Competition on Auto Pilot

At the Hudson Institute recently, two economists and a business reporter discussed ways in which General Motors could avoid turning the lights off on the U.S. Auto Industry. The discussion was moderated by Christopher Sands, a fellow at Hudson

Sands introduced the key question of the morning when he asked his audience (and the panelists), “Are these company troubles more lasting?” The answer was unanimously in the affirmative. Thomas Klier, senior economist at the Federal Reserve Bank of Chicago, warned his audience that “we’ve got to keep our eyes on the underlying structural changes” which made GM, Ford and Chrysler’s business model fail, to the extent that their capacity utilization, according to Klier, “has never dropped as low as it has recently.” This stark news, however, was but the tip of the proverbial iceberg, as Klier used numerous graphs to paint an increasingly gloomy picture of the decline of GM, Ford and Chrysler.

“A large industry is shrinking,” Klier said, adding that uniquely American brands had never recovered from the advent of the VW Beetle, and had since gone into “free fall” after Japanese cars such as the Honda Civic had entered the market. Moreover, Klier argued, the expansion of the automotive market from four to 13 carmakers placed the geographically monomaniacal Big Three at a disadvantage. “This is one concentrated industry,” Klier said. “Michigan’s taken the hardest hit…almost two-thirds of what they have.”

Joseph White, author of the Wall Street Journal’s “Eyes on the Road” column, took a similarly dim view of the Big Three’s current business models, though he eschewed the broad macroeconomic brush strokes employed by Klier, instead settling for five specific observations about automotive history. “First, GM definitely underestimated the competition,” White said.

White used his second observation to agree with Klier’s harsh assessment of the impact of Japanese imports. “Detroit’s business model was dead from the moment the Honda Accord rolled off an assembly line in Ohio,” he said. White’s reasoning for this argument stressed the importance of a new Japanese business model known as “lean production”— a holistic model in which workers are taught the entirety of the manufacturing process. According to White, non-union lean production was the “central fact” of why the Big Three were losing out to Japanese competitors.

It quickly became clear that the “non-union” portion of this “central fact” was just as important as the new “lean production” method. White accused the Big Three of making “promises they could not keep” and creating a “demographic time bomb” by capitulating to unions as much as they had. The Big Three had also “relied too heavily on a few gas-hungry trucks and SUVs” to make money, White argued, and “desperately avoided globalization” because of their refusal to “accept that they could not be what they were in the 1950’s and 1960’s.”

Yet White saw potential hope in this harsh picture. “The Big Three, when they have gotten in trouble, have done their most innovative work,” he said, though he echoed earlier strictures against complacency and emphasized the Big Three’s need to modernize. “There are two auto industries in this country. The first is non-union, mostly Southern, new production systems which are modern. The second is the legacy auto industry, which is roughly a century old,” White said, arguing that if GM was going to break the “negative feedback loop” it had created, it needed to join the first industry.

Yet both Klier and White also saw danger for the Big Three in their close ties to the Government, which they warned could force uncompetitive business models on these companies. “With the best intentions, President Obama will compel GM to build lots of cars that the market won’t accept without high gas prices,” White said, adding that the market had “cooled off” on Hybrids and that GM needed a new image of “freedom, power and sensuality” rather than environmentally conscious efficiency.

When asked about whether unions would try to invade the Southern car industry through mechanisms like the Employee Free Choice Act, White said this was a minor danger because of the sharply decreased benefits of union membership. “The UAW has been unsuccessful organizing non-union plants,” White said.

Mytheos Holt is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.