PermaLink WHAT mistakes?11/17/2008 10:16 AM
Can somebody tell me exactly what Detroit did wrong?  Can you?

Over the last week or so, there's been a lot of discussion about whether to "bail out" the major US automakers with guaranteed loans, similar to the "bailout" Chrysler Corporation got in the late 1970s and Lockheed got around the same time. With all the other bailing going on, $25 billion doesn't seem like a lot, but the rhetoric surrounding it really puzzles me.

A comment I keep hearing over and over is that Detroit should "pay for their mistakes."

Well, what mistakes?

The comparisons people make between Detroit and Wall Street don't fit. They are in fairly similar positions, actually, but with a critical difference: the individual volume was different, and the dollar amounts of each transaction were at vastly different scales. Most of you don't buy negotiable securities, but those who do, such as institutional investors, international investment funds, and foreign governments, do so in massive dollars amounts. When you and millions of other individuals buy cars, you do so (generally) one at a time, and in dollar amounts generally under $30,000.

The talk of allowing Detroit to go bankrupt seems almost punitive, as if (again), people think that there must be horrendous penalty for "mistakes." People who don't seem to know what they're talking about point to airlines and other companies that have gone into bankruptcy and emerged on the other side, stronger. They completely ignore the difference between an airline ticket and a minivan. When you get off the airplane, you have paid for a service. You walk away with no need for and no expectation of ongoing support for that purchase, except maybe airline miles and points. When you buy a car, you have both a need for and an expectation of ongoing service and support for that rather larger purchase. As Studebaker, Bricklin, DeLorean and hundreds of other past bankrupt auto companies can attest, few people will buy a car from a bankrupt company. As long as the plane flies, nobody really has a problem flying on an airline being reorganized under Chapter 11.

But that "mistake" thing.

What, exactly, did Detroit do wrong?

I'll tell you what: they listened to their customers and shareholders.

That's right.

You wanted big, powerful SUVs and made it clear you didn't give a shit about mileage. Throughout the 1980s, 1990s and 2000s, the major US automakers built small, fuel-efficient cars. To meet corporate average fuel economy (CAFE) standards, they were required to. You, however, were not required to buy them, and you didn't. Shareholders -- and many of the same people who were customers were also shareholders in these companies -- said they wanted maximal return on investment. Because Chevrolet made lots of money on the Suburban and the Yukon, they built a lot of them, and customers eargerly bought them. Ford's F150 pickup truck was, for years, the largest selling motor vehicle of any type in the country, and profitable, too. And people bought them. Chrysler Corporation couldn't sell enough Grand Caravans.

They did exactly what you told them to do. You had the option of buying a Chevy Aveo or a Ford Aspire or a Plymouth Neon. You bought a Yukon or an Explorer or a RAM pickup instead.

And shareholders, many of you watching the Dow every day and often not looking past your next GM dividend check. If you think short-term, don't be surprised if the companies in which you invest think short-term, too.

Until maybe two years ago.

Because they didn't foresee Hurricane Katrina or out-of-control price speculation in world energy markets, Detroit was nearly immediately left with large stocks of those same cars you wanted yesterday and then suddenly didn't want today. "Oh, but Toyota had the Prius! Volkswagen had the TDI!" people whined. Sure, and until gas hit $2 a gallon, then $3, then $4, Toyota and Volkswagen really didn't sell a lot of those, either. Yes, they were making them, but not in the numbers needed to instantly replace the hundreds of thousands of Camrys and Lexuses and gas Passats that got half the mileage.

Let me explain something: in 2008, it is nearly impossible to bring a completely new car to market in less than eight years. Even if they already have the design on the boards, it still takes something like five years to line up the parts supply chain, retool plants, retrain workers, ramp up marketing and distribution, and complete safety and emissions testing regimens.

An airline can change a route in days. They can reallocate planes in hours. They can cut or add staff in weeks. Starbucks can build more stores, or close the ones they have, in weeks or months. Ever see a Waffle House get built? It comes in on a truck and gets bolted together on site. One day, an empty field, the next day, hashbrowns!

Detroit can't operate that was, they don't operate that way, and they never have. The nature of heavy manufacturing just doesn't allow it.

The closest comparison I can make to Detroit is the California energy market back about seven or eight years ago. There's a sudden pinch in the supply of electricity, and suddenly everyone is up in arms: "how could you not build more power plants?" Well, you said you didn't want them. No nukes, right? No coal plants. No new dams. Until you DO want them. But that doesn't magically make a dam appear, or a nuclear plant go on line, or magically make a solar or wind industry spring up overnight.

Building new plants, retooling existing ones, retraining, rejiggering the supply industry... all that costs money. Would you really have been patient with Detroit if they'd said, "well, our dividend will be lower in 2004 because we're investing $11 billion to make small, lower-powered, fuel-efficient cars and will be tailing back our production of the cars people are walking into dealers right this very minute and buying at big profits to us, and to you?"

No, the "fault" of Detroit was in listening to what its customers said they wanted. Listening to what its shareholders demanded.

You, personally, didn't think ahead, but the fact you can change your mind faster than a factory can change its output doesn't change the reality of the situation. If you didn't foresee $4 gas and unavailable credit, and you'd have penalized car makers for attempting to do so (and most actually did), where is the "mistake?"

And by extension, where should the "blame" really go?

Fuckit. Give them some loans, help them out, save what little of US heavy industry is left. It's a small enough price to pay for you to be able to plausibly deny your own complicity in Detroit's "mistakes."

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1. Milo Bloom11/25/2008 12:27:47 AM

I can safely say that I had nothing to do with Detroit's "mistakes" as presented above, having voted with my dollars and bought fuel-efficient imports for some time now. (You could make the point that I hurt the domestic auto industry and am responsible that way, I suppose.. if they made something reliable and worth buying, maybe I'd have made different choices.)

I don't believe that Detroit can or should have it both ways. Back in the heyday of SUVs and gas-guzzling trucks some 5-10 years ago, if anyone criticized the auto makers or suggested the US government close the EPA light-truck loophole, the auto makers would have shrugged and said they were just building what the public wanted, returning value to their shareholders, business is business, yakkety schmakkety. Now that times have changed and the public decides it doesn't want what Detroit is making, it's suddenly an emergency that the government should take notice of and do something about. Seems pretty two-faced.

In my mind, the only point in favour of any kind of assistance to the US auto industry is the thousands of workers employed in it and the spinoff industries that they support. I agree with the suggestion that any government help should have some serious strings attached.

2. Tim Haugen11/22/2008 06:35:57 PM

One caveat or possible consideration for "messing" with the pure free market economics is the critical value to the US of the auto industry to retool for military support as in World War II. Hopefully the need never arises, but if it does, the inability to meet it could be disasterous.

3. Jerry Carter11/18/2008 01:40:13 PM

Stephen is right on. If the bail out were off the table, GM would be already looking at what to cut, what to refine, what to restructure. When you run a business, you have to make tough decisions. To me, it's about the average American (and let us pray politicians alike) get off this notion that the Government should be bailing anyone out of anything just because of financial straits.

The way commerce is supposed to work is you make money when you do what works and you don't when you don't. And if you keep doing what doesn't work, you rightly fail. It may sound punitive but in a natural selection sort of way, shouldn't that be the way it is? Do we want a bunch of poorly managed businesses out there gobbling up resources that could be better put to use by efficient and profitable businesses?

I also thing the general meme is that the financial bailout, while as you point out correctly is of a different breed, was such a spectacularly stupid thing to do that anything remotely similar in smell is met with much agitation.

The government should govern, not run the whole show. I look at the bailouts an the equivalent to a gamer writing on their screen "you win" rather than playing the game. Business is like a sport, it's a game meant to be played competitively so the best rise to the top and society benefits in superior goods and services. Remove the perils that go along with competition and you water things down to the absurdly poor of quality. Remove the need to compete and differentiate from the market and THAT will truly bring about the collapse of the economy. History repeats again and again the fall of society followed close on the heels of apathy.

4. Stephan H. Wissel11/18/2008 05:24:42 AM

I think the discussion is heading in the wrong direction. It is not about punishing or saving. Car makers run a business. Business is connected with risk. Risk includes the possibility of failure. It doesn't matter what or who caused the failure. US bankruptcy laws (Chapter 11 if I'm not mistaken), compared to the European ones, are much more modeled around recovering the good parts of an enterprise and let it shed the rotten ones (in Europe it is more likely that a bankrupt company disappears and assets are sold in a "corporate garage sale" - got my first set of office furniture that way ).
So the demand of Detroit for a bail-out looks suspiciously like: "There's a cookie jar and I want to get my hand into it". Providing a bail-out might be much more inefficient than let bankruptcy take its course. Look at the airline industry. AFAIK going into chapter 11 has made them stronger in the end.
Nevertheless there are plenty of mis-takes Detroit has made in the past: allowing competitors to operate more efficiently, letting go of entire market segments (if similar cars like the Toyotas and Hondas would have been available at comparable quality and price points, the loss in market share wouldn't have been so dramatic would it?), narrowing their view onto the next quarter (and shareholder demands is not an excuse. Profit maximizing, done by the book, typically includes sustainability of the investment).
Of course I'm not an economic expert and people smarter than me will spill ink and cross their pens on the efficiency of chapter 11 vs. bail-out.
My 2c

5. Michael Sobczak11/17/2008 06:19:39 PM

@4 If CAFE standards were increased ten years ago, or 15 years ago, GM, Ford, Chrysler wouldn't even exist today.

Detroit's problem has been having operations way too big to support the amount of product is sells. GM has always been very top-heavy management-wise...which is surprising considering how many bad decisions still waft through so many layers of management.

The only way Detroit made money was by selling big vehicles. Detroit typically lost money on all of its smaller cars due to legacy costs (pensions, healthcare, union pay scales) that Toyota, Honda, etc. never had to worry about.

Once the price of commodities went up (steel being #1), the costs of making a large truck or SUV went up, reducing the profits on each vehicle sold. Add to that the increase in the price of oil (thank you, OPEC) and people decided to hold off on new big car purchases. Now Detroit is left with paying for a huge infrastructure to sell hundreds of thousands of cars LESS than it did a year ago. Definitely a recipie for disaster!

6. John Turnbow11/17/2008 01:55:13 PM

It's not Detriot, it's Congress. Congress passes crazy laws, for instance laid off employees are paid $81 per hour for retraining (they never do) - oh there are 15,000... Next Congress plays games, if one car company puts emphasis on a small car and the others don't that's a loss in a martket. Congress changes their minds all the time... It's not free market, It's Congressmarket - and both sides are to blame and they know it...

If no bailout, the cascading effect could be more than 10 Million jobs...
So, Congress as an opportunity to yet again to screw everyone....

Now, don't go blaming Bush, Bush only approaves what Congress gives him, so will OBama..

7. Chuck Dean11/17/2008 01:05:06 PM

You have to lay some of the blame on the fact that the Texas oil patch has been running the White House for the last 8 years. CAFE standards should have been tightened up during those years which would have put more efficient cars in the US market.

Neither the US government or the people have shown much sense when it comes to fuel consumption over the past decade. After Gulf War I we should have had the sense to try to get ourselves out of our addiction to Mideast oil. More so after 9/11.

So yes, help bail them out now but also demand something back.... mandated improvements in fuel efficiency and the availability of alternate energy power plants (clean diesel, biofuel, hybrid, plug-in,etc. )across the production line.

8. Turtle11/17/2008 12:13:40 PM

But the thing is, that planning costs money, and nobody spends lots of money on building something when it's clear the customers aren't going to buy enough of them to make it worthwhile. European customer tastes and regulations are much different. Through artificial taxation, their fuel is artificially expensive (no, US fuel is not "artificially cheap") so the market conditions are different.

9. Carl Tyler11/17/2008 12:04:23 PM

Although Detroit could have hedged it's bets much better. In Europe GM sells fuel efficient cars, they sell diesels, they could have planned for such a day and had something in place, that if worst came to worst they could quickly modify their European models and offer them over here.

10. Bob Baehr11/17/2008 12:00:10 PM


I have to tackle this one....

As the son of a Steelworker, I saw that industry go south because of Government Regulation and raw greed. This, coupled with the fact that the product could be produced cheaper abroad (and, sold here) is what eventually lead to the demise of the steel industry.

Looking back, the auto industry is suffering the same fate.

Bob Baehr
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