Thursday, March 3, 2016

Why the US Auto Industry is Headed for Bankruptcy Again

"American" (Union) car companies still cannot compete with foreign makes.

The recession is over and everything is back to normal, including the same bad old habits that caused us to go into recession in the first place.   American car makers (which means "Union" car makers, as one of the "American" companies is Italian) are back to making huge SUVs and Pickup Trucks as the price of gas is cheap and the profit margins on these beasts is in the five-figure range.

Why make some tiny car that sells for $10,000 when you can make $10,000 profit on an SUV?  It is compelling math, but illustrates the short-sighted nature of the "US" auto industry.

Before discussing this further, we need to address exactly what is the "US auto industry" anyway.   The traditional "Big 3" automakers - GM, Ford, and Chrysler - are now international conglomerates, like most large auto companies today.  There is nothing particularly "American" about them, other than their country of incorporation.   Like any other automaker on the planet, they manufacture and sell cars and trucks in the USA, Europe, and China - and have factories in all three locations.

So why are Honda, Toyota, BMW, Mercedes, Nissan and (until recently) Volkswagen, so profitable, while the US automakers were struggling?   The answer is that there is one thing and one thing only which distinguishes the "US Auto Industry" from the rest.

The United Auto Workers.   If you see a posting online about how great "American" cars are and how all "foreign" cars are crap, you can bet it is a posting by a paid shill for the UAW.   Because American cars, by all real metrics, still do not match the quality of most foreign brands.   They do not last as long, they cost more, and they are less of a value.   And the companies are constantly in trouble financially.

Today, the "Big-3" are making money hand-over-fist because gas is under $2 a gallon and pickup trucks are selling for as much as $70,000, which means they make ten grand (at least) on each one that goes out the door.

But the "Big-3" are losing money on smaller cars.   Fiat-Chrysler is discontinuing the Dart and the 200, while Ford is moving Focus production (and other small car production) to Mexico.   GM is cranking out pickup trucks and SUVs, as fast as it can.  So long as gas is cheap, people will keep buying large trucks.   But when gas goes to $5 a gallon or the economy blips - as it did in 2008 - things will get very, very bad in a real hurry.

Fiat-Chrysler's solution is no solution.  Simply abandoning the small car market is not the answer.  If other companies can make money - worldwide - on small cars, the "Big 3" should be able to, too.   And if not, they should ponder why this is so.   And I would suggest the answer lies across town at the union hall.  Despite the relief that GM and Chrysler found through bankruptcy, their labor costs are far higher than their competitors - in terms of wages, benefits, and restrictive union rules.   Bankruptcy (and the threat of it, with Ford) granted these companies only a temporary repreive from the inevitable.

Once again, we are back in the 1990's, when cheap gas fueled SUV sales and everyone bought low-mileage enormous vehicles which were profitable for the Big-3 "American" car makers.  Meanwhile, every other car maker in the world was able to make money selling smaller vehicles and did so.   When the shit hit the fan, GM, Ford, and Chrysler found that they could not make money selling smaller cars and the smaller cars they made were not attractive as they were so de-contented (to bring down costs and compensate for overpaid labor) that no one wanted to buy them.

Even small trucks were unprofitable.   As I noted in earlier postings, when manufacturers sell products, they do so based on perceived value not on "actual cost plus a reasonable profit margin".   So a small truck, such as a Chevrolet Colorado, costs about as much to make as the big one, the Chevrolet Silver-A-Do.   They have the same number of parts, more or less, and cost the same amount of labor to assemble.  The big difference is in perceived value as the buyer thinks that a "larger" truck should cost more and a smaller truck should cost less.

As you can see, the smaller truck is thus a better value than the larger one, which is why I have a Nissan Frontier and not a Nissan Titan.   Better gas mileage is just a bonus.  Nissan has been able to stay in the small truck game by not changing the design for a decadeThey also assemble them in Mississippi, not Michigan, and pay part-time employees $15.50 an hour to screw them together.   Even then, Nissan would rather I spend $10,000 more on a V-8 Titan, as they would make a lot more money on that.

GM got back into the small or "midsize" truck business, but as others have noted, they are likely less profitable than the full-size trucks.  Ford still sells the smaller Ranger overseas, but is giving mixed signals whether it will come to America.   Fiat-Chrysler is on-again, off-again about bringing back the Dakota.   At the present time, with Dodge Rams running out the door, why bother?

Fiat-Chrysler has shed its small car lineup (or will do so shortly) and is actively looking for a buyer to take over the company - and odd thing in this era of record profits based on SUV sales.  Problem is, who would want it?  Marchionne already had lunch with my old college classmate Mary Barra, and she took a pass on the offer.   Why bother buying another American car company with outdated car designs and products that compete with their existing lineup of SUVs and Trucks?  Who wants more outdated plants and UAW workers (and their pensions?).

The same will be true for the Japanese.  Maybe Honda would like to have big trucks, but not the headache of UAW plants and bloated management (which would be a culture clash with Japanese management and union practices).   Nissan and Toyota already have full-sized trucks (at least in the half-ton range) - why would they want the Ram?

The Germans?  Well, Mercedes already tried with Chrysler and then threw in the towel.   I doubt BMW would want such a nightmare.   One problem for all the "foreign" companies is that if they bought Chrysler, the UAW would likely demand that they unionize their transplant factories already in the USA and that would be a nightmare.

The attempt to sell off Fiat Chrysler is admission that there is too much automobile manufacturing capacity in the world today.   And as the weakest link in the chain, the "American" auto companies will once again be the first to fail when the economy weakens or conditions change.

What sort of conditions?   Well, China exporting cars to the USA or even India exporting cars to the USA.   Both China and India are selling cars already (Volvo and Jaguar/Land Rover) in the United States, albeit not cars made in China and India.   But once the camel has his nose in the tent...

Things are finally back to normal after the crash of 2009.  Sadly, this means we are right back where we started from - with an overheated Real Estate market, ultra-cheap gasoline, and everyone buying monster trucks like there is no tomorrow.

Seems like we never learn, do we?