Thursday, October 11, 2007

Auto Makers, The UAW & CAFE

Holman Jenkins wrote a superb editorial in yesterday's Wall Street Journal on this topic.

In his piece, Jenkins points out the forgotten burden still bedeviling Detroit's auto makers- government-mandated CAFE standards.

Much as I argued in my post yesterday, here, that government works best when it simply sets minimal standards and allows people to create value, I feel, like Jenkins, that the CAFE concept is an abomination which violates this idea.

In an ideal world, people would be free to choose whatever mix of automobile features they wished, including the vehicle's gas mileage. Each person's individual weighting of this feature would be their own.

Not so in our real world. In our world, do-gooding legislators have decided what the range of fuel economies will be among vehicles you will be allowed to purchase.

As Jenkins so elegantly puts it,

"One analyst shop, Global Insight Inc., reckons that under a realistic CAFE scenario, by 2020 one-third of the new car fleet would have to be diesel-powered and half would have to consist of diesel- or gasoline-electric hybrids. This implies massive investments on which the auto makers would not earn a decent return. Why not? Because consumers do not value these improvements highly enough to pay the price for delivering them.

How do we know? Because car makers would be delivering the prescribed mileage improvements already if there were profits in it. Cars that get 50 mpg-plus are a snap, going back to the 1954 Nash Metropolitan and 1990 Geo Metro XFi. But consumers have shown over and over that they value energy-efficiency gains (which auto makers have duly delivered) not to maximize miles per gallon in absolute terms, but to afford heavier, roomier, more comfortable cars, with more horsepower, at any given gasoline price."

See the point? If you just leave the manufacturers to figure out what makes money, they'll supply fuel economy when it pays. And not, when it doesn't.

As it is, Jenkins writes elsewhere in his column,

"Detroit is making genuine headway on one of its perverse burdens -- wage contracts that turned labor into a "fixed cost," requiring the Big Three for decades to churn out cars at a loss to meet "job security" commitments. But the other stanchion of perversity -- CAFE, which has exactly the same effect -- remains in place and will likely become more perverse.

Ford's new CEO Alan Mulally, recently arrived from Boeing, described for Barron's his astonishment upon discovering this reality: "For all you read about it, it was difficult to understand the degree to which the CAFE regulations distort the market . . . Ford had to put out two small cars and discount their prices to get people to take them, so that we could also make and sell cars customers really wanted."

Can it be any clearer than that?

And, while you can blame auto executives stretching back to the 1950s for making boneheaded choices regarding non-cash benefit promises to union employees, CAFE is not their direct fault.

No, this is something created by the gang that's now trying to criminalize buying incandescent lightbulbs.
So, as the nearby, Yahoo-sourced chart indicates, the remaining two publicly-held US auto makers, GM and Ford, have been declining or stuck in neutral since the end of 2003.
Or, in Holman Jenkins' words,
"If the restructuring of Detroit's costs now underway is so epoch-making, why haven't the stock prices of the two remaining publicly traded auto makers noticed?

Maybe because investors recognize the elephant in the room, one whose presence has been a central preoccupation of the UAW and the auto makers, even if ignored in media reports. That pachyderm is known as CAFE, aka the government's Corporate Average Fuel Economy rulebook. How could pending congressional changes in the mileage rules blow sky-high the labor concessions being negotiated by the Big Three? Let us count the ways."
To which I would add Detroit's continuing demonstration of inept basic design and marketing of vehicles. Put it all together, and it spells continued dark days for anyone foolish enough to be the last person stuck holding Ford or GM equity.
I'm gratified that someone else, notably Mr. Jenkins, has identified some of the other reasons why, the recent UAW pacts at GM and Chrysler notwithstanding, American auto makers are still in deep trouble for the long term.

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