The Big Car Crash

Is there really a good argument for building cars in the west?

“… these jobs are going, boys, and they ain’t coming back!”

Bruce Springsteen, “Your Hometown”

The scene is Detroit, a worn-down neighbourhood. Joe the mechanic is driving down the street with his lunch box, on his way to the conveyor belt to see if he still has a job. Chrysler will shut down production for a month, Ford is expanding their Christmas holiday for one week, and… or no, stop. The scene is not Detroit.

Things aren’t happening there now, but they are in Washington. On Capitol Hill, where Republican senators are saying No to saving the faltering auto industry. It’s in the White House, where President Bush is begging for a Yes. And in Ottawa, Canada, where American brands are threatening to move production home. It is in Stockholm, where the government is saying Yes to Volvo and Saab, “sure we’ll give you a loan.” It is in India where Tata Motors and Hyundai are promising to share the rewards of the government’s tax relief with customers.

Because we are in the main phase now. The political phase. Joe the mechanic is just a prop, an argument General Motors, Ford, and Chrysler are pulling out of their trunks when they are begging the authorities for emergency loans and subsidies… excuse me, “bridge loans to better times” and “restructuring funds for a future-oriented industry.” In this phase, some questions are being raised:

Are there too many cars in the world?

Is the auto industry worth preserving in the West?

Is the car the new cow? In other words, is the auto market becoming like the market for agricultural goods, where all countries that can afford it are subsidising and protecting their national production, regardless of how outdated it is?

THIS HARD LAND

Last week the U.S. Congress turned down a rescue package for the auto industry. This time the proposal to support Chrysler, Ford and General Motors with 14 billion dollars passed through the House, but stopped in the Senate. The three big Detroit-based manufacturers are now hoping for aid from the White House, so that they will survive until a new Congress, with more Democrats who are more friendly towards industrial jobs, is inaugurated next year. But what should the auto lobby say when they try again?

Chrysler says this with shining, green letters on their website: “It’s not a bailout to help us from failing, but a loan to help us succeed.” GM promises more cost efficiency and cuts in production. The company becomes profitable in the north American market with twelve million cars, as opposed to the average of 17 million in the last few years.

Mats Kinnwall, the head economist of the Swedish bank, Handelsbanken, says that this is nothing new:

-The American auto industry has shrunk to a third of what it was in the 1990’s. They have cut 250,000 jobs in fifteen years. They have a structural problem. They have produced cars that are too big, poor quality and consume too much gasoline. On top of this an economic downturn that makes the crisis acute.

On its website General Motors is stating, as one of multiple “facts about GM,” that the fate of the American auto industry affects the entire country.

-In many industrialized countries the auto industry is seen as a core industry, said Harald Espeli at the Norwegian school of management. In America it is also connected to its own national understanding: every American in his own car and, preferably, an American car.

He says that the auto industry in America has a long tradition for pushing through protective measures. It started in the 1970s when the Americans gave the Japanese auto industry the choice between import quotas or so-called voluntary export limitations.

There can be no doubt that the car is an important object of American culture. All the sectional headers in this articles are titles of Bruce Springsteen songs, where driving is involved. But Torger Reve, Espeli’s colleague from the school of management, says the auto industry cannot claim any special strategic importance:

-The auto industry cannot use strategic arguments like the defence industry, and the agricultural industry for food safety, to argue for the importance of national production. The auto industry is not in a special position when it comes to technological research.

THE PRICE YOU PAY

Actually, the auto industry is left with only one argument: jobs. 355,000 Americans are employed by the Big Three. GM claims that every tenth job in America is dependent on the auto industry. That includes sub contractors, and “hot dog stands, local shops and local restaurants.”

-“It’s difficult to estimate, but it is clear that a loss of jobs in the auto industry has huge implications,” Mats Kinnwall says. “In Sweden we estimate that every job in the auto industry creates four other jobs.”

When the Americans say that three million jobs are dependent on the auto industry, that means that every job in this sector sustains about nine others.

Unfortunately for Joe the mechanic and his employers, these jobs do not have a lot of sympathy for others. These jobs are viewed as some of the best paying jobs in the American working class. Unions are blamed for the Senate’s No vote, because the Unions refused to accept a clause that would lower wages and other social expenses down to the level of Toyota’s American factories.

And so they are opposed: Joe the mechanic, and Joe the tax payer. The atmosphere is hostile, time to leave Washington.

BADLANDS

In no-mans land we stop to look for the ruins of the 20th Century Motor Company. In the novel, Atlas Shrugged (1957), Ayn Rand portrays how America grinds to a halt. Greedy unions and industrial leaders are more concerned about going to Washington and begging for subsidies than to developing new products. In the middle of the economic ruin our heroes (railroad owner Dagny and steel mogul Hank) discover the ruins of 20th Century Motor. There, in a dusty back room, they find the remains of the engine that could get the world moving again…

But with Rand, the liberalist, and her heroes, there will be little sympathy for the auto industry. To show that the crisis is not self-inflicted, one has to go abroad. Since the companies are yet to sell the executive jets, it is easy to travel to a mess even Chrysler cannot be blamed for.

FROM SMALL THINGS (BIG THINGS ONE DAY COME)

In November, 74 cars were sold in Iceland. The statistics from the European auto industry organization ACEA show that sales were 95 percent lower than November last year. In a market of 74 units even the most cost effective producer will struggle to make a profit:

-“Everyone is hurting now, not just the big ones with structural problems, but also the more effective producers like Toyota. In the same way as the construction industry, the auto industry is a business where closures can have a huge effect on society,” economist Kinnwall says.

-So is it understandable that Sweden and the USA are helping their auto industries in the same way as Norwegian authorities started major construction projects to save the construction industry?

-Yes, the reasoning is the same. Both industries have the same effects on society.

The question is how big the bankruptcy crisis really is. Harald Espeli thinks the companies are overdoing it:

-America has different bankruptcy laws that make it easier to restructure companies and keep them running than it would be in Europe. In Norway all creditor votes must be unanimous. In other words, all creditors must agree that they would be happy with recovering, for example, 70 percent of what they are owed. In America, creditors do not have veto rights in such situations.

BLINDED BY THE LIGHT

On December 1st, the EU agreed on new climate emission laws for cars. The laws mean easier restrictions for the industry, compared to the proposal drafted this spring. For example, only some new cars must meet the new restrictions the first few years.

“Like banning smoking for non-smokers only,” the environmental organization, Transport and Environment, said. The environmental lobby was outraged that the auto industry was able to water down the original proposal to such a degree that they do not even match the voluntary standards the industry placed on itself ten years ago.

-How did the auto industry become so rude?

-“Climate is a rolling snowball, but jobs are a problem, too,” Espeli says.

It seems it has been rude for a long time. While the American companies were negotiating a deal with Washington, they also sent a message to Canadian authorities. If Canada wanted to keep its GM, Chrysler and Ford plants, they would have to come up with subsidies as well. The Swedish government has already promised loans for Volvo and Saab, who are owned by Ford and GM, respectively.

Espeli says that the Italians and the French also forced the Japanese to voluntary export limitations in the 1970’s.

-In South Korea, which today is a pretty big producer, the entire export industry was built under import protection, and Japan itself was one of the most closed markets until the 1990’s.

Norwegian auto manufacturing industry was also built under strict import restrictions: labour-politician Jens Christian Hauge negotiated increased access to the Norwegian market for Volvo, in return they had to buy Norwegian parts.

-Is the car the new cow, meaning does it have a market that is subsidized and protected by its national governments?

-“History shows that downturns in the economy have led to protectionism, but in the near future I don’t think they will preserve an auto industry in every country,” Kinnwall says.

-Are we producing too many cars in the world?

-From a climate perspective many would say Yes, but from an economic perspective, I don’t think so. In growing markets there are still few cars in relation to the size of the population.

But we are producing the wrong type of cars. Too many big, gas-guzzling cars, too few small and efficient cars. And are the cars in the right place?

THE PROMISED LAND

Last year 10.5 million cars were built in the U.S., and 6.9 in China. According to analysis bureau CSM Worldwide, China will make 12.2 million cars in 2014, while production in America will be roughly the same as last year. At the same time India’s production will more than double from 1.9 to 4.3 million in 2014.

-Which brands will make the most money?

-“There are European brands with small, fuel efficient cars,” Kinnwall says. But the Americans and Europeans are moving their international products to the new markets. The Asians are building cars more suited to a dense population. The Indian Tata company is making cars so small that westerners can’t fit in them.

CMS is hailing the Tata Nano. The cheapest car in the world, according to the builders. A car suited for the Indian first-time buyer. But CSM does not believe Tata Motors will dominate the Asian market the minute the crisis blows over.

We must look further east.

WORLDS APART

We are talking about Toyota, the only manufacturer still enjoying a triple-A rating from two of the three major credit rating companies. Research Fellow Dr. Monica Rolfsen teaches organization and leadership at the Norwegian University of Science and Technology. Her doctoral dissertation was about “Japanism.”

-Japanism or “lean production” is about producing only what you need, instead of the old Ford method where you planned beyond the horizon and produced for storage. Japanism means less storage, so what you make must be right. It puts high emphasis on quality, flexibility and organizing. The idea spread throughout the auto industry in the 1980’s and 90’s.

-With Ford, as well?

-They are trying, but can’t do it. First of all, it took a long time before they realized they had to do anything differently at all. The American auto makers have not prioritised building cars running on less fuel, but have let Japanese and European makers cover that part of the market. The fact that they haven’t learned from the oil crisis in the 70’s might be because they have been subsidized by the government every time they were in trouble.

But Rolfsen also blames structures in society.

-If you hire a person at GM, half the costs are connected to things besides pay, like pension, paternity-leave and health insurance.

And it is also about problems with cooperation.

-Europe and Japan have traditions of good cooperation between unions and companies; this helps in restructuring. In America it is only conflict and negotiations. I think it is an attempt at creating security for workers in a reality that is very hostile to workers. There are no laws against scabs, for example. All welfare benefits we take for granted, unions in America have to negotiate: There are great, major three-year deals, where it is very hard to change things.

Rolfsen thinks this is why unions reacted so strongly when the aid package contained changes in negotiated agreements.

-I visited an American factory last year, where they had 47 different job descriptions for the workers. In Europe and Japan it is easier to make people work where it is needed.

I’M GOING DOWN.

In Ayn Rand’s novel, salvation for America comes from Colorado. The inventor of the ingenious engine comes out of hiding when the people have learned their lesson and are ready to hail unregulated capitalism yet again. The Americans in Rand’s book have a competitive advantage compared to their countrymen, because other countries are going in reverse even faster. Europe and South America are mired in unproductive socialism. Asia is hardly worth mentioning.

But now we know that this does not match reality.

This year the majority of cars in the world were produced in North America and Europe. In 2014 the majority of production will happen in other parts of the world, CMS Worldwide estimates. This is because of the growth in China, South-east Asia and India, who will increase their production by 40 percent. If it wasn’t for growth in Russia, Turkey and Mexico, auto production in North America and Europe would be flat, and Asia would pass America and Europe on its own.

The relief for Joe the mechanic will hardly come from Colorado, but maybe from Japan. Thanks to Toyota’s method, the car has become a fresh product that can be enjoyed right from the factory. Just in time delivery. No storage.

-“High transport costs makes one want to have manufacturers in all markets,” Monica Rolfsen says.

-A Norwegian company like Kongsberg Automotive has factories all over the world, because they must be near the markets. If Chrysler or GM have to close, it won’t be a disaster. The parts suppliers can supply others. And with the parts suppliers, the need for restructuring is not pressing.

Summary:

Are there too many cars in the world?

Yes, in the short term. Next years production will be lower than this year. In the long term Asian demand will increase. But cars are produced in the wrong place.

Will a collapse in an auto company put a catastrophic chain of events in motion?

Maybe, in the short term. In the long term, employees might have less to fear in America and Europe, than their owners.

Is the car the new cow?

No, the industry cannot expect that amount of patience. Even if rescue packages could delay the processes, jobs and demand are only headed one way. East.

PS: We haven’t written much about cars vs the climate crisis in this piece, but to those who wonder what made Rand’s engine ingenious, it is that it used only air for fuel.