The Homa Files

Ken’s Take: It has taken awhile for folks to begin to realize that Detroit execs weren’t complete dolts — save for the unfortunate union negotiations in the 1970s that doomed the companies.  Consumers did want mini-vans and SUVs, and fortunately for the Detroiters, minivans and SUVs were profitable enough to cover their labor cost disadvantages.  Now, only to find a way out of the mess …

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Excerpted from WSJ, “Auto Bailout Caps Flawed Relationship”, Dec. 22, 2008

The Detroit Three’s post World War II business strategies — which relied on large, powerful cars built by richly paid union workers — were doomed from the day in 1982 when the first Honda Accord rolled off a nonunion assembly line in Ohio.

How Detroit’s auto makers will be able to stabilize financially in the short run is unclear, since it takes years to redo their product lines.

The fastest way to profitability for the Detroit Three, beyond giving haircuts to bondholders and slashing workers wages, would be to take advantage of falling gas prices to sell more of the gas-hungry sport-utility vehicles and large pickup trucks that  Obama and congressional Democrats don’t like.

Washington’s policies, and the way the government exerted regulatory control over the auto makers, often worked against the profound changes the companies needed to make to compete with foreign makers.

Up until this year, Detroit had few reasons not to lean on trucks and SUVs for profits — and government policy all but invited them to do so.

Since the 1980s, Washington’s de facto energy policy has been to keep gasoline prices, and gasoline taxes, low. By contrast, European nations for years have boosted fuel prices to around $6 a gallon through taxes, which pushed consumers toward small cars.

The result: U.S. consumers gravitated toward ever larger and more powerful vehicles because the costs to fuel them were relatively low. In 1987, the average American vehicle got 22 miles to the gallon, weighed 3,221 pounds and accelerated from 0 to 60 miles per hour in 13.1 seconds. By 2007, the average car weighed 4,144 pounds, accelerated to 60 miles per hour in under 10 seconds — and averaged 20 miles per gallon.

Federal tariffs imposed on imported trucks and other quirks in Washington’s fuel-economy regulatory scheme also encouraged U.S. auto executives to push trucks and SUVs.Federal fuel-economy rules allow car makers to average the fuel usage of most of their products. They could sell fuel-efficient small cars and trucks at little or no profit to make up for the high-profit, gas-hungry luxury cars and big SUVs they promoted.

In recent years, GM, Ford and Chrysler made money on trucks — with profits of as much as $8,000 a vehicle — and lost money on cars. Detroit made enough money to cover spiraling health-care and pension costs.

Federal rules caused Detroit “to cede the car market and make all their money in trucks.”

Full article:
http://online.wsj.com/article/SB122990466217625249.html?mod=article-outset-box 

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This entry was posted on December 22, 2008 at 8:06 am and is filed under Autos - Travel, Government & Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.