Editorial: In Defense of: The Detroit Bailout

Ronnie Schreiber
by Ronnie Schreiber

As the domestic auto companies appear to be circling the drain, there’s been debate about the extent of the impact of their failure on their supplier base, the impact on the industrial manufacturing base of the United States, even possible negative implications for Toyota and Honda. One party in all this that has rarely been mentioned are the consumers. While a few automotive analysts, pundits and bloggers have touched on how an implosion of the Detroit based car companies will affect consumers, almost all of the discussion has centered on whether or not people will buy a car from a bankrupt manufacturer, and the related issue of how product warrantees will be covered if their manufacturers go belly-up. A more basic consumer issue: how the loss of GM, Ford and Chrysler from the US auto market would affect the prices, features and technology of new cars.

While some critics of the domestics would have us believe that nobody is interested in cars built by the domestics, the fact remains that The Big 2.8 still sell millions of new cars a year in the North American market. October was a sales disaster for the domestics, with GM’s year to year sales falling 45 percent, Ford 33 percent and Chrysler seeing a decline of 37 percent. Foreign brands also saw declining sales but the decline was not as steep. With consumer confidence at the lowest level since just after the 9/11 attacks by Al-Qaeda, sales will not likely pick up anytime soon. The overall industry is on pace for a 10.6 million unit year, down from 16 million in 2007, and down over 40 percent from the record year of 2000. Still, between them the domestics sold just about 400k cars in October, good for 55 percent of the total US car & light truck market.

It’s a simple fact of business that competition puts downward pressure on prices. Critics of any bailout for the domestics like to say how their customers won’t go away; they’ll just buy Toyotas, Hondas, Nissans and Hyundais. What they don’t say is how much more expensive Toyondisssandais will be without competition from GM, Ford & Chrysler. You simply cannot remove competitors with a 55 percent share of a market without seeing the remaining vendors raise prices. Without competition from domestic competitors, the foreign brands have much less of an incentive to keep their prices down. Also, the structural costs of the domestics (at least until the cost reductions due to renegotiated UAW contracts kick in in 2010) create a price ceiling foreign brands can undercut. Take away that ceiling and watch Toyota raise its prices.

Conversely, take away that structural cost disadvantage for the domestics and you’d see lower prices right now on all brands, foreign and domestic, because of real price competition. Look at India. That market is very price sensitive. Just about all the global manufacturers are active in India, but the growing indigenous Indian auto industry led by Tata and Mahindra creates price competition for the transplants. Since Tata announced the sub $3000 Nano, Renault-Nissan, which already produces the low cost Dacia Logan, has announced a joint venture with Bajaj, maker of scooters and three-wheelers, to compete with the Nano at the new entry level price point.

A Detroit meltdown would affect more than just new car pricing. Say what you will about the domestics, but their presence in the market forces the other manufacturers to compete on features and technology as well as price. I’m not saying that a disappearance of The Big 2.8 would return the days of “radio and heater optional,” but there’d be less incentive for remaining companies to keep content level high. The Honda Accord’s initial market success in the late 1970s was partly attributable to a higher level of standard equipment than the domestics offered.

Regarding technology, the list of innovations introduced to the market by the domestics and their suppliers is almost endless: electric starters, seat belts, catalytic converters, modern refrigerants, car audio, defoggers (forced hot air and electrically heated), turbochargers, magnetically controlled dampers/shocks, and on and on. Without the billions the domestics spend on R&D ($15.6b for Ford & GM in 2007, not counting Chrysler which is privately held and doesn’t publish proprietary data or the moneys spent on R&D by domestic auto suppliers) the pace of technological improvements will slow significantly.

The domestic car companies’ disregard of their foreign competitors in the 1970s and their poor quality in the 1980s have so alienated consumers (and their now adult children) that it’s easy to see why so many people either don’t care if the domestics disappear or actively wish for their demise. If they think, however, that such a disappearance will be good for consumers, in terms of price, features and technology, they’re sadly mistaken.

Ronnie Schreiber
Ronnie Schreiber

Ronnie Schreiber edits Cars In Depth, the original 3D car site.

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  • ZoomZoom ZoomZoom on Nov 18, 2008
    Bozoer Rebbe : ...I’m a Michigan resident, we’ve sent billions and billions more to Washington than it’s spent here, so they’ve already raided our wallets. How does one find this information? I'm not being mean or anything, but I'd really like to know if this statement is factual; and the only way to do it is to find out the real numbers, in and out, yes? On second thought, I think EVERY single state has sent more money to Washington than what came back. Why? Because government is by its very nature...inefficient; wasteful even! About 15 years ago, the figure was that on average, each dollar sent to Washington would only result in 28 cents being passed on to the people in the form of program/benefit. There's little evidence to me that this has changed in the last decande and a half.
  • Ronnie Schreiber Ronnie Schreiber on Nov 19, 2008
    How does one find this information? I’m not being mean or anything, but I’d really like to know if this statement is factual; and the only way to do it is to find out the real numbers, in and out, yes? Here's the data for 1981-2005 http://www.taxfoundation.org/research/show/22685.html Michigan averaged $0.81 cents for every dollar it sent to Washington, about $200 billion over that period. Most of the net flow was to the south, southwest and the D.C. suburbs in Virginia and Maryland. The southwest got water projects and infrastructure, the south got defense bases and plants, and Virginia and Maryland got all those GS-11s and above who mostly sit on their asses working for the Federal government. Meanwhile they closed two Air Force bases here in Michigan and consolidated tank production, taking it out of Michigan. Maryland averaged $1.25 in Federal spending for every $1.00 in taxes paid to Washington. Their net gain was only slightly smaller, $190 billion, than Michigan's net loss. Mississippi is over a buck and a half. Just about all the southern and sunbelt states are over a dollar. Louisiana averaged $1.14 and now we're spending $200-$300 billion rebuilding New Orleans. I don't begrudge the people of New Orleans. They experienced a natural disaster and need assistance, but the magnitude of the damage and suffering was mostly due to a lot of bad mistakes by people, starting with locating a city under sea level and proceeding to poor levee design & maintenance, inadequate emergency preparedness and response, incompetence on the part of Mayor Nagin (and a big chunk of his police force) and Gov. Blanco (remember those flooded parking lots full of school buses), slow action by FEMA and, no doubt, some level of corruption in the rebuilding process. You can point to mistakes made by Detroit if you want, but they aren't the only ones who have made bad decisions.
  • Richard Poore Sure, as the article itself notes (hence my ire) California has mandated that all new vehicles sold in state be EV by 2035. They require EV or hybrid by 2026. Since the author admits to this mandate it seems that the article title is clickbait... was really hoping that there was some sort of changes in the CA position since the state is sorely behind on where they need to be with charging stations for this sort of requirement.
  • VoGhost When will Audi eliminate the fake, oversized grills that impede aerodynamics?
  • Kelley It's about time! I was so discouraged to see those poor Chevy Bolts stuck at the charging station receiving level 2 speeds after 80%, it was ridiculous. It would be nice if EA would had more level 2 chargers, also, at the same locations for people to top off above 80% on the fast chargers.
  • Tane94 Carmela Harris is supportive of EV adoption, so government incentives will be continuing under her watch.