Does Detroit Deserve a Bailout

Is there any point to bailing out the American automotive industry? Who is to blame for the failure of the industry anyway? Consumers? Unions? Executives?

So right now, people are complaining that Detroit does not produce economical cars. Until the price of gas spiked, however, there wasn’t widespread American demand for fuel efficiency. We were still riding the gravy train of cheap gasoline and Americans wanted either big giant SUV’s or heavy, luxury cars. Meanwhile, in markets that suffered from high fuel prices (Japan and Europe), research and development produced hybrids and efficient diesels. Today, Japan pretty much leads the globe in hybrid vehicle technology. Diesels in Europe enjoy more than 30% market share. This was driven by mass consumer demand. Now there may have been pocket demand in the United States for more fuel efficient vehicles, but the vast majority of purchases reflected that our interest lied with either heavy luxury or the cheapest sticker price possible.

Now, it’s clear that the nature of America has very legitimate use for pick-up trucks from light to heavy duty. That need really has not come into question. However, it is extraordinarily obvious the American consumer drove the remainder of production towards P.O.S. compacts and incapable SUVs. It wasn’t until gas prices hit $4 a gallon that dealers actually reported an inability to sell such staple vehicles like the Ford Explorer. Regardless of what the ecological pundits proclaimed about the vehicles like the EV-1, the quiet consumer wasn’t buying them. And an already struggling automotive industry had to produce what people bought in order to barely stay in business.

Let’s take a sampling of some vehicles that are produced. What’s the point of a Chevy Cobalt? I had a chance to drive one of these pieces of junk in 2006 as a rental. The vehicle could barely break 20mpg (unloaded mind you), was terribly uncomfortable, had little cargo space, an underpowered engine and last but not least … it’s horrendously "uncool." Yet they, and other vehicles like them, sell. For practically the same price, a consumer could have bought a base model Jeep Wrangler SE. The 2.4L version of this Jeep is known to exceed 20mpg, is just as uncomfortable (though larger inside) and given the choice, is far cooler and more utilitarian than a Cobalt. It certainly can’t be argued that the consumer purchases crappy vehicles like a Cobalt for efficiency or economy as equivalent performance can be found for the same price in a better vehicle.

So the blame cannot lie entirely with industry executives. They produced vehicles that their consumer base wanted. Of course, they could be blamed for having not truly created an effective market for new technologies. Toyota has already proven with its Titan, Tundra and Tacoma pick-up trucks that a well-built vehicle can be constructed that has hauling strength, fuel efficiency (for a truck) and creature comfort amenities. What do Ford, Chevrolet and Dodge rely upon? "Buy American" is their mantra and they’ve stuck to it for decades. I’m all for buying American products … if the product is worth buying. Just as I won’t buy low quality crap from China just because the price is low, I also won’t buy poor quality crap just because an American put it together. And for that, I blame the unions. In completely ideal conditions, a union is good check and balance to ensure companies are not taking advantage of their employees and trampling the little guy. But over the decades, unions have evolved into such a worker protection entity that it has pervaded everything from marketing, R&D to even the consumer’s buying decision. When it comes to quality and craftsmanship – for an equal price would you really buy American over German? When it comes to reliability and longevity – for an equal price would you really buy American over Japanese? The "Buy American" motif is a great slogan but it’s simply smoke and mirrors over an inferior product line. Travel around the world and take a look at the automobiles. In impoverished countries, the vehicles of choice are either something produced locally or some equivalent P.O.S. When a little more money is available, look at the imports – European and Japanese. Why? They’re better products for the price. There is no reason for these consumers to pay the overhead induced by union labor fees for a car that is likely to break down on them where parts are scarce.

Back to a bailout. Is there a need for a Detroit bailout? Yes. The loss of those auto companies will put an extraordinary number of Americans into unemployment which will only further strain the economy by loading the social protection mechanisms, eroding GDP and further slowing money velocity. But a bailout for Detroit will only go so far. They will continue to produce shoddy, overpriced vehicles that nobody else in the world cares to import and that domestic Americans are ever yet less inclined to purchase themselves. A bailout this year simply means the Big Three will be back before the American people again next year asking for yet another bailout. Do they deserve a bailout? Absolutely not.