Monday, May 04, 2009

3 Ugly Truths About the Auto Industry

Now that I've pissed off the coal miners, I'm going to take on the auto workers. Jack Hough, writing for Smartmoney, thinks the picture for the auto industry is only going to get worse.

Readers should note that Smartmoney is home to two free market fundamentalists whose opinions I find repugnant. I don't believe Hough is one of them, and I do agree with him.

For most of this decade, Americans could be counted on to buy more than 16 million cars a year. Last year sales barely topped 13 million. This year industry forecasts call for 10 million.

America’s car makers are thus struggling to survive. Chrysler couldn’t convince a cluster of debt holders to accept less than they're owed, and filed for bankruptcy on Thursday. On Monday, General Motors (GM: 1.81, -0.11, -5.72%) said it will cut 2,600 dealers and eliminate its Pontiac brand, and will either sell or close Hummer, Saturn and Saab. It faces a June 1 deadline to restructure, or file for bankruptcy.

I wish both companies success, but for America’s car business to have a shot, policy makers and Detroit executives must come to terms with three ugly truths.

1. The new sales pace is closer to normal than sickly.

America’s car count has grown well faster than its population over the past half century (see graphic below). Credit two trends: Incentives for house buyers have pushed citizens away from cities in search of affordability, giving them long commutes, while the cost of living has outstripped wage growth, leading to a surge in two-worker, and two-driver, families. But our stock of cars couldn’t grow that fast forever. We’re already well past the point where our cars (close to 250 million of them) outnumber our drivers (just over 200 million).

I’m guessing the bubbly pace of sales we took for normal a few years ago was driven far more by fashion than utility. The suburbs, after all, put neighbors’ cars on naked display. In 2002, the average new car buyer kept his car for just over 49 months. Whether because consumers can’t borrow more or because flashy displays of wealth have fallen out of style, that number has since crept up to 56 months. It can surely climb higher.

Sales of 10 million cars a year are enough today to keep every driver in his or her own car (already an astounding thing), with many of them driving new cars and none driving ones built much earlier than 1990. That’s enough. It’s not like new technology demands a stampede to showrooms. Tree lovers who buck up for a Toyota Prius today will go five fewer miles on a gallon of fuel than I went at age 16 in a Volkswagen Rabbit with a diesel engine. It was made in 1980.

2. Recent boom years weren’t so great for car makers, and Congress is partly to blame.

General Motors didn’t turn a profit in 2005, 2006 or 2007, years of relative opulence. Even before that, profits came largely from lending, including for houses, and not from making and selling cars. Operating margins for the car business have been more or less in decline since the 1960s. Health-care costs have steadily risen. General Motors famously spends more than $1,600 per car for employee health care.

In the U.S., government payments to the middle class for health care are decried as socialist, but the money is nonetheless needed, so we route payments through employers using a giant tax subsidy, and somehow convince ourselves that we’re more capitalist for it. The money ultimately comes out of workers in the form of lower wages and take-home pay instead of taxes — a subtle enough difference, except the scheme also leaves employers on the hook in the event of a sudden rise in plan costs, which we’ve had over the past decade. Nonunion companies and ones without steep obligations to retirees can adjust. Car makers can’t. On some level, rather than boo them we should applaud them. By losing money to health-care costs, they’ve taken on a responsibility that politicians have shirked.

3. Jobs worth saving generally don’t need saving.

Over the past year policy makers have lent car companies billions of dollars on the theory that if we keep them alive long enough the economy will pick up and good jobs will be saved. But financial failure for a company doesn’t mean that it ceases operations. Often, it means it drastically shrinks, takes on new management and forces otherwise impossible concessions on its unions and creditors. That might be just what’s called for.

Last week I wrote that what some politicians call extraordinary times, financially speaking, are really a return to normalcy. Personal savings (what consumers don’t spend) has recently risen from less than 1% of after-tax income to more than 4%, but its long-term average is 7%. After-tax corporate profits have fallen from 7% of the nation’s income to 5.1%. Their long-term average is 5%. If sales of 10 million cars a year is the new normal, too, we still need plenty of car workers — just not as many as we have today.

One recent proposal by lawmakers would give $4,000 to $5,000 to a consumer who buys a new car by year’s end. It seems like an easy fix. I can picture cashing my $5,000 check and driving off in a new Ford with the thought that I’ve helped my fellow American earn a decent wage. But giant car incentives will only lure Americans into buying more of something when they don’t truly need it, in the same way that giant house incentives have doubled America’s average house size since 1950, even as families have shrunk.

Better to let the car business shrink to a healthy size, whether through bankruptcy or selling brands and closing production lines. Send more taxpayer cash to Detroit if need be, but use it to help our former car workers find and qualify for good new jobs that need them.

More cars than drivers

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