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Detroit's Other Big Problem

Posted By Nicolas Loris On September 29, 2008 @ 1:28 pm In Economics | Comments Disabled

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 [1]. 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 [2]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 [3]:

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 [4]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 [4]

[…] 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.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/09/29/detroits-other-big-problem/

URLs in this post:

[1] 7.5 billion: http://www.foundry.org/2008/09/26/the-auto-bailout-what%e2%80%99s-behind-the-wheel/

[2] we touched on : http://www.heritage.org/Research/Budget/wm2060.cfm

[3] Larry Reed and Burt Folsom explain: http://www.washingtontimes.com/news/2008/sep/16/the-downshift-at-gm/

[4] This : http://www.freep.com/apps/pbcs.dll/article?AID=/20070617/BUSINESS01/104170005/1002/business

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