US Car Industry: One Down, Two To Go?

A FAMOUS joke goes that when Israel won major battles against its neighbours, an admiring USA asked Israel to give the US its top general, to which Israel agreed on condition that the US in return gave its top three generals, General Motors, General Electric and General Dynamics!

General Dynamics, once a leading US military aircraft manufacturer, has long ceased to exist, having been merged into one of the two conglomerates that now dominate the US military aerospace industry which saw an inexorable process of consolidation during the 80s and 90s. General Electric is still a large entity albeit with a smaller profile than it once had. General Motors, once a global giant and for long the number one company in the world not to mention the undisputed leader of the US is today on a path of steady, some say terminal, decline along with the rest of the US automobile industry. Some indeed argue that this is but symptomatic of the overall decline of the US manufacturing sector in general, giving way to services, especially financial services, in the present phase of late capitalism, but that’s another article!

CHRYSLER FOR SALE

As for the US automobile industry and its long dominant “Big 3” in the Detroit belt, that is General Motors, Ford and Chrysler, stark evidence of its decline was the decision last week by DaimlerChrysler to put its US arm, Chrysler Motor Corporation, up for sale and offers made for it of around US$ 4.5 billion (Rs 20,000 crore). Peanuts really, when you consider that Chrysler, always the smallest of the Big 3, once had a total market capitalisation equivalent to the GDP of some countries such as Australia!

What a fall it has been. Chrysler had been taken over by the German auto giant Daimler Benz in 2004 in an ill-advised US$ 22 billion deal disguised as a “merger”. Predictably, Daimler Benz completely failed in overcoming the basic reasons for Chrysler’s failures, rooted in the very structure of the US auto industry and the US economy, and decided to bail out before the ship sinks completely. The $4.5 billion offer by Tracinda Inc. owned by maverick entrepreneur, Kirk Kerkorian, once Chrysler’s largest shareholder, is itself a mere 20 per cent of the $22bn he had himself offered for the company in 1995.

Why Kerkorian still wants to buy the clearly down and out Chrysler is a mystery and has even been explained by some commentators as merely the ego-driven personal quest of a long-time suitor! Kerkorian has stated that he will turn the company around over a 7-year period and that he believes that the private equity route is the best way to go. Interestingly, two of the three rival offers are also from private equity entities. Some industry observers feel that such buyouts of Chrysler at rock-bottom prices are only a prelude to the final dissolution of the firm.

And this may only be a sign of worse things to come for the US auto industry: if one goes, can the others be far behind? One may indeed be witnessing the unfolding of a prediction by author Micheline Maynard that “at least one of the big three will not exist in its present form” within this decade in her presciently titled book “The End of Detroit.”

TROUBLED US CAR INDUSTRY

The US market leads the global car market by a long way. 49 million new cars were sold worldwide in 2006 of which 16.5 million or around 30 per cent were sold in the US alone! Demonstrating the strength of its domestic base, the major factor keeping the US auto industry afloat, 11.8 million of these vehicles were manufactured in the US, 2.6 million in Canada and 2.0 million in Mexico. But these figures also contain a larger story within them.

In 1990, cars and light trucks sold in the US accounted for 65 per cent of world sales. Within the US itself today, the Big 3 face extremely hard times. General Motors (GM), while still the market leader, saw sales drop by 8.7 per cent, Ford by 8 per cent and Chrysler by 5 per cent. By contrast, in the US itself, Japanese auto giant Toyota sold 2.5 million vehicles manufactured in US plants, up by 2.7 per cent over 2005. Toyota, which is already bigger than Ford globally, is poised to overtake it in US sales soon. Other US-based Japanese manufacturers such as Honda are also doing well as are the smaller but quite dynamic South Korean auto makers.

GM is losing $4 billion (Rs 16,800 crore) on average every year and that when its sales numbers in terms of automobiles sold are near record high levels! Ford reported a net loss of $7 billion in the first 9 months of 2006 and Chrysler lost $1.3 billion in the same period. And the Big 3 are dragging other parts of the US auto industry down with them. GM sold off its subsidiary, the auto components major, Delphi Corporation in 1999 in a move to boost efficiencies. Only Delphi, itself bloated and inefficient, lost $4.6 billion in 2004 and is now operating under bankruptcy protection laws. Notably, Toyota USA imports most of its components from different Asian countries.

That GM and Ford are still afloat today perhaps owes more to their financial dealings than to automobile engineering. In the past few years, GM has earned three times as much from selling property mortgages it holds than from selling cars! Ford too has been described as “a profitable bank latched to an unprofitable carmaker!” With zero worth of its net tangible assets, GM is actually insolvent and could well seek the bankruptcy option but for the huge blow this would deal to its image and the shock waves it would send through the US economy.

All in all, caught in the maelstrom of a globalised auto industry, the Big 3 US auto manufacturers appear to be set in a downward spiral of obsolescent designs, outmoded manufacturing technology, rising fuel costs and protectionist US policies.

OBSOLETE TECHNOLOGY

All these US manufacturers rely heavily on a few fuel-guzzling models of cars and sports utility vehicles (SUVs) so beloved of US consumers who saw them as integral parts of the “American way of life”. Such vehicles were fine when petroleum was available in plenty and at low prices both domestically and from abroad, but with gasoline prices rising steeply in recent years, the US consumer is beginning to feel the pinch and turning to other options. For instance, Toyota’s hybrid cars running on petroleum and battery-power, have registered enormous growth in the US market with demand so high, and rising by over 40 per cent annually, that an unheard-of waiting list of six months has built up.

In contrast, the Big 3 US manufacturers appear caught in a time warp and are simply not ready to face contemporary challenges. They have almost no fuel-efficient models ready to hit the market and very few models even on the drawing board. Chrysler is relying on a re-launch of its Voyager model which already accounts for 30 per cent of its vehicle sales and hopes to build on its established image as a founder of the mini-van. Ford has discontinued two popular sedan models and is planning to focus on “cross-over UVs”, really smaller SUVs. All old wine in new bottles. Only GM has plans on the anvil to directly take on Toyota and Honda family saloons with fresh models.

The industry has tried to overcome this weakness in product development by devoting its energies to marketing hoping, in the American way, that smooth sales talk will cover up for poor product values. Spending on advertisement by auto manufacturers in the US alone was $46.5 billion compared with a worldwide ad spend of $20 billion! But to no avail.

Detroit is trapped in a moribund mindset and manufacturing systems frozen in the past. Most Detroit area auto plants were built and tooled during the ‘70s for big cars and painfully re-tooled in the ‘90s for SUVs. Big 3 plants have very large rigid production lines geared for making huge numbers of a few models, in contrast to the plants set up by Toyota and Honda in the US itself which are more flexible, permit switching of models and production capacities in the short-term, and produce several models with more frequent introduction of new ones. Cars made by Japanese and European manufacturers are perceived in the US market as more durable and economical, a sea-change from public perceptions twenty years ago.

For all the international competition it faces, the problems of the US auto industry are largely of its own making. Huge overcapacities, high fixed costs, inefficiencies sustained by decades of operating in an oligopoly market with no price competition, poor and overpriced products and profits siphoned off when the going was good, have all combined to become a millstone too heavy to bear.

The US auto industry seems to be following the trend in the wider US manufacturing sector which shows a long-term secular decline, and may be going the way of the US steel industry.

WORKERS PAY THE PRICE

The auto industry has been a powerful engine of the US economy. One in every ten jobs in the US are directly or indirectly on the automobile sector, accounting for around 1.3 million jobs in direct employment and 7.9 million in dependent or related jobs. Responses to the crisis in the industry have therefore followed two broad trends: first, calls for greater protectionism, and second, shrill cries for lower wages and slashing of hard-earned pension and health care benefits.

Automobile imports into the US are very small compared to domestic production, even if by Japanese or other non-US companies. On the other hand, US auto makers have historically never seriously tried to export US-made cars to other countries, refusing for instance even to make right-hand drive models or adopt metric standards for the European market. Yet none of this has prevented calls to force open the Japanese auto market or to impose even stiffer import duties than prevail at present.
US Business & Industry Council president Kevin Kearns, speaking in 2006 of “…the accelerating slide of Ford and GM toward oblivion,” pronounced that “without a major overhaul of US trade policy, much of America’s core domestic manufacturing will soon disappear.”

Apart from such protectionist moves, the burden of the crisis in the US auto industry is being thrown on its workers in the classic manner. In the next few years, the Big 3 are slated to close down 35 plants in the US and slash 100,000 jobs in the Detroit area alone.

A chorus of conservative commentators are screaming about the huge pension and health care liabilities that the Big 3 have accumulated, and have called either for the State to under-write these and bail out the companies or for the workers to forego these payments altogether. Some commentators believe that the Big 3 have collectively under-reported their pension liabilities by as much as $40 billion! Chrysler alone is believed to have $22 billion of liabilities on pensions and health care and therefore Kerkorian made a point of stating that he would “work together” with the giant United Auto Workers (UAW) Union on his revival plan, meaning twisting their arms into accepting far less than their due or face a total shut down of Chrysler.

All this talk of high costs ascribed to “unrealistic” worker benefits in fact hides the reality. The US Census Bureau estimates that each UAW worker generates half a million dollars in revenues! And after all, UAW workers manufacture Toyotas too in the US, although several US-based plants of Japanese manufacturers also employ numerous non-unionised workers.

US workers are today being made to pay for the past sins of their corporate employers and of the American State. Even as workers are being asked to accept lower wages and benefits, managerial remunerations continue to be obscenely high, one way or another, even in bad times. The president of Delphi, now under bankruptcy, was paid a bonus of $2.75 million against a salary of $1.15 million! And 460 executives on salaries of around $475,000 were paid bonuses of $450,000 even as their firms were posting huge losses!

As for health care, it was left to a Canadian commentator to point out that the US is the only OECD country without a State-run health-care system, passing the buck either to the workers through personal insurance or to the corporates who again, as now, pass the burden on to the workers.
The roots of the crisis in the US auto industry lie, therefore, not only in the structure of the US manufacturing sector and its response to globalisation but also in the US model of capitalism.