Three Ways to Turn Around the Auto Industry

Thu, 16 Apr 2009 21:17:15 +0000 – By Horace CooperLegal Commentator/Senior Fellow, National Center for Public Policy/Former Bush Administration Labor Official

In the wake of news that General Motors is on an expedited path to bankruptcy and that Chrysler will pair up with Italian automaker Fiat, things are not looking up for the American auto industry. While the credit crunch and the ongoing recession have played a significant role in reaching this point, frankly much of the blame rests with policy makers in Washington, D.C.

The shibboleth that the plight of the Big Three (Ford, Chrysler and GM) is simply a function of their terrible product line is tired, worn out, and in most respects simply untrue. Actually government industrial policy has been more harmful to the American automobile industry than any of the decisions of the auto industry management. And now that the industry is on a rendezvous with destruction, perhaps we ought to make a change before it's too late.

Here are 3 policy shifts that will restore life and vitality to the automakers each of which ought to be considered immediately and certainly before any more taxpayer bailouts are considered.

1. Adopt a 3 Year Moratorium on UAW (United Auto Worker) Union Representation and Immediately Suspend the Existing UAW Union Contract.

The federal government policy of authorizing and enabling an all too powerful union to represent employees of all of the American automakers has been a costly mistake. Using the protections of law and possessing little interest in the ongoing concerns of the host corporations, the UAW has acted like a predator going after any or all of their targets when they were most vulnerable.

And this strategy has paid off handsomely for the unions, but there's been little to no return for the automakers or the car buying consumer. The UAW contracts run over a thousand pages in detail and all focus on extracting and maintaining medical, pension, and retiree obligations that are now nearly $30 billion for GM alone. These costs make GM and Chrysler uncompetitive and were never sustainable, and now having overwhelmed the automakers they'll be passed along to the American taxpayer if we don't act soon.

Today as most Americans sit at their kitchen table deciding on cost cutting measures that will allow them to keep their houses and their families intact, the UAW continues to hold out hope that it can keep its excessive gains that its maintained over the last 30 years. Since the UAW can't act responsibly their contract should be suspended and a 3 year moratorium should be put in place to give the American auto industry the running room necessary to survive and thrive without needing further taxpayer bailouts.

2. Let the Market Decide the Automotive Product Line, Not Environmentalists and Washington, D.C. Bureaucrats.

In the midst of plunging auto sales which set new records lows each month it is essential that the automakers be unleashed from rules that require them to sell products based on the desires of powerful eco-interests groups instead of those of the buying public.

A key failure of Washington policymakers over the last 30 years has been its view that Washington knew better what products the Big Three should bring to market than the companies themselves. After spending nearly $25 billion of taxpayer dollars to keep Chrysler and GM operational, its high time we revisit this attitude.

It simply isn't true that federal policy requiring ever greater fuel efficiency and emissions reductions line up with the interests of the buying public. One glaring fact is that for the last 15 years the single best selling vehicle in the U.S. has been that paragon of fuel efficiency, the American pick-up truck. Yet Washington still insists that automakers must focus ever greater efforts on selling smaller, lighter "enviro" friendly autos?

Derided as "automotive birth control" by car aficionados these fuel efficient vehicles have been seen by the auto buying public (particularly in the exurbs) as unattractive, unsafe, slow and incapable of meeting the basic transportation needs of working families. Notably every Toyota Prius, the icon of fuel efficiency, is sold at a loss. In other words the other cars Toyota sells subsidize the cost of making the Prius available to the public. Even when gasoline was over $4 a gallon Toyota can't profitably sell the Prius. On the other hand pick-up trucks, SUVs and sports cars are much more profitable to make than hybrids and they outsell the hybrids by nearly 10 to 1.

Continuing mandates that ever greater percentages of the new vehicles manufactured must be either hybrids and/or emissions free vehicles can only be considered what economists call the "the Triumph of Hope over Experience." This mindset is damaging to the auto industry and to the taxpayer. Rather than continue forcing the taxpayers to bear the operational costs of the American automakers as they are forced to sale products that the buying public eschews, we should temporarily repeal these mandates and allow the automakers to sell as many of their most profitable cars as the public wants. Especially in a plunging market it is more important than ever to let the market dictate sales not Washington, D.C. and green activists.

3. Instead of having U.S. government backed warranties, we should lower the costs of servicing and maintenance of all vehicles.

The so called "Motor Vehicle Owners' Right to Repair" should be enacted to require that both dealer and non-dealer repair shops can provide automobile repair service. President Obama's decision to put the federal government in the business of "backing" the warranties of American automakers is exactly the wrong policy. It perpetuates a monopolistic practice and shifts the burden of keeping the automakers operational to all taxpayers (even those who can't afford to buy a new car) all the while doing nothing to encourage potential customers concerned about repair and servicing costs.

Because new cars and trucks are increasingly sophisticated virtually every aspect of the vehicle is either monitored or controlled by computers. The upside is that these vehicles are far more efficient, environmentally friendly and reliable than ever before (even without the government mandates).

But the systems necessary to keep them in safe and efficient working condition requires access to complete and accurate repair information from the car companies. The auto industry has refused to make this information available outside of their dealer network even on a fee basis. Notably the cost of dealer service is a major hindrance to auto buying even for late model used cars (which are increasingly just as sophisticated as new vehicles) and this is especially true during this recession.

The costs to car owners when they have their vehicle repaired at the dealership is estimated to be as much as 25 percent higher with labor charges alone, according to a study comparing dealer repair tags compared with those of an independent service center. And the problem is worse for those who live in rural areas as the added cost of gas and travel time to the nearest dealership is an added burden.

There is no safety issue involved here - in fact just the opposite. Some newer vehicles are not getting properly serviced at all as job layoffs and recession worries cause them to delay or put off altogether a costly dealer servicing visit. While this monopolistic practice might have been overlooked during a boom time now that the taxpayers are subsidizing the automobile industry this practice must come to an end.

In conclusion, in essential respects US policy towards the automakers is shortsighted and in most respects unlikely to accomplish any other objective than saddling the taxpayers with ever greater levels of debt. Each of these three solutions focus on returning the American automakers back to profitability by doing what they do best - selling the types of automotive products that consumers want without unneeded mandates and monopolistic interventions.

After dismal car and truck sales in 2008, and with demand off more than 33 percent in the first three months of this year already unless we want to see the ultimate demise of the auto industry major industrial policy changes are in order.

Horace Cooper is a legal commentator and a senior fellow with the NationalCenterfor Public Policy and former Bush Administration Labor Official (www.horacecooper.com)