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Car companies in trouble

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“What’s good for the country is good for General Motors, and vice versa,” said Charles Wilson to the Senate Armed Services Committee, after being reluctant to part with his stock in the company while being confirmed as Secretary of Defense. GM had numerous defence contracts at the time, and Wilson’s $2.5 million in stock was considered a conflict of interest.

Wilson was right, although you could substitute the word General Motors for Ford or Chrysler these days, the so called “Big Three” auto makers that once set the world standard for quality and efficiency.

It’s estimated that more than three million Americans are directly or indirectly employed by these companies, either on the manufacturing lines, in marketing companies, in car dealerships and garages, in parts manufacturing and retailing plants. That’s about one out of every 50 working Americans.

Those companies have been going through hard times for decades, as Americans embraced imported cars, as the cost of providing healthcare to those employees soared, as the price of gas has increased and spending power of the middle class has declined, and recently, as the world economic crisis has put a stranglehold on all forms of credit. And so the Big Three, after laying off everyone they could possibly lay off, went to Washington two weeks ago to beg for a $25 billion bailout with no plan for recovery.

So far government has been cool to the idea, although I personally fail to see what the difference is between bailing out the greedy assholes at investment banks and the incompetent dinosaurs running the U.S. auto industry.

I think the government will cave rather than risk having the Big Three scooped up by Chinese companies for pennies on the dollar, or another two per cent of its workforce unemployed. I agree that these companies must be rebuilt, I just disagree with the method that most hardliners are advocating, which is breaking the unions and paying workers less.

The first thing government needs to do is to adopt a universal healthcare system in the U.S. It’s estimated that GM pays out $1,525 for healthcare for every vehicle they assemble, versus $197 per worker at GM factories in Canada. Health care is one advantage that foreign competitors have over the Big Three auto companies.

Another advantage is cultural. I recently read two articles in business magazines, one about Toyota and one about Honda, that explain why these companies are thriving.

Toyota, for example, refuses to lay off workers when the market slows down. Instead they keep those workers employed making improvements to the factories, and retraining them to do their jobs better. That creates loyalty in the workforce, who pay Toyota back by being more productive and sticking with the company longer. When the orders for vehicles come back in, Toyota is fully staffed and quickly adapted to build whatever vehicles make the most sense for the market.

Comparatively, the Big Three’s first inclination in a downturn is to lay off thousands of workers, which is good for a boost in their stock value but inevitably results in a drain of skilled workers to other companies. It also creates bitterness — someone laid off by GM at the first sign of trouble might not be as keen to buy American next time.

Although Henry Ford was not the nicest man on the planet, the inventor of the automotive assembly line wanted every single employee to be able to afford one of his cars. He also knew that well-paid workers would spend that money in the community, enabling even more people to purchase Ford vehicles.

At Honda, which has never had an unprofitable year, their top management is recruited from their engineering departments, and manager wages are a fraction of what the top brass are paid at the Big Three ($13 million for 36 board members at Honda, which is less than top executives make in Detroit). Honda also hates waste — rather than ship empty containers back to Japan, they bought farms in the U.S. and planted soy to fill their containers on the round trip. They actually invested in farming technologies to make their farms more productive.

Honda also uses its manufacturing (not to mention design and engineering) power to make everything from lawnmower engines to airplanes, and is not afraid to experiment in new fields. They are diversified, and that helps protect them in hard times.

Most of all, these companies make cars that people actually want to drive, while the Big Three tend to spend more money on ad campaigns telling people what they want. And it didn’t take a crystal ball to realize that oil prices were going to increase, that environmental awareness was creeping in, and that people would have less money to spend on big, inefficient vehicles.

The Big Three can be saved, but it’s going to take more than a cash bailout. They have to give people a better reason than patriotism to buy American.

What’s in your driveway?

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