of directors" of the U.S.A. then they shouldn't be flying around on private jets while the country is going bankrupt on their watch.

[rwh]

TriciaTim:

I drive a Honda. So from that you deduce I'm a traitor. In deference to the rules of decorum on this blog I'll refrain from saying where you can put your opinion.

[rwh]

I think in the end there will be government aid to the domestic auto companies. Chrysler will probably go away or merge with GM or Ford. The government may actually take over the companies by purchasing their stock at firesale prices. Maybe in a few years they can then sell the stock for a profit and recoup much of the initial cost of the bail out. The domestic industry will probably be smaller in the future.

Regardless, I think cooler heads should prevail and think long and hard whether it is in our national interest to potentially let our auto industry disappear. At some point we could become a country that doesn't make anything of significance. We already don't make most of our electronics and are losing market share in appliances, machine tools, bicycles, textiles and clothing.....the list goes on and on. We can't go on forever as a debtor nation with a massive trade imbalance. There's more at stake here than a few Chevys.

I also drive a Dodge Caravan and Mazda van with a Ford engine and transmission. My Honda was built in Ohio.

[tom]

I've said it before and I'll say it again. At that level, corporate jets are a MUST. When you are needed in person at meetings around the country (even world) back-to-back, you cannot fly air carriers. They are never on-time, always overbooked, and are completely unreliable. A CEO cannot be put in that position, they are too important to be waiting around at an airport because their flight was delayed or their luggage was lost.

[Jim]

I'm amazed how divisive this topic seems to be. Everytime that the US automakers comes up theres an argument with very strong opinions about it on extreme ends of every issue.

I don't recall seeing such emotion over the $100B that the government threw at AIG.

The govt. throws another $40B at AIG and people hardly seem to notice. But they talk about maybe loaning $25B to the US auto makers and the comments are full of accusations of communision, questions about peoples patriotism and predictions of the end of civilization.

Is it really the $25 billion that the congress is talking about loaning the US auto makers that people are so concerned about? Or are these arguments more a reflection of peoples dislike for certain companies?

[kitty]

Jim, I am actually on the fence here: I am worried that bailout will not be enough, I don't want to subsidize "job banks", but I do worry about the implications for the economy. Also, Chrysler bailout in the 80s was pretty successful and the government did make money. I am also wondering if it would be cheaper to bail them out then to deal with consequences of their failing. So I am really torn. I am even considering gambling a few hundred dollars - obviously the amount I can afford to lose - on Ford stock believing the government will not let it fail regardless.

I do believe, however, that the AIG wasn't allowed to fail because the implications of AIG failing would've been much wider. Also, AIG has some profitable parts which can be sold. In fact, one of the conditions of the loans was that they sell some of their businesses to pay back the government. It has one unit that is losing money due to large exposure to CDS but it has a number of profitable units that are worth more, if I am not mistaken, than the debt to the government.

The failure of automakers while devastating for a number of businesses doesn't affect the whole world financial system to the same degree as AIG does. Plus, I am not sure if automakers have any profitable businesses they want or can sell.

I do realize that flying on a private jet is a non-issue, but it was bad PR and it was stupid.

BTW - the main reason people by Hondas and Toyotas instead of American cars is quality. You can drive a Honda for over 100K miles without having problems. Check out Consumer Reports and you'll see how Hondas and Toyotas consistently get higher quality marks than GM cars. If American workers earn more, shouldn't they do a better job? Also, look at Blue Book value for used Toyotas and Hondas and some of the used GM cars. Toyotas and Hondas keep their value a whole lot better.

Sorry TriciaTim, but what you are preaching is protectionism and it doesn't work as it removes the incentive to be competitive. Besides, many of these Japanese cars are actually built in the US. American car manufacturers need to learn to compete. Computer industry, for example, doesn't have this requirement and it is doing now a whole lot better than automakers.

BTW - GM already has small cars that it sells in Europe. Presumably they are better quality cars than the ones they sell here too, but they cannot bring them to the US because of protectionist legislation. They should be allowed to bring these cars to the US, it would save them money. Yes, some people here may lose their jobs, but it'll be a lot fewer people than if the company goes bankrupt.

[kitty]

Oops, editing error. This sentence "Computer industry, for example, doesn't have this requirement and it is doing now a whole lot better than automakers." was related to the fact that American automakers aren't allowed to bring to the US cars they build abroad. Of course, I could be wrong here, this is something I heard.

As someone who has an immediate family connection to all of the domestic auto manufacturers, I can validate some of what the article says, but I certainly wouldn't suggest it really answers anything.

Bottom line -- they have all been behaving like its a dying industry. Not one darn bit of real innovation. How did a company like Apple regenerate itself? Product innovation that created new markets or just changed the old game into something new. But the big three are content to just slug on. We will see. But I can't tell you how many things have been pretty obvious to anyone who has been around the industry, obvious for years. Whether they are just incapable due to their size or too stupid to do so, the bottom line is that they haven't reacted to the times as they should. That's not to say that they've been sitting on their hands. But it is to say they did nothing risky that could have reaped real rewards. Essentially they have all been doing what they can to keep afloat with the hope that something else will change the landscape for them. None of them have gone out and changed the market themselves.