• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Detroit's Other Big Problem

    Last week the House approved a $25 billion loan for Detroit’s Big Three that, if signed into law, would cost taxpayers $7.5 billion. General Motors, Ford and Chrysler claim they need assistance to make the switch from gas-guzzling vehicles to more cars with better fuel-efficiency.

    We’ve broken down a few of the reasons why Detroit’s business model has been failing. One reason is simply their choice to remain committed to building minivans and SUVs. As gas prices rose and consumer demand slowly shifted to more miles per gallon, Detroit’s Big Three stuck with SUVs, a once profitable strategy. More competition from the likes of Mazda and Toyota combined with Detroit’s complacency are prime culprits for Detroit’s demise.

    But there’s more to it.

    One area we touched on is the high cost of labor. The United Auto Workers union contributed to a significant increase in cost for the production of each vehicle as Larry Reed and Burt Folsom explain:

    As recently as 2005, U.S. automakers (led by GM) were paying out a billion dollars a year to 12,000 idled, unneeded workers in a “jobs bank. Senior economist David Littmann of Michigan’s Mackinac Center for Public Policy points out that per-vehicle labor costs for U.S. automakers were as high as $2,500 more than those of foreign competitors, even though those very foreigners were often paying comparable or higher wages and benefits in their U.S. plants.”

    Another problem is the number of dealerships GM, Ford and Chrysler have in the United States. This April Detroit Free Press article notes that Detroit’s big three have 15,710 independent dealerships compared to fewer than 4,000 for top Japanese rivals, which means they sell half as many vehicles per dealership. These excess dealerships “weigh down the retail network as a whole, ultimately costing sales and adding up to $4 billion annually to the automakers’ costs, industry analysts and many dealers say.” This translates to $436 more per vehicle than the industry average.

    And it’s not an easy problem to fix, either. The article mentions that downsizing is difficult because automakers are

    […] hamstrung by state laws, individual dealer contracts and the gritty will of dealers who want to keep their businesses alive — or don’t want to sell out at prices automakers can afford.”

    Again, it’s not the taxpayers who should be at fault for how Detroit’s Big Three chose to operate. If the government bailed out every bad business model, we’d be living in a world without innovation and adaptation to consumers’ needs.

    Thanks to The Heritage Foundation’s Senior Data Graphics Editor John Fleming for the pointer.

    Posted in Economics [slideshow_deploy]

    One Response to Detroit's Other Big Problem

    1. You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I?ve spent most of my time here just lurking and reading, but today for some reason I just felt compelled to say this.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.