Wednesday, December 10, 2008

The role of Congress in the Big Three's problems

Holman Jenkins points out that Congress won't confront its own role in GM's problems with their CAFE standards that have been forcing the company to build and try to market two separate fleets.
Leave it to Bob Lutz, GM's voluble vice chairman, to puncture the unreality of the auto bailout he himself has been championing. In an email to Ward's Auto World, he notes an obvious flaw in Congress's rescue plan now taking shape: The fuel-efficient "green" cars GM, Ford and Chrysler profess to be thrilled to be developing at Congress's behest will be unsellable unless gas prices are much higher than today's.
[Business World] AP

The profitable part of Detroit.

"Very few people will want to change what has been their 'nationality-given' right to drive big and bigger if the price of gas is $1.50 or $2.00 or even $2.50," Mr. Lutz explained. "Those prices will put the CAFE-mandated manufacturers at war with their customers -- and no one will win in that battle."

Translation: To become "viable," as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.

None of this was mentioned at four days of congressional bailout hearings, because Detroit knows better than to suggest Congress has a role in the industry's problem. Yet its own recently updated Corporate Average Fuel Economy regime, or CAFE, makes a mockery of the idea that government money will render the companies profitable, even as the same bailout bill demands that the Big Three drop their legal challenge to a California mileage mandate even more unsustainable than the federal government's.

Forget Chrysler, which has needed a bailout from Washington or Stuttgart in three of the last four recessions. The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages.

All this is dragged down by federal fuel-economy mandates that require them to lose tens of billions making small cars Americans don't want in high-cost UAW factories. Understand something: Ford and GM in Europe successfully sell cars that are small but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. Americans are not Europeans. In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren't bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car as the transplants can.
Something has got to give. Either the ridiculous UAW contracts that inflate the cost of the Big Three's cars, or the CAFE standards which involve government trying to determine what the market should want. Preferably both, but with a Democratic-dominated Congress, the most probably result is that neither liberal sacred cow will be abandoned. And so any bailout plan is doomed to failure.

And for some humor on the whole bailout proposal, my husband links to this satire of an ad for the Big Three's cars that perfectly expresses our feelings.