Dan Calabrese

Look out, Cleveland, Pittsburgh and Raleigh. You could be next.

After touting the outcome of his decision (actually George W. Bush regrettably got the ball rolling) to bail out the Big Three, President Obama told the nation on Wednesday night that it doesn’t have to end there!

“What’s happening in Detroit can happen in other industries,” Obama beamed. “It can happen in Cleveland and Pittsburgh and Raleigh.”

Leaving aside for a second that he also declared “no bailouts, no handouts and no copouts” (we will leave that aside because he certainly did not mean it), let’s consider what is happening in Detroit – and whether this is really what we want to see on a widespread basis across the nation.

To wit:

• To this day, the federal government owns 33 percent of General Motors.
• Chrysler, which is still not profitable, just added 2,100 new employees anyway.
• GM, which fell far short of its goal of selling 10,000 Chevy Volts in 2011, is still proceeding with plans to boost production of the vehicle to 60,000 a year, and promising to add shifts to the plant in Hamtramck for that purpose.
• All of the Big Three have promised the UAW that they will fulfill commitments to massive new hiring, signing bonuses, inflation protection and investments in plant upgrades – in spite of the fact that they continue to face competition from foreign transplants with much lower labor costs.

These are not good business practices. These are political business practices. They are undertaken because politicians who bail out companies want to show, as quickly as possible, that they were wise in doing so. No method of showing this is more effective than touting new hiring and plant expansions, so we get lots of both.

The problem, of course, is that the Big Three came into their existential crisis precisely because their overhead and legacy costs got out of control. Between their wage levels, benefit packages, plant operation costs and retiree health care burdens, it became impossible for the Big Three to avoid losing money even if they sold every car in their inventory.

When Obama boasts that he got management and labor to “settle their differences,” well . . . yeah, but not every agreement reflects an understanding of fiscal reality such that the parties can move forward prosperously. The UAW made short-term concessions and let it be known that it would be looking for make-goods at the earliest opportunity. And it got them in the form of the signing bonuses and other attractions that made media and politicians cheer – more jobs! good-paying jobs! – but also reflected an institutional failure to understand that without cost control, you cannot long sustain the profitability that is only a very recent development in Detroit.

The larger problem, of course, is that Obama propped up this very way of thinking by bailing GM and Chrysler out. Rescued companies who truly understood what they had done to themselves would have downsized, dramatically cut their labor costs and focused on generating more revenue from less capacity. The last thing they would be doing is opening and/or expanding plants so soon after having their lives saved from the crushing weight of their old overhead costs.

If fundamental thinking in the domestic auto industry does not change, the Big Three will be back before the federal government the next time the economy tanks, credit tightens or people just figure out that their products aren’t really worth what they’re asking for them.

Had GM and Chrysler gone under, we are told, they would have taken suppliers down with them and 9 million jobs would have been lost. This is garbage. To the extent that a market existed for some of their brands, other companies would have purchased the plants, purchased the brand names and kept a portion of the operations running. Suppliers would still have had their customers. The industry would have been smaller – which it needed and still needs to be – but the predicted Armageddon would not have occurred.

Because Barack Obama and almost every Michigan politician – regardless of party – did not understand that, we have a domestic auto industry that remains bloated and is making decisions to expand its cost structure so as to vindicate these same politicians.

And this can happen in Cleveland, Pittsburgh and Raleigh too, can it? Friends in those cities: Run.

© 2012 North Star Writers Group

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