Thursday, November 20, 2008

What Is an American Car? Why Should Government Offer Special Deals for Uncompetitive Cars?

Before “loaning” billions more in taxpayer money to some very bad credit risks, simply because they are old American brands associated with Detroit, we might ask what distinguishes these companies from others.

The not-so-big three are certainly are no less global than, say, Honda. General Motors gets 44% of its revenue from other countries and Ford gets 53%. A German company, Daimler-Benz, still owns a fifth of Chrysler, and a group of affluent private investors owns the rest.

An “American” brand tells you little about where all the parts in a car are made.

Cars.com found only 4 cars and 6 light trucks with a domestic content (meaning US or Canadian) above 75%. That list includes the Toyota Tundra and Sienna and the Honda Odyssey. Other Honda’s have a 60-70% domestic content, barely missing the cut.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate. Among the remaining seven vehicles with a very high domestic content, 3 are made outside Michigan —the Chevy Malibu from Kansas and Cobalt from Ohio, and the Ford Explorer from Kentucky. Ford’s F-150 truck might be made in Michigan or Missouri, the Chevy Silverado in Michigan or Indiana.

The only strictly “Detroit” cars with high domestic content are the Pontiac G6 from Orion MI and the Chrysler Sebring from Sterling Heights MI. Consumer Reports says, “The G6 isn’t a very good car” and “The Sebring is one of the least competitive family sedans on the market.”

Yet these are the only Detroit-made sedans with a high domestic content. Does anyone really think taxpayer subsidies can save cars like that? And why should the federal government offer special deals for uncompetitive cars made in Michigan, thus tilting the playing field against better cars made in, say, Ohio, Tennessee or South Carolina?

~Alan Reynolds at Cato Institute

14 Comments:

At 11/20/2008 11:23 PM, Anonymous Anonymous said...

I thought it was a credit problem. Isn't that what the bail out is for?

 
At 11/21/2008 12:21 AM, Anonymous Fred said...

Britain fought the same battle the same way in the '70s and '80s to save their auto industry. They poured over ten billion dollars into saving Leyland and others only to lose them anyway, as well as losing all ten billion dollars sunk into them.

I visited Britain several times from 1986 to 1999. There are good people there who could have made better use of ten billion dollars of capital investment.

That said, the Humber Supersnipe was a mighty fine machine.

 
At 11/21/2008 2:38 AM, Blogger 1 said...

"Why Should Government Offer Special Deals for Uncompetitive Cars?"

Hmmm, couldn't there be some reasons the socialist, nanny state federal government that has evolved in the US is in large part responsible for American cars being uncompetitive?

Note the beginnings of federal government interference by the imposition of CAFE standards on the auto industry...

Note the beginnings of the federal nanny state's intervention into the auto industry via the imposition of EPA rules...

Note the beginnings of the federal nanny state's intervention vehicle safety...

 
At 11/21/2008 4:11 AM, Blogger @sethstorm said...


An “American” brand tells you little about where all the parts in a car are made.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate.

With regards to the author's use of the "Detroit" and "American" metaphors, they are inaccurate. Describing a "Detroit" or "(North) American/United States" car can also mean the design choices. I'm not talking about building bigger, but by designing for performance first, then working with fuel efficiency, and putting both in an affordable package. To some extent, all of the Big Three do this - it is rare to see them build or captively import a compact.

To kill the Big Three in Detroit, choice would be reduced. It won't affect me much for a while as I have little to no problem with their vehicles and their maintenance. I call it the cost of being able to have a decently powerful 6/8 cylinder engine(in a car, not just a truck/SUV) as a viable choice. Viable would mean that you can get them in more than just an expensive "luxury" vehicle, but in the affordable ones.

It doesn't matter that it was a car built far from Detroit, but that it follows the idea of affordable performance.

I would not want to end up with the situation in Europe, where it's small or expensive. Right now, I'd have no problem with removing a lot or all of the environmental regulations. I'd only consider touching the union issue if it means that the "labor relations" will not go for a cheap final shot.

For the record, I have a Canadian built, V6 powered car from GM. It may be a Canadian vehicle by origin, but it is definitely a "Detroit" car.

There would be much support at all if there was another brand that built in the US (separate of the companies in Michigan) and offered a "Detroit" build in mass quantities. No, I'm not counting the various exotics and kit cars, but an actual competitor to GM/Ford/Chrysler.

 
At 11/21/2008 9:59 AM, Anonymous rvturnage said...

"To kill the Big Three in Detroit, choice would be reduced."

But that choice was made by the buying public. It's not Governments place to override the markets choice to kill a plan that is obviously not working.

I'd also add Mississippi to Mr. Reynolds list of states where better autos are built...Nissan is currently building several models here and Toyota is in the process of constructing a plant here. Of course, they're considering delaying the opening. I wonder if that has anything to do with this proposal to subsidize their competition?

 
At 11/21/2008 10:16 AM, Blogger Walt G. said...

rvturnage,

Mississippi and Canton paid over $400 million to attract that Nissan plant. And they also gave tax abatements on top of that. Isn't that a subsidy?

 
At 11/21/2008 10:40 AM, Blogger Walt G. said...

Here's my source. You can decide for yourself if these are "subsidies":

Advantage Mississippi: Economic Incentives Provided by the State

“In order to be competitive among so many other locations, the Mississippi Development Authority offers a number of incentives to potential companies considering relocating to the state. In order to secure Nissan’s relocation within its borders, Mississippi provided the company $363 million in direct incentives; including the additional funds allocated for the expansion effort, in 2002, which was initiated ahead of schedule.

Tax Breaks: While tax incentives are a major component of the package pulled together for companies, there are many more features such as a tax credit program, the 4 percent payroll rebate, tax free zones and the Regional Economic Development act–which allows local governments to form alliances with other political subdivisions.

Employee Training and Support: Since training is key to a company’s success, updated legislation now gives the Mississippi Development Authority the flexibility to offer highly specialized technology training and multi-year training commitments as incentives.

Infrastructure: The state constantly seeks to enhance its capacities in air, rail, road and port, including intermodal connections, so as to broaden its appeal to companies. Telecommunication improvements, especially in the area of high-speed data and broadband access, remain important.

University Resources and Research: Given the network of universities, technical and two-year colleges across Mississippi, the state seeks to effectively use these knowledge-based resources to increase its attractiveness to companies.

Government Support: The MDA offers government accessibility, accountability and responsiveness to business and industry leaders either looking to locate or expand in the state.”

(Source: A state of Mississippi official publication: The Drive to Move South)

 
At 11/21/2008 1:57 PM, Anonymous rvturnage said...

Walt, yes the tax breaks and other things you mention are subsidies.

But they (or incentives) are available to all companies willing to build plants in the state...including any of the Big 3.

The handouts being asked for by the Big 3 are available only to them. That's a pretty big distinction in a competitive market, don't you think?

 
At 11/21/2008 1:59 PM, Anonymous rvturnage said...

oops...second 'graph should read:

But they (or similarly negotiable incentives) are available to all companies willing to build plants in the state...

 
At 11/21/2008 2:50 PM, Blogger Walt G. said...

rvturnage,

I agree, but they cannot be ignored as if they don't exist. I prefer full discloure of the taxpayers' expense. It's pretty common to spend public money for private business.

Some companies give back:

Nothing needs to be said... Ford, Chrysler and GM's contributions after 9/11

An interesting commentary...You might find this of interest:

'CNN Headline News did short news listing regarding Ford and GM's contributions to the relief and recovery efforts in New York and Washington.

The findings are as follows:

1. Ford- $10 million to American Red Cross matching employee contributions of the same number plus 10 Excursions to NY Fire Dept. The company also offered ER response team
services and office space to displaced government employees.

2. GM- $10 million to American Red Cross matching employee contributions of the same number and a fleet of vans, suv's, and trucks.

3. Daimler Chrysler- $10 million to support of the children and victims of the Sept. 11 attack.

4. Harley Davidson motorcycles- $1 million and 30 new motorcycles to the
New York Police Dept.

5. Volkswagen-Employees and management created a Sept 11 Foundation,
funded initial with $2 million, for the assistance of the children and victims of the WTC.

6. Hyundai- $300,000 to the American Red Cross.

7. Audi-Nothing.

8. BMW-Nothing.

9. Daewoo- Nothing.

10. Fiat-Nothing.

11. Honda- Nothing despite boasting of second best sales month ever in
August 2001

12. Isuzu- Nothing.

13. Mitsubishi-Nothing.

14. Nissan-Nothing.

15. Porsche-Nothing.

16. Subaru- Nothing.

17. Suzuki- Nothing.

18. Toyota-Nothing despite claims of high sales in July and August 2001.

 
At 11/21/2008 5:16 PM, Anonymous rvturnage said...

"I agree, but they cannot be ignored as if they don't exist. I prefer full discloure of the taxpayers' expense. It's pretty common to spend public money for private business."

The fact that the incentives offered by MS to Nissan are available to any company maintains the level playing field. They have no bearing in the point I was making regarding whether select incentives available only to specific companies may cause other companies not getting those subsidies to reconsider expansion in that particular market. Though, I could have been more clear in my original post on that point, I admit.

I'm aware that it's common to give tax breaks and other incentives to private companies...personally, i'd rather it didn't happen at all and have taxes lowered across the board to a rate that wouldn't require those special incentives. But if they do offer them, i prefer any subsidy to be an across the board subsidy available to all businesses, not just paticular ones, and most certainly not to ones who have been losing money hand over fist for years and are the most inefficient companies in the industry. Wasn't it just 30 years ago Chrysler went to Washington with their hands out? Now they're back again?

And IMO, whether or not a company donated to charity shouldn't play into this decision. If those donations had been important in the matter, then the U.S. car buying public would have considered it more heavily in their decision making and bought more cars from the Big 3. It appears that, since they've been hemmoraging money for years, the car-buying public wasn't too impressed with their philanthropy.

Who knows, maybe the capital saved by losing GM ($182 billion lost over the last decade, according to this post) will be used instead by other companies that are even better "corporate citizens" and give comparable amounts to charity and still maintain profitability.

 
At 11/21/2008 6:00 PM, Blogger @sethstorm said...


But that choice was made by the buying public. It's not Governments place to override the markets choice to kill a plan that is obviously not working.

You are ignoring the people who still have confidence in buying "Detroit" cars. They exist and are not just the workers who do so.

 
At 11/24/2008 10:23 AM, Anonymous rvturnage said...

I'm not forgetting those people. But obviously not enough people want the "Detroit cars", or the Big 3 wouldn't be needing a handout. That's how the market decides. Enough people buy the cars as produced or the company A.) changes something in order to sell more cars, B.) raise the price of the cars that are selling enough to cover the costs of production, or C.) go out of business.

It's been years now that the Big 3 have suffered compared to foreign automakers, so I doubt "A" will happen. Also doubtful that "B" will work. So, that leaves us with "C".

Or a government handout and more losses by the Big 3, another handout in 10-20 years, and billions more scarce capital wasted by inefficient business that could have been used elsewhere.

 
At 11/26/2008 3:29 PM, Anonymous Anonymous said...

Rice is still rice, no matter where it's grown. I laugh at American consumers that drive imports and have an American flag decal on the bumper...it's funny, yet pathetic at the same time...and it just goes from there.

 

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