Categorized | News, Personal Finance

Top five reasons the auto industry is insoluble

Posted on 21 November 2008 by Jacob Jasperson

With news in the past week that GM, Ford and Chrysler, the big three, would be seeking part of the financial industry bailout to stay afloat, one has to wonder what exactly is going on right now in this economy. This economy that was built on the foundation of “life’s tough, so what?” This economy that manifests itself in profits and losses, every man, woman and child for themselves, take what you can get and give nothing back. When did we let ourselves get to the point of having companies that were “too big” to fail?

I know there are many out there who feel the auto industry deserves to be saved; we can’t afford to lose all those workers, those workers can’t afford to lose their salary and allowing the big three to go under will devastate the economy.

All valid arguments, but I would like to add something to the debate. The auto industry is insoluble. I’m sure if you’ve been watching the news or reading a newspaper you’ve heard that argument. I would like to outline here the five reasons the auto industry in the United States cannot be saved.

1. In a global economy, let others do it better. Adam Smith would be rolling over in his grave if he heard about the auto industry in America. Capitalism is all about the most efficient producer producing (i.e. absolute advantage). Let’s be honest here, Japan makes a darn good car. And they can do it for relatively cheaper than here because they don’t have to pay union wages or benefits. This does not mean, however, that they cheat their employees or deny them a fair wage; for one thing, Japanese wages don’t have to include healthcare costs.
2. U.S. auto makers make bad cars. Gas guzzlers, poor designs, unreliable. The last few models to come through the big three have been better, but you can’t make up for years of poor manufacturing. People have a much longer memory when it comes to bad products. This is the U.S. auto industry reaping what they’ve sowed.
3. Pension costs add $2500 per car. I can buy a car cheaper than that! OK, maybe not, but still, you get the idea. Pension systems are terrible and not built for long term use. Any normal business would see that IRA and private accounts are clearly the way to go, and make the transition. The big three wasn’t able to do that.
4. GM has 7,000 dealers compared to Toyota’s 1,500. This goes hand in hand with my second point: not only do domestic auto makers make bad cars, they make them in all varieties. Toyota’s small numbers of large dealers make them better equipped to advertise, market, and sell their product. Why doesn’t GM simply close some of these stores? Many of them are protected by state laws, making them very expensive to close.
5. Ford burned through $7.7 billion in cash in the third quarter. Does anyone think another $25 billion is going to make any difference?

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