Three years ago “American” cars held a 100% market share of my garage. We favored domestic automobiles due to our “blue-collar” roots. My father-in-law was a municipal union worker for many years. I was raised exclusively on United Autoworker Worker wages. My father was not an autoworker, but worked in a factory represented by the UAW. This heritage had always influenced our car buying decisions.
But now things have changed. American cars now hold a paltry 25% market share of my household. First, my daughter got a used Kia. Strangely enough, my father-in law (a Korean War veteran) became a strong admirer of Kia cars before his death.
Next, my other daughter chose a Hyundai Elantra for her college graduation gift. Her other options were a Mazda and a Nissan. She refused to test drive a Chevy. I would have forced her to test drive a Ford, but they are not part of our supplier discount program. Her Elantra was an award-winning model and my daughter is very pleased with the car.
Then my wife bought a Mazda 3 (another award winner) this year. My wife was very brand loyal to the Saturn brand. Three years ago we owned three Saturns, and she certainly would have bought another if General Motors had not discontinued the line. She loves her new Mazda. My Saturn Aura, one of the best cars GM has ever made, is the last Yankee standing.
|The Last "Yankee" Standing|
And just as America cars lost market share in my driveway, they also lost share of the total market. The value and quality of cars started to decline years ago and foreign competition has continued to improve, especially the Korean companies.
American cars are providing less value because they cost more money to produce. This is the result of paying generous union wage and benefits even in the face of increased competition and foreign companies opening factories in the U.S. The American companies are also saddled with large pension benefits and retiree medical expenses. In addition, I believe the lack of competitive advantage has led to complacency in new product design, quality standards and creativity.
General Motors and Chrysler were already in a swirling downward cesspool when the Great Recession hit and threatened to flush the companies away. Typically, the companies would have gone through a structured bankruptcy. The purpose of the process is to restructure the resources and debt of the troubled company so it is able to continue operations in a reduced, profitable, condition. This is very beneficial since it preserves investor, creditor, and employee value.
But there was no structured bankruptcy this time. There was a government bailout with partial government ownership. Recently several commentators have referred to the bailout in very positive terms. This is so wrong! A bailout is a very negative thing. It means you have failed so miserably that there is no way you can climb out of the mess by yourself. It should be a very shameful, embarrassing, occurrence.
A big government bailout has winners and losers and the government gets to select who the winners are. It can be argued that the government did not bail out the car companies, but bailed out the UAW. It some cases union pensions were preserved over salaried pensions and union wages won out over preferred stock holders.
And while a bankruptcy forces a company to correct its bad practices so that it can regain profitability, a bailout doesn’t have to do this. The government initiated some peripheral changes, but did not address the big issue: GM union wages and benefits are still significantly higher than the competition. Because the root cause of GM’s problems were not addressed, I expect the U.S. operations (they are doing well in China) to “fail” again in the future.
In a free market economy the government should never own any part of a company. This is what communists do. Unfortunately governments do not understand business, but they sure do understand politics. A good example of this is the Chevy Volt. It has been reported that a Volt costs $80,000 to produce. The asking price was $40,000, but there were few buyers so they had to drop the price to $30,000.
|The Volt: Shocking "Profitability"|
The manufacturing costs will fall as volume rises, but how long will it take for the Volt to be profitable? And this is a “high-tech” product which means new technology will make the Volt obsolete in a shorter time. Producing a product for $80,000 and selling it for $30,000 is a business model only the government, and the Underpants Gnomes from South Park, can buy into. It does produce many “green jobs” however, you happen to be paying for the bailout with your green.
It is also rumored that the recent increase in Volt sales is not just due to the price cut, but has to do with the government buying many Volts for its own use. Boosting Volt sales before the November election may be very bad business, but it is very good politics.