When the wheels fall off

The $6.2 billion being handed over by the Australian government to local automotive manufacturers is starting to look rather pitiful amid industry bailout talks in the United States. America’s major car makers — Chrysler, Ford and General Motors — are in a parlous state. Chief executives from the Big Three testified before Congress yesterday, warning of imminent collapse and the loss of at least two million jobs. Cap in hand, Detroit’s finest are now seeking some US$25 billion in taxpayer funding (over $38 billion in Australian dollars) to help meet their operating costs. On its own, it seems like a thoroughly remarkable amount. Yet it can hardly compare to the $700 billion set aside for relieving the financial sector of troubled assets.

The viability of the US automakers has been in question for some time. Each of the Big Three has spent their time under scrutiny in recent years. Ford was forced to embark on a cost-cutting drive in 2006 as the company bled money. Chrysler had previously merged with Germany’s Daimler Benz, but was spun off in 2007 owing to losses in excess of $1.5 billion. Yet it is currently GM, the largest of the domestic carmakers, which has the most doubts surrounding its operations. Without new funding, many expect it to go bankrupt before the end of the year.

Despite its long history as the manufacturing hub of America, Detroit is struggling to compete against international competitors. An oft cited concern is the dominance of America’s United Auto Workers union. The UAW has helped to instill rigidities in the carmakers’ labour structures. These not only cause upward pressure on wages, but also force carmakers to employ more workers than is necessary. Moreover, pension entitlements owed by the carmakers to retired employees impose a significant cost pressure. With ageing workforces, this bill is only likely to increase. By contrast, foreign car manufacturers which operate plants in the US have largely been able to avoid such issues. For example, Japanese car manufacturer Toyota has performed well in the US market, and despite a largely non-unionised workforce, has continued to offer their employees decent wages. Moreover, given its relatively younger workforce and the fact it has been operating in the US for far less time than the Big Three, its retirement claims are far lower than those faced by their American counterparts. It is telling that Toyota now sells more cars in the US than any of the Big Three.

Still, it is unfair to blame union interference for the Big Three’s woes. In truth, the problems facing US carmakers are far simpler to explain. Much like Ford and Holden in Australia, Detroit has failed to adapt to changing market conditions. US carmakers focused their efforts on producing gas-guzzling pickup trucks and SUVs, despite the first warning signs of higher petrol prices in 2001. Now Americans want smaller cars with greater fuel efficiency. The Big Three failed to recognise the potential for the sorts of hybrid engines being developed by Toyota and Honda. Today, American consumers are increasingly wary of relying exclusively on oil-based fuels, and are looking for alternatives. While US carmakers are now working to overhaul product line-ups, government funding shouldn’t be used to reward their slow response times.