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From The Times

February 27, 2007

Counting the cost of a welfare state for US car workers

American View: Gerard Baker

Who says American carmakers can’t inflict real damage on the competition? Less than ten years ago, Daimler Benz, the mighty, synchronously engineered, luxury vehicle of European motor companies, paid $36 billion for Chrysler, by anybody’s estimation an old-fashioned clunker of an American model.

At the time it was Americans, and specifically Detroit’s elite, who were aghast at the news, seeing it as the latest and most egregious example of the capture of America’s industrial heritage by rapacious foreigners.

The “merger of equals”, as the legendary Daimler chief Jürgen Schrempp proclaimed it, was nothing of the sort. Chrysler was being subsumed into the maw of the mighty German machine; the US company’s handsomely remunerated executives would be forced to fly across the Atlantic almost weekly to Stuttgart, where they would have to take orders from humourless Germans who were paid a fraction of what the Americans got.

Shrewder and perhaps less interested observers thought better of the deal. They believed it would represent a new start for the most vulnerable of America’s Big Three. Having access to that German engineering and managerial expertise would surely mean another resurrection for the company Lee Iacocca (with a little help from the federal government) had saved 20 years earlier.

Unusually, neither the pessimists nor the optimists were proved right. The German takeover brought only misery to the Germans; and it did nothing for the Americans either.

The Chrysler part of what is now called DaimlerChrysler is now worth, according to the company’s optimistic estimates, perhaps $5 billion (£2.5 billion) — a $31 billion loss of value in nine years. Daimler could have given away 20,000 of its top-of-the-range sports cars to deserving and needy Americans every year for the past nine years and it still not have lost as much money as it has by purchasing Chrysler.

So less than a year after launching a US advertising campaign around the personality of Dieter Zetsche — “Dr Z”, the first German chairman of Chrysler, the man the company said “put us on the path to be competitive with the best in the world by combining the great strengths of two historic companies” — Daimler wants out.

If it can find a buyer it will happily end the whole sorry saga and put it all down to experience.

The story of the failed merger is not only a familiar tale of an unbridgeable cultural gap between two very different companies. It is probably the most powerful demonstration of the likely destiny of the American motor industry. If a company such as Daimler, the very model of successful German carmaking, cannot turn around the smallest and least burdened of the Big Three US carmakers, what hope is there for the industry as a whole?

The fate of Chrysler itself is uncertain. There are brave sounding noises from General Motors that it might be interested in acquiring Chrysler — but coming from a company that is losing each year more money than Chrysler is apparently worth, this is presumably somebody’s idea of a joke.

Another foreign company might be interested — Renault, for example, currently with no foothold in the US market. But why would anyone take the risk?

The Chrysler episode — and the dramas unfolding at Ford and General Motors — are not just about US carmakers failing to adapt to the shifting global demand for smaller, more fuel-efficient vehicles. They are rooted in the structural weaknesses of an economic system in the American auto sector that was already outdated in the 1980s, and looks prehistoric today.

It is true that the immediate cause of Detroit’s latest woes was the sharp increase in oil prices in 2005 and 2006. The companies had ridden a temporary wave of success in the late 1990s and early 2000s, on the surging sport utility vehicle and light truck market. For Detroit, it was almost like old times as consumers went in for vast five and six-litre vehicles they happily filled with petrol at little more than a $1 a gallon.

But when oil prices climbed towards their peak last year, this one success story of US carmaking turned into a nightmare.

The deeper problem was the whole way US automakers have been run for the past 40 years. The Big Three’s managements had caved in to powerful unions that bid up wages and health and pensions benefits to the level where car workers were the plutocrats of American industry. The most notorious example, the infamous Jobs Bank, ensured that workers would be paid to sit at home in lean times so they could return to work when demand picked up.

These “legacy” costs have created a financial burden that is literally bankrupting the companies.

Here is the ultimate irony in the decline of America’s car industry. Even as the US economy outperformed Europe for most of the past decade, thanks in large part to its more flexible hire-and-fire approach to employment, the motor industry has been running a welfare state within a state that would be the envy of most socially protected European workers. How doubly ironic that it should have been a German company that ended up bearing so much of the cost.

The analysis is superficial. It isn't the unions that are the problem. Germany has unions and employee elected works councils that co-manage the automobile firms. It is the American conception of management that is proving to be unsuited to complex manufacturing processes. As long as managers and stockholders neglect the welfare of their employees, they won't work for them, as employees in Japanese transplans do. What Japanese transplant would hire an American MBA?

robert r locke, Honolulu, Hawaii

"all their problems can be saved by making cars people want to buy".

Yes,and they could start by producing cars which have an energy efficient transmission which is available today and called an "Infinitely Variable Transmission" - IVT for short, giving a 15%/20% improvement in fuel consumption plus increased performance!

Oh and by the way it's designed in the UK by an outfit called Torotrak. (Just in case their designers don't know about it!)

Neil , KL, Malaysia

all their problems can be saved by making cars people want to buy

ed strosser, new york, ny USA

I think the American automobile industry has failed to respond to change. In addition they have failed to anticipate and prepare for the changes in customer values, attitudes and lifestyles. Furthermore the price of gasoline has not been of help. May be the government should bail some of these companies out in order to preserve the great American icons and tradition!

FEMI AKINSOLA, ESSEX, ENGLAND

Toyota

Firozali A. Mulla MBA PhD, Dar-Es-Salaam, Tanzania

These are some of the problems with the 'big 3':
- No focus on what they are good on e.g. too many models
- Not enough margin per sold car
- Do not understand what customers want
- Not interested in building quality (too hard)
- Poor real innovation e.g. compare the germans BMW, Audi and their engines
- MBA's instead of traineeship like the germans have
- All productivity is eating up by customer discounts

Anders Andersson, Sydney, Australia

I don't agree that labor issues are at the heart of the "Big Three's" troubles. Certainly, the cost for them of doing business would be lower without organised labor as it would, no doubt, be cheaper still using slave labor!
No, the problem for Ford, Chrysler and GM is they're non-responsiveness to the desires of the automotive consumer. Detroit has always operated under the assumption that they would create demand for whatever evil piece of junk technology they deemed the public would be made to want. Occasionally this has worked out for them. Witness the SUV craze. Many americans desire to "keep up with the Joneses" and own a vehicle known for it's conspicuous consumption married neatly with Detroit's need to produce high profit margin vehicles with a minimum of R&D. Recent fears of climate change and higher and unstable gasoline prices here have started to erode these vehicles desirability. As usual, Detroit has no fallback and is purely the victim of poor management decisions.

E. Hinrichsen II, NYC, NY, USA

This is a business story, not some anti- American salvo. And what has the British car industry got to do with this story, Christopher Holland? I find more and more that the comments lose themselves in parochial clap-trap and complete non sequiturs rather than addressing the nub of the matter. If you are not making products which the market wants and management can not adequately control the production inputs then your business will not prosper. You do not need an MBA to know that.

John, London, UK

Mr. Baker please check the fact before you write. Daimler didn't pay $36 billion for Chrysler. It was done via stock swap and at the time Chrysler was worth $36 billions. Daimler also took the billions of Chrysler rainy day cash. So Daimler didn't pay a dime for Chrysler, instead it profited from it.

Bob, Houston, USA

Only a massive shift in corporate culture in Detroit can save any of the Big Three. Toyota has been developing its Lean Enterprise since the 1950s. Since 1992 Detroit has known what it would have to do, but the people in charge are in survival mode, and not able to take a strike from unions that are willing to go to bankruptcy if necessary. Meantime, a company like Chrysler makes mistakes like its mid-1990s auto transmission disaster and more recent 2.3 L engine debacle, destroying demand for its cars. Even if Toyota somehow bought the Chrysler business without the unions, it would take many years to fix. Daimler could unload Chrysler fast if the UAW was willing to convert its Chrysler locals to the kind of labour deal that Toyota has in the US transplants. But the whole raison d'etre of the UAW is to look after its existing members, not to save any car company, so why would it do that. Chrysler is a victim of US auto industry labour history and Toyota genius. Capitalism rules.

B. McCarten, Calgary, Alberta

Wow - this is a very poorly written bit of America bashing. Does Mr. Baker actually know anything about car sales and manufacturing? Did he bother to do any research at all before typing out this summery of stereotypes? It wasn't the "job bank" that put Chrysler in the state its in, but the "sales bank" that was approved by DC's top management. For the last few decades Daimler has been anything but a paragon of good management, and Juergen Schrempp's record there makes him one of the single worst automotive CEO's in history. While some of the gripes made here are legitimate, most of the problems in the US car industry have to do with MBA trained managers who sold short the product in order to make short term profits. GM seems to have turned its act around, and hopefully Ford will learn and follow. Also, Mr. Baker should take note that the new plant Toyota announced is dedicated to the five liter plus trucks and SUV's he ridicules - trucks being the main source of Toyota's profits.

Leo Schmidt, Seattle,

As a small business owner and having to compete for the human resource, I found that it's easier and cost effective to train new, rather than negotiate with prema-donnas and loose sleeps at night. You have to do what is best for your business.
I would tell the union to take a hike and file bankruptcy if I had to. Nostalgia can't pay your mortgage!
Wake Up and get with it or loose

Thuy, Austin, Texas

This B.S.Daimler used Chrysler's $$ to bail out of their difficulties while letting Chrysler slide. Now that Mercedes is back on stream, let's get rid of Chrysler! Even at a loss! As for the Japanese, their banks and government bailed them out the whole way(without unions, thank you) and with plants brand new after the war with US assistance. The US is the only place the Germans and Japanese can sell their product and make money. GM will survive as will Ford and Chrysler.

jvetter, Dallas, Tx,USA

Anybody who wants to write-off the American car industry doesn't know a lot about the history of the American car industry. All three manufacturers have been through a lot worse than this and they have adapted and come back much fitter and stronger. These guys are not dinosaurs hit by a meteorite. The American car industry invented change and adaptation so wait, watch and learn. Finally, the country that hosted the sick joke called the British car industry isn't in a position to sneer at anybody.

Christopher Holland, Canberra, Australia

If they gave better customer service for the price I paid for a Sebring with a presumed 7year/100,000 year warranty; maybe they would have better business.

owner of a 2.7 3rd engine sebring convertible, bought new for the warranty perks

cindy, G, md

It is not the fault of the unions that the US auto industry will soon go the way of the US electronics industry. It is the corporate culture that is driving the never saving, ever spending American consumer to buy "stuff" they don't need. The truck culture could be rapidly shut down if they made better cars. What we have in the US are truck companies selling cars that are second rate.

Jaan, cleveland, usa

You failed to mention how atrocious American cars are in style, quality and ingenuity. The Big 3 had sewn the seeds of their own demise by not following the Japanese example of constantly improving and evolving the product. I have never and will never own a Ford or GM product, as long as this trend continues. Most Americans now know that the majority of "Japanese" autos are actually designed and built in America and have dropped the notion that buying these products is "unpatriotic". I suspect that within a decade their will be only one truely American auto manufacturer, GM. And it will only survive through government bailout.

Charles Brands, Seattle, USA

How sad but true. Union leaders greedy for short-term gains without considering long-term consequences plus car makers with myopia about making cars that reflect what people want = industrial disaster. I think it is questionable whether any U.S. car maker survives. It will be announced today that Toyota is building yet another U.S. plant to keep up with U.S. demand for its products.

tom , minneapolis, minnesota

RIght on!

Gary Pederson, Edmonton, Alberta/Canada

Chrysler's misfortunes are the direct result of collusion between industry executives and the major political party leaders - just as are Ford's, GM's and the host of other failed/failing US Blue Chip corporations.
The mere mention of Iacocca, renowned by this same clique as the 'Saviour of Chrysler' and proposed candidate for Vice President, incites anger in many of us who 'played by the rules' and suffer the consequences of not having the 'connections' criminals of his ilk had.
To think he groveled before Congress - pleaing for $62 million or ".. I'll have to close plants and lay-off thousands of workers" and once he receives the money - closes plants and lays-off thousands of workers. But, of course, not before ordering the company to purchase his home for $2 million - twice the appraised value.
Congress violated federal law in ordering the SMALL Business Administration to award a 'small business' loan to Chrysler - quite a LARGE business. Daimler should prosecute for fraud

Lawrence Pines, Middletown, USA/NY

The oil price may appear to be high, and all of Detroit is planning on the assumption that it can only go down, but this is nothing compared to where it will go to once China starts outbidding the West on the remaining supplies. Figures as to remaining reserves are little more than wishful-thinking when the politics are factored into the equation.

The only car manufacturers who are adjusting their model ranges to take thing into account are some of the European and Asian ones. Chrysler is especially enamoured with thirsty SUV's. Ford and GM are only marginally better.

Alfred, Ryde, Isle of Wight, UK

Saving an American car company is like renovating a hundred year old home. Even though the structure is sound, the problems are vast. It would seem that the best thing to do is to tear it down and begin again. With people living longer, the promised lifetime pensions are like a large hole in the roof that is losing all of the heat. With staggering operational expenses off the top of the budget, it leaves little money for developing new and better products to stay competitive. A rust bucket? Where do you begin to fix it?

Jeanie, Philedelphia, USA

It's all very well to blame the welfare system inside US companies but Japan, whose car producers are running all over the US, hasn't gained huge market share because of a more ruthless hire and fire culture that excludes union interaction. Rather, it is based on the fact that Japanese capital investment is seen as part of a long term relationship with banks which gives them access to five or six times the finance of their short-termist US counterparts. This high level of stable investment allows them to develop deep-rooted and long term improvements to their ways of working. True Japan has had a lot of trouble with finance recently but as we can see, the system still works!

Andrew Edmondson, Edinburgh, UK

The "deeper problem" is high labor costs? A likely story.

US trade unions were defanged 26 years ago, and the US has had the lowest industrial labor costs among the rich nations for two decades.

The surge in manufacturing exports that was forecast in the 1980s as the dollar fell in tandem with US wages has yet to materialise!

Auto factories in Germany and Japan pay much higher wages.

Bad management has something to do with this situation.

Sam Kigongo, New York, USA

It is amazing how almost no else seems to understand this. In the long run paying more than market price for labour is destructive. I imagine this will hit the German car makers soon.

John Donner, Rio Verde, Arizona