The American Automobile Industry Should be Allowed a Merciful Death

Lam Hang Chi: the American automobile industry shouldn’t be saved; it is now a “retrograde production instrument”

American Congress’s discussion on saving the top three automobile manufacturers i.e. General Motors, Ford and Chrysler came to a dead end last Thursday, East Coast time. It then triggered a huge fluctuation in the stock market. Worrying that the crisis over these three will bring in an enormous unemployment problem, The Department of the Treasury is planning to stop the tragedy from happening before Congress resumes early next year. On the one hand, it is going to offer a grant from the 700-billion “Troubled Asset Relief Program” (TRAP) and on the other hand, the Federal Reserve will make an exception by giving loans to the three manufacturers. After all, the last thing the U.S. government wants to see is three American icons closing down and an increasing unemployment rate.

The U.S. senate voted against the 14-billion so-called bridge loan that could probably help the three manufactures hold up till next March. The decision seems to be not caring at all and not considering the whole picture but if you look closer, you will see that the opposition is not completely unreasonable. If this is what we use to attack the Republicans’ lack of mercy, it will be unfair then. In fact, the condition suggested by the Republicans on this grant makes sense in two ways. One is that the creditors of the three manufacturers will claim the loan back at a 33% off. Two is that the union members will have to cut their wages to the level of those of non-members. UAW, however, didn’t agree and the negotiation ceased.

As the three manufacturers are at the edge of bankruptcy, it is not a harsh condition to have the creditors reclaiming at a price of 33% off. To ask union members to give up high wages seems to be the only way to boost the three manufacturers’ competitiveness and to save their cost.

Below is the average hourly salary (basic salary with welfare) of American automobile workers:

1. Ford: $70.51 ($141025 annually)

2. General Motors: $73.26 ($146520 annually) and

3. Chrysler: $75.86 ($151720 annually)

For workers of Toyota, Honda and Nissan, their average hourly salary is $48 ($96000 annually). According to the comparison made by Professor M. Perry from University of Michigan, the annual salary of professors in American universities was $92973 in 2006. In 2006 workers of UAW with the average education level up to high school were making 57.6% more money than university professors and 52.6% more than non-UAW members…perhaps it is meaningless to make such comparison as better education doesn’t necessarily help one make more money. Nevertheless, such high salaries of UAW members are making their employers less and less competitive to low-salary industries. If UAW members can lower their salaries to the level of the non-members, there is still a chance for manufacturers to survive. 18 foreign automobile manufacturers who didn’t talk to the UAW are building new factories in the U.S. This tells us that if the union gets too powerful, it will bring more benefits to its members but will in turn stop them from career opportunities.

Apart from salaries, political factors are also taken into consideration. Toyota settles in Kentucky, Nissan in Tennessee and Honda, Mercedes and others in Alabama, senators of these states are mostly Republican and they do not want to subsidy union members thus inviting in competitors from overseas for the three local manufacturers.

While the media is occupied by the voice of “saving the automobile industry,” why is it that a large issue of saving the manufacturers is not mentioned? The decline of America’s piano making industry is a good lesson to learn from.

From 1870 to 1930, apart from their houses, the most important property of American families (should be more specific to say middle class families) was the piano. Way before hi-fi was born and became popular, the piano was the only musical instrument of many families and importantly, it is a symbol of elegance and good education. “Pushing-on” families all had pianos and it hence became an inseparable part of American families, social life and religious activities. At the time, the market’s needs made New York, Boston and Chicago major locations where pianos were made. Piano advertisements were everywhere like cosmetics ones today. In addition, piano stores, tuners and tutors were also very abundant. The piano making industry and jobs derived became a pillar to America’s economy. From 1890 to 1928 (before the Great Depression), pianos’ annual sales volume boosted from 172,000 to 364,000. These goods were not just a majority in the domestic market but were also sold overseas. The advantages from their production scale soon helped them occupy half of the world market.

Soon, when Wall Street collapsed in 1929 and the Great Depression followed, American people were not into music and joy anymore. They no longer had money to buy pianos and manufacturers went bankrupted one after another. Although economy gradually revived after World War II under the economic transformation, domestic piano making industry de facto entered the dead corner. Foreign brands such as the Japanese ones in 1970s and 1980s followed by Korean and now Chinese, they are economic and of decent quality thus have become consumers’ choice. The U.S. economy made some quick self-adjustment during the economic transformation so it was not hurt much.

Half a century ago, if the government saved the piano making industry, it would have probably lasted for a little longer. Less competitive products, however, will just not help the economy. More importantly, during those times, foreign piano making industries were developing and they would have definitely put the American one in a difficult situation. It is the same story with the automobile industry now.

The fall of America’s automobile industry will only give the U.S. economy more to do like the piano making industry did before. It will not be for a long term. If the three tycoons cannot survive under the current harsh situation, then let them have a merciful end. Indeed, this rather reasonable idea will not be acceptable to the government and politicians. High unemployment rate means that the government is incapable; the government officials will no accept that. Politicians funded by workers’ votes will not accept that. The government and politicians will therefore figure ways out to save the three tycoons and they will not hesitate even if it needs a tremendous amount of tax. Either Bush or Obama will definitely save the three tycoons. They, however, need to carry out upside-down revolutionary reformations (at least the salaries of union members should be lowered down to that of university professors). Otherwise, pouring large amount of capital or imposing penalty income tax on automobiles will not be helping but slowing down the development of the U.S. economy.