Commentary Magazine


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Why Can The Competition Turn A Profit?

The Wall Street Journal editors let the cat out of the bag: there are companies that produce cars profitably in the U.S. They explain:

These are the 12 “foreign,” or so-called transplant, producers making cars across America’s South and Midwest. Toyota, BMW, Kia and others now make 54% of the cars Americans buy. The internationals also employ some 113,000 Americans, compared with 239,000 at U.S.-owned carmakers, and several times that number indirectly.

The root causes, of course, for the inability of the domestically-owned Big Three to do the same are not hard to find: ludicrously expensive labor obligations, out of date work rules, and a resulting cost structure which prices them out of the market and makes innovation difficult, if not impossible. The editors conclude:

Last year Detroit struck a deal with the unions to unload retiree health obligations by 2010 to a trust fund set up by the UAW. The trio’s productivity has improved as well. In 1995, a GM car took 46 hours to make, Chrysler 43 and Toyota 29.4. By 2006, according to Harbour Consulting, GM had moved it to 32.4 hours per vehicle and Chrysler 32.9. Toyota stayed at 29.9.

Yet these moves born of desperation have come so late that the companies are still in jeopardy. Both management and unions chose to sign contracts that let them live better and work less efficiently in the short-term while condemning the companies to their current pass over time. It is deeply unfair for government now to ask taxpayers who have never earned such wages or benefits to shield the UAW and Detroit from the consequences of those contracts.

There’s no natural law that America must have a Detroit automotive industry, any more than steel had to be made for all time in Bethlehem, Pennsylvania or textiles in New England. Britain sold off all its car plants to foreigners and was no less an advanced economy as a result, though it was a healthier one. Detroit may yet adjust to avoid destruction in the best spirit of American capitalism. The other American car industry is a model for how to do it.

What is not clear is whether this argument, as unassailable as its logic is, will carry the day. The President-elect and members of Congress still seem clouded in a haze of nostalgia for the “American car industry.” (And they don’t mean Honda.) They seem unwilling to force the hand of the companies into the most viable arrangement — a prepackaged bankruptcy proceeding that would provide the legal framework for the massive reoorganization required to make these companies viable. And, although the Big Three’s CEO’s submarined their own efforts last time, they will be back this week with new pleas and half-measures as they try to convince Congress to shovel more taxpayer money their way.

We’ll see if Congress and the President-elect have enough guts and foresight to point to the Big Three’s foreign competitors and ask a simple question: Even if we gave you billions, how would you compete against them? Unless and until they get a satisfactory answer with a complete plan for how to get from here to there the Congress should hold firm. Will they? I’d be surprised if they did. Nevertheless, smart conservatives would be advised to make a principled stance on behalf of taxpayers and workers who will be forced to subsidize the gluttony of the UAW and the ineptitude of Detroit’s management.