How to Save the US Auto Industry
As the arguments have gone on about how to bail out the US auto industry, I’ve thought a lot about it myself.I believe that the US auto industry can be saved with some rather simple steps. Primarily, these include such common-sense things as un-crippling the automakers, reforming the automotive market, and trying some innovative experimental tax reform.
First, we need to think about why the US auto industry is doing badly, while foreign automakers are performing better with US based plants. A large reason for this is that the unions have, over time, gained far too much control over the automakers.
When most think about union involvement in the automotive industry, they think of the line-worker. It isn’t unreasonable that automakers provide decent pay and benefits to those who make the cars. When someone talks about reducing the power of the unions, the automatic assumption is that this would mean lower pay and benefits for the line workers. While that may be a side-effect of reducing union power, it’s not the area in which the unions need to be broken from the process.
The most cumbersome requirement of the unions is that the automakers rely on unionized vendors. Let’s take brake pads, for instance. If Ford has bids from three different manufacturers of brake pads, each capable of producing the same pads to the same standards of quality, they are able to make a decision on price. Manufacturer #1 can create the brake pads for $20 per car in its North Carolina plant using non-union labor. Manufacturer #2 can make the brake pads for $30 in Massachusets using some union labor. Manufacturer #3 can sell their brake pads for $50 per car out of their Ohio plant using nothing but union labor.
Given identical standards of quality and safety, the choice is easy. The North Carolina manufacturer gets the contract. In Detroit, this isn’t allowed. Union contracts require that the parts that go into the cars be made by union labor. This means that each part of the car costs more to produce than it should, thus driving up the price
It’s the extraneous requirements on the contracts that have to go. The best way to do this is the bankrupcy process. Bankrupcy proceedings could allow the big-three automakers to renegotiate these contracts. The end result could, and should, be reduced manufacturing costs per car, and therefore a lower cost per car.
Lower prices per car would increase sales, allowing for profitability.
Lower prices aren’t the only answer, though. In order to be able to sell the cars, the automakers also have to be able to make cars that people want to buy. That’s easy enough, isn’t it? A little market research, good design teams, and quality engineering should be able to produce the cars that America wants.
Wait a minute, though. That isn’t how it works. Thanks to the US Government, the automakers can’t just produce what America wants. The greatest impediment to this is called CAFE standards. CAFE stands for Corporate Average Fuel Economy. In short, the CAFE standards say that each automaker must produce CARS with an average mileage defined by the government.
Notice the emphasis on cars in that last sentence. That’s important, and I’ll get to why in a moment.
My parents love their Mercury Gran Marquis. It’s not a gas hog, but it isn’t going to get any awards for economy, either. The estimated miles per gallon on the highway is 25mpg. This is below the government’s CAFE standard rate of 27.5mpg. In order to compensate, Ford must produce cars that exceed this standard. The Ford Focus exceeds this standard. Unfortunately, the Focus is a tiny car that, quite frankly, wouldn’t meet my parents needs in a car. By averaging the fuel economy across the full production, the automakers try to keep the number below 27.5mpg. If they exceed 27.5mpg, they pay civil fines.
Personally, I love my Mustang. If I change the plugs and wires, and buy a new air filter, it should get more than 27.5mpg. It is, after all, a six-cylinder model, and I drive conservatively. I’d really rather have a V8, as I’m sure many other people would. What happens, though, if the automakers find that there’s more demand for the V8 model, and other less fuel-efficient automobiles? They either follow the CAFE standards and make cars that are in less demand, or they pay fines on their cars and pass the costs on to the customers.
There is another answer. You see, the standards for light trucks are necessarily lower than those for cars. People in need of more space for their family, more cargo room, more pulling power, or safer cars (CAFE standards kill, but that’s another post and a radio interview I gave several years ago) have to buy a light truck, instead of a car. The intersection of needs for more car and a family-friendly format created the surge in SUV sales.
The SUV turned out to be the best way you could get a “real car” in the current regulatory environment. A new format, the crossover, still qualifies as a truck while providing better fuel economy to meet the light truck CAFE standards of 22.2mpg. They’re lighter, and less safe than the SUV, but still provide more than that little Ford Focus in room and carrying ability.
So, the second thing that should be done is to abolish the CAFE standards, and allow the automakers to create cars based on customer demand, rather than government mandate. Let’s face it, letting the government decide what you can and cannot buy has never been a good idea. For the automakers, it’s been a disaster.
Thirdly, the government should reduce taxes on the auto manufacturers. The fact of corporate taxes is that the companies have to pay the taxes out of money they get from the consumers. If you buy a car, part of the cost of that car is taxes paid by the company. Corporations DO NOT PAY TAXES. Their customers pay them in the price of the products consumed.
The government should, therefore, start a 12 year tax reduction plan for the automakers. For the first two years, corporate income taxes on the big three should be reduced to zero. That’s right, they should pay no corporate income taxes. The savings should be taken out of the price of the cars, thus allowing consumers to buy new cars at lower prices. After the first two years, the taxes can be put back into place in 10% increments. At the end of 12 years, the corporate tax burden would be back where it was in the beginning.
Of course, reducing or abolishing the corporate income tax isn’t just a good idea for the car companies. It should be done across the board. Corporate income taxes should be abolished entirely. The best way to demonstrate this is to experiment with the auto industry in their time of need. It would be a great benefit to the manufacturers, the employees, the consumers, and the economy as a whole.
Three simple steps. Reduce costs by reducing union controls over every aspect of the big three automakers. Remove the crippling restrictions that government has placed on the industry, and allow the companies to create cars that people want for a change. Finally, cut the unnecessary cost of government out of the automakers’ bottom line by cutting their taxes to zero for at least a short time.
If, after all this has been done, a loan is needed to get the companies past the short run, then maybe that can be done. Just don’t add on extra requirements that hurt their business like demanding they make certain types of cars, or disallow dividend payments for stockholders. That’s just more stupid government micromanagement, and that’s been half the problem the automakers had in the first place.
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