Sunday, March 1, 2009

Should we bail out the automakers?

I could go either way on whether to bail out the automakers  I don't think it's worth a bailout unless the firms can some day be independently competitive again, but in that case some sort of transitional plan is need for the auto economies and workers.  If there's a bailout, that money needs to be re-paid and it has to make those companies competitive again by downsizing and seeking out efficiencies.  

Personally, if it were possible, I'd say that GM should be sold to the unions, who can work out their own fate.  It would properly align incentives and worker motivation - a completely worker owned company.  Either that or it should be forced to merge with GM, with redundant brands and costs cut out to create operational efficiencies.  Ford's doing fine relative to the other two, partially because they have the best CEO in Alan Mulally (Sloan Fellow).

Can they be competitive again?  A key driver is obviously labor cost.  Check out this article in the New York Times comparing labor costs.  That $73 an hour number is thrown out there, but the article breaks it down in a more nuanced way:

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn’t made up. But it is the combination of three very different categories.
The first category is simply cash payments, which is what many people imagine when they hear the word “compensation.” It includes wages, overtime and vacation pay, and comes to about $40 an hour. (The numbers vary a bit by company and year. That’s why $73 is sometimes $70 or $77.)
The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so.
Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour. It’s a little more than twice as much as the typical American worker makes, benefits included. The more relevant comparison, though, is probably to Honda’s or Toyota’s (nonunionized) workers. They make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.
The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix — dividing those costs by the total hours of the current work force, to get a figure of $15 or so — and end up at roughly $70 an hour.

But labor costs actually only make up 10% of the total cost of making an automobile.  Innovation, brand and strategic focus are also essential.  Americans are usually pretty darn good at these things, but for some reason, the automakers have missed the ball in most of these areas.  

There's been a major erosion of brand equity over the past years.  A bankruptcy would completely destroy any left.  It's questionable without a major change as to whether the image of American automakers can ever really be fully rehabilitated.

We also shouldn't overplay that, since just a few years ago the American automakers were doing okay.  They made a strategic bet to focus on SUVs and trucks and were doing okay while people were buying those up.  Then high gas prices and the recession hit.

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