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November 19, 2008

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I agree that the US auto sector has been mismanaged for a very long time, but the sad fact is if the Big 3 go bankrupt, the taxpayers will be on the hook to cover the pensions and medical plans of those blue-collar workers -- $25B will seem like a bargain.

I'm also a little confused on why Ford can't get their high-mileage cars made in Europe over here for US consumption. I can't find much out about this. I suspect mismanagement and/or bureaucratic snafus.

Obama won't let them fail. He understands it. The question is can GM wait until next year? I myself am getting ready to buy Ford stock. The gamble has good odds.

If you reward failure, they what you will get in return is more failure. It really is that simple.

A better way to spend the money would be to offer a yearly prize for fuel-efficient and low emission vehicles, and hand it to the winner each year BASED ON PERFORMANCE. If the foreign makers win on their merits then the local guys are just going to have to try harder.

Until the very recent oil spike, Americans weren't exactly clamoring for low-emissions, fuel-efficient vehicles. Judging from sales figures, they were clamoring for gas-guzzling SUVs and big-horsepower cars.

I'm also not sure which "merits" these foreign manufacturers are supposedly winning on the basis of. Most buyers don't scrutinize the car issue of Consumer Reports looking for the most dependable model; not all foreign models are dependable; and U.S. manufacturers have closed the gap in recent years, when comparing the (relatively few) top rated foreign models with the top rating American models.

Then, there is (was) the question of the weak U.S. dollar vis a vis the Euro. If foreign manufacturers have an advantage based on currency valuation differences, that is scarcely the fault of uncompetitive business practices. I'm unsure of the extent to which this contributes, but it ought to be carefully considered. We have all heard stories about foreign tourists coming to the United States for the bargains: why should foreign companies operating here but receiving funding assistance from their home offices (or even home governments) be any different? What sort of "level playing field" is tilted in favor of those whose currency trades at a higher price?

What about American auto-manufacturing plants based in Mexico (or elsewhere)? Are those wages included in the "average", or factored into comparisons of "competitiveness"? And why the race to the bottom? What if GM closed all its American plants and set up shop in Mexico? I'll bet it would be "competitive" then, but so what? The American worker would be the loser, and since those workers are also consumers, they would be losers there, too.

The public can only make informed decisions if it is INFORMED. If kept in the dark about the basics of how things work, why should anyone expect their decisions to be rational? The fact is, if an American company goes to the trouble and expense to move its operations to another country (like Mexico) where the laws are different, the infrastructure may not be as dependable, the language is different, where the host government's finances and political stability may be at greater risk, it isn't because they want to bring lower prices to consumers: it's because they want to increase their PROFIT margin.

Apply a little logic, and assume that some, but not all, of the labor cost savings will be passed on to the American consumer. Look at it systemically. Let's say that in a given year, American consumers as a whole earn Z dollars as income from work. Then, American industry relocates, saving X dollars in labor costs. Since labor costs for manufacturers are income from work for consumers, this means that consumers will now have X less dollars, or Z-X dollars, to spend.

Since manufacturers are moving to increase their profit margins, they aren't going to pass all X dollars along to consumers in lower product prices, but rather some value less than X. This means that consumers are earning X dollars less, but saving less than X dollars in lower prices. If you lose more than you save, you lose. Therefore, consumers as a whole cannot benefit from this kind of income loss.

Who does benefit, then? Because if ordinary consumer income decreases, but net consumption doesn't decrease, then somebody is consuming more to make up the difference. Well, we've already seen that the main reason for relocating a manufacturing plant is to increase profits. Those increased profits go to the owners and their most favored managers. It's income redistribution, but from the bottom towards the top. The rest -- the middle and working classes -- experience stagnating or decreasing real income, and must make up for it (if they do) by means of credit purchases in order to maintain the same total rate of consumption they were able to afford when their total income from work was higher. Sound familiar?

The other class which benefits from such policies, are well-off white collar professionals whose jobs don't depend on the manufacturing sector, and who have substantial stock holdings in companies whose manufacturing operations relocate.

As these companies cut labor costs, their profits go up, and their stock values do too. This means that this well-off class of workers has an incentive to support the foreign relocation of American companies, provided they don't lose out personally.

But this professional class is the one most valued by media advertisers. Newspapers are written for them, not for blue collar manufacturing workers. They contribute more to political campaigns, are more influential as opinion makers, and are also targeted more often by those who want to shape public opinion. They are society's gatekeeper class, and include most managers, most professional workers, most of those working at "think tanks" and other influential institutions, and most of the national media.

The former American manufacturing workers, meanwhile, are now earning less, because they started new jobs at the bottom of the ladder, and likely service sector jobs which paid less than their manufacturing jobs anyway. They're buying a lot of junk from Wal-Mart designed to wear out quickly so that American consumers have to buy more, thus maintaining the profits that Wal-Mart and other companies like them want. Meanwhile, the owners getting rich off of labor cost saving relocations, are pumping money into the luxury economy, getting the very best of everything. Their abetters in the gatekeeper class aren't doing too badly either. Is it any wonder, then, that things aren't properly explained in the media?

How "competitive" would these auto companies be if they were given to the workers and middle managers who run them now, to be operated on a non-profit basis? That would save an enormous amount of overhead (fat-cat profit sharing).

"Until the very recent oil spike, Americans weren't exactly clamoring for low-emissions, fuel-efficient vehicles. Judging from sales figures, they were clamoring for gas-guzzling SUVs and big-horsepower cars."

You might want to take a look at Toyota's US sales figures, every year a record breaker for them from 2004 to 2007, only 2008 failed to meet expectations and even in 2008 the hybrid Prius still sold better than anyone expected. Honda have been doing pretty well too.

Strange that the Japanese can rapidly adapt to a changing market, must have been all that unfair help they get from their government huh?

The Detroit giants are dinosaurs, their management are lost in their own sense of self importance, the unions are still fighting the battles of the 19th century. Stagnation is the enemy here, not the professional middle class.

Currency values are based on balance of trade. The US has been borrowing more and more while producing less and less. It worked only while the US dollar was a defacto world reserve currency and while oil trade centered around US dollars. Now oil is traded in Euros, Russia is busy buying gold, China and Japan reluctantly keep the US afloat for the time being because they don't want the economic disruption that would be caused by dumping their US dollars. You can thank the Asians that you have as much spending power as they have generously offered you.

Tel, Toyota's sales figures have nothing to do with the popularity of SUVs and other gas guzzlers in recent years (until the oil spike). Are you familiar with that trend? Evidently not.

As for Japanese automakers "rapidly adapting to a changing market", you're assuming what you intend to prove. That's circular reasoning. The whole point of my post is that nobody has taken the time to stop and analyze the factors that actually give foreign automakers this supposed competitive advantage. There's a lot of simple-minded dogma about unions and dinosaurs, put out there by the conservative paper-mills and their benefactors, and that's it.

Funny, but German automakers (operating in Europe) like VW and Mercedes were doing pretty well, with even stronger unions than here in the United States. And, they'd been around for many decades too, so I guess they could be called "dinosaurs" also.

I don't believe that most American consumers who buy Toyotas and Nissans and Hondas do so on the basis of well-reasoned consumer research; and in many cases neither the exterior nor the interior appearance of their vehicles is anything special.

That leaves price and/or lending terms. To what extent does the weak dollar give Japanese automakers an advantage? To what extent does foreign government help assist their American branches? They don't have to be wiring cash. Tax breaks in the home country for the home office, and other subsidies, could have the same effect.

More broadly, exactly what effect do the trade, tax, and subsidy policies of the Japanese and American governments, as well as the weakness of the U.S. dollar vis a vis the Japanese yen, have on the bottom line of Japanese automaker branches operating in the U.S.? Not only directly, with respect to the auto companies, but indirectly with respect to industries which provide manufacturing inputs to the auto industry (e.g., electronics).

Tel, like most conservatives, seems to imagine that commerce operates in a "free market", when in fact nothing of the sort is the case. Commerce operates in an environment determined by the laws of governments: their domestic and international policies on taxation, trade, and subsidization. Until you address these fundamentals, you can't even begin to talk about the bottom line. You also need reliable data about the operations of foreign based companies -- not forthcoming.

Without these things, Tel, you're just whistling Dixie, and your comments merely reflect your biases. You seem to think that the idea of governments supporting their native owned industries abroad with favorable treatment, in order to get a foothold and gain market share, is some sort of joke. Not all governments do.

Currency values are the result of a number of factors, including speculation. I fail to see how the business practices of American auto manufacturers can be blamed for the weak dollar.

As for oil being denominated in Euros, I know there is a movement in that direction, but so far as I'm aware it's a long way from culmination. Most oil sales in the world are denominated in U.S. dollars. Do you have information to the contrary?

"Funny, but German automakers (operating in Europe) like VW and Mercedes were doing pretty well, with even stronger unions than here in the United States. And, they'd been around for many decades too, so I guess they could be called "dinosaurs" also."

No, the Germans knew how to adapt. VW started it's existence making the cheapest of cheap cars (for the time). The "beetle" was an ultra simple design that barely changed from year to year. However, VW understood that when the Asian cars hit the market, they would not win the battle with cheap cars anymore so the modern "beetle" remake is actually a high-tech luxury car and not particularly cheap either.

German industry as a whole has aimed to fill the most expensive side of the market -- high quality goods with a high quality reputation for picky consumers. Asian industry (particularly China and Hong Kong) is filling the bottom side of the market. Japan is putting its bets a bit each way, Honda engines were winning Formula One races so regularly that Honda felt it was time to gracefully give someone else a go... yet Japanese cars have been unable to get the same reputation for luxury and quality that German cars enjoy.

Car making is a very competitive industry, if there's a niche then there are probably two or three players fighting for that niche. Detroit just couldn't keep up. The sales figures tell the story and the fact that German and Japanese industry are not begging for handouts.

As for exact details of tax law and trade law right around the world, you seem to think there's a few paragraphs I can cut and paste that will explain everything. It's a hugely complex issue, and you are welcome to use the same research tools that I have available. All countries have offered trade barriers to shelter their local industries (in one form or another) but these are in effect really just a tax on their own citizens. It works when used carefully and strategically to get a foothold into a market, but it never works as a long term strategy to keep a market. The only way to keep a market in the long term is to genuinely produce a better product or a better price or both.

"As for oil being denominated in Euros, I know there is a movement in that direction, but so far as I'm aware it's a long way from culmination. Most oil sales in the world are denominated in U.S. dollars. Do you have information to the contrary?"

The movement in that direction is enough, because the shifting reserves swing the trade balance one way or another (in this case, against the US dollar). Norway already trades in Euros, and they are pretty big for oil and gas (one of the top 10 in the world, I can't be bothered looking up exactly how big). Iran has had a few goes at switching onto the Euro, here's an article which suggests they finally got their act together:

http://www.reuters.com/article/oilRpt/idUSBLA02024820080430

Naturally, I don't have magical inside information to know how much of it is true. Iran certainly have a big incentive to avoid the US dollar for political reasons.

Russia sells oil and gas mostly to European customers. This is something like 15% of the world oil market (not small). From what I've heard, Russians prefer gold, but also trade in Euros. It really doesn't make much sense for them to use US dollars to trade with the EU. Putin has no particular love of the USA so he would rather avoid the US dollar.

The crazy thing is that there are reports that Columbian drug dealers prefer Euros these days (go do the search yourself). That speaks volumes about where the US economy is going.

Tel wrote:

"As for exact details of tax law and trade law right around the world, you seem to think there's a few paragraphs I can cut and paste that will explain everything. It's a hugely complex issue..."

I think either one of us would be hard pressed to find good summary reports by means of random Internet searches.

That's rather the point, I think. We're arguing in the dark. I'm playing devil's advocate because what gets consistent national press coverage in the United States are the SIMPLE claims put forward as propaganda, the Just So Stories about unions and dinosaurs. But if the framework for auto-industry competition between nations is more complex, how can the country have an intelligent public dialogue about the subject? My position is that there is a backstory which needs to be addressed before the discussion can proceed.

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