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The Unions Didn't Bankrupt Detroit, But Great American Cars Did

23 July 2013 - Forbes

The Unions Didn't Bankrupt Detroit, But Great American Cars Did

Those who rent cars are increasingly aware of the high quality vehicles manufactured by wrongly bailed out U.S. automakers. More on the bailouts later, but the fact that American cars drive so well today paradoxically helps explain why Detroit filed for bankruptcy last week.

Longtime readers of this column might note the presumed flip flophere. For the longest time the argument made here to explain Detroit’s demise was the dollar. It still can’t be dismissed. Figure American carmakers are best at producing muscular, noisy, gas guzzling rides (think GM’s Suburban, Cadillac and Corvette, Ford’s Bronco and Lincoln lines), but with President Nixon’s mistaken decision (one oddly encouraged by American carmakers) to delink the dollar from gold in 1971, the demise of the Big Three began with great speed.

That was the case because a fiat dollar in the ‘70s coincided with a weak dollar, oil is priced in the latter, and with the dollar in freefall, gasoline prices naturally soared. Expensive petrol prices made that way by faulty U.S. monetary policy robbed the Big Three of their market advantage. Nominally expensive fuel made American cars unattractive to cash-conscious consumers, at which point fuel efficient foreign cars that often looked and drove better increasingly captured market share.

The Reagan ‘80s and Clinton ‘90s during which monetary policy was mostly sound gave the Big Three a renewed lifeline (oddly former GM CEO Rick Waggoner lobbied for a weak dollar), but their revival proved short lived. The George W. Bush administration, staffed by mercantilists of the Paul O’Neill variety, questioned the importance of sound money on the way to a falling greenback, high gasoline prices, and a sagging Big Three; Chrysler and GM in such bad straits that they required bailouts nearly five years ago.

The weak dollar made the Big Three uncompetitive, and the bailouts simply added gasoline to the fire. If GM and Chrysler had at least been allowed to go bankrupt, they would still be making cars today; albeit as part of Toyota, Nissan, Volkswagen, or some other carmaker with a clue. If so, they’d be able to attract somewhat better talent. But having been saved by a federal government that never hands out billions for free, they’re now a creatures of a meddling Washington, D.C. (a for-profit business not indebted to politicians would never have made the Chevy Volt) and a dying union movement. Since they are, is it any wonder that the best and brightest avoid the Big Three for employment, and by extension, Detroit?

So yes, a weak dollar followed by corporation-enervating bailouts laid the groundwork for the demise of the Big Three and Detroit in a major way, but arguably the biggest factor has to do with the quality of American cars. At present they’re very good as anyone who has bought one or rented one can attest. And that’s the problem. High quality American cars signal that automobiles in a general sense have become easy to manufacture.

No doubt some readers remember that particularly in the ‘70s Ford’s nickname was “Fix or Repair Daily,” and just the same, GM and Chrysler were similarly known (the latter bailed out in the late ‘70s) for their low quality output. It was owned by the British government in the ‘70s, but so bad was Jaguar that some leasing companies wouldn’t even offer the product line stateside.

Of course, what the above signaled was that there were still profits to be had in the automobile sector. If so many big names were so incapable of manufacturing cars that started each day, then it was certainly true that there was a market for carmakers capable of producing that which was stylish, and that would start. The Japanese proved particularly adept at the latter by virtue of manufacturing reliable, high gas mileage cars, and the Europeans proved skilled at the former while also producing very reliable autos for the upper end of the market.

Fast forward to the present, and seemingly all cars are good. No doubt some can point to outliers, but in general if you buy a car today you can rest assured that it will start tomorrow, a year from now, and five years from now. Those who purchased new cars in the last five years know this intimately, that the modern auto generally doesn’t break down all that often. In short, cars are simple, prosaic, and easy in a modern sense to manufacture well.

But because they’re easy to produce, there’s little advantage to be had in manufacturing them for the middle market. Unions can be blamed, and no doubt the $1,500 per car cost of union labor will be trotted out a great deal in the coming weeks, but the facts are that unions or no unions, mid-range cars are yesterday’s innovation.

Precisely because they’re yesterday’s innovation the profits in the space aren’t sufficient to attract talent or investment. If anyone can produce reliable cars, why be in the business? No doubt Americans could if they chose to manufacture great tube socks, toothpicks and paperclips, but why produce what anyone can? If anyone can produce something, the margins are naturally going to be small. Cars today fall into the ‘anyone can produce them’ category, and the fact that they do explains Detroit’s demise more than anything else.

Some readers might point to computers as similar in the above regard, but unlike the Big Three, Silicon Valley’s technology firms have long outsourced the manufacture of their technologies overseas. When Apple Inc. puts out ads about how its goods are ‘designed in California,’ the tech giant is speaking volumes about Detroit’s problems.

Put simply, Michigan and its city most known for the rise of the automobile clung to a business – car manufacturing – that was long ago rendered yesterday’s commercial news. And just as Silicon Valley would be destitute too if its companies used limited U.S. labor to manufacture computers that anyone can make, Detroit is bankrupt because its biggest employers still manufacture – as opposed to simply design – cars that anyone can make.

The mainstream punditry will talk about unions, crime and high taxes as the causes of Detroit’s bankruptcy, but the real answer is rooted in something far more basic: cars are easy to make, and Detroit’s biggest employers make cars. Detroit will revitalize itself once its biggest employers migrate toward that which isn’t so simple.

 

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