The core of Cohn’s argument is that the Big 3 are turning around, and that the bailout will give them time to complete their transformation to competitive companies. While this might be true, it is very hard to accept that Cohn provides any compelling evidence that the future is about to become very different than the past several decades of Big 3 performance.
He begins this portion of his article by writing:
But what’s missing in the tsk-tsk editorials is any recognition that the culture of Detroit has been changing, however belatedly, starting with its labor relations. … “I think they’ve shown unprecedented ability to change and transform the union,” says Kristin Dziczek, who directs CAR’s Automotive Labor and Education program. “They understand what is at stake.”
Yeah, well, here’s the lead headline on Yahoo Finance as I write this: “UAW leader says blame economy for Detroit 3 woes”. And of course GM’s CEO just got a 64% raise this year, presumably for the excellent performance.
Cohn then goes on to say that:
So far, the results are promising. According to the most recent Harbour Report, the benchmark guide for manufacturing prowess, Chrysler’s factories now match Toyota’s for the most productive, while both Ford’s and GM’s are improving. (A Toledo Jeep factory was actually named the nation’s most efficient.)
I’ve done a lot of manufacturing benchmarking-and-improvement analyses, and while this is a frequent interpretation of the numbers in that report, it is very misleading. The statement is true as made, as long as we define “productivity” as labor-hours / vehicle. What are some of the problems with this definition if we use it as a synonym for “profitable” or “good” or “successful”? Here are several off the top of my head (even accepting that Harbour attempts to adjust for differing total loaded cost of an hour of labor across companies): labor-hours / vehicle ignores the issues of the relative gross margins of the cars this labor is used to produce, product line complexity, plant utilization and non-production costs (especially dealer network costs) attributable to each plant. Guess who is disadvantaged on these metrics?
It would be complicated to combine all of these metrics to a better summary metric of profitability; luckily, I really don’t have to, since this exact report does it for me by reporting pre-tax profit per vehicle for North American sales for each major company. Here’s how well the Big 3 are actually doing:
They’re getting their clocks cleaned (even before adjusting profits to reflect the amount of capital each business ties up to produce a dollar of cash, which would almost certainly make the Big 3 look even worse). U.S. automakers are nowhere near competitive with their Japanese rivals, even here in their home market.
Cohn goes on to say that in spite of this “remarkable progress,” the Big 3 do have some “lingering problems”, but that “[b]ankruptcy is a messy, expensive process that would likely do more for lawyers than for the automaker, which has already taken the most obvious steps toward efficiency.”
This story – look, we now see how foolish we’ve been, and finally have our act together; with just a little more time we’ll be world-beaters again – has been sold by Detroit to journalists many times over the past 20 years. Here’s the New York Times in 1992, making almost the exact same argument as Cohn makes: “Ford and Chrysler have increased the efficiency of their factories and workers so much in recent years that their basic cost of producing a car is now less than that of their Japanese rivals, according to a study published today.” Here’s Fortune in that same year saying that “For the first time in a decade, the U.S. auto industry has a genuine chance to grasp the lead from its Japanese competition. Ford and Chrysler are operating at worldclass efficiency, and General Motors has taken on a new sense of urgency with seismic shakeups at the top.” This kind of coverage continued almost into the current crisis – here’s Fortune as recently as 2004 saying “GM Gets Its Act Together. Finally. How America’s No. 1 car company changed its ways and started looking like … Toyota.”
But inexorably, in the face of all of this serial optimism, the Big 3 just keep losing share:
In 1960, the Big 3 sold about 90% of all cars purchased in the U.S; today they sell about 47%. That is, most cars bought by Americans this year were not made by the Big 3. And this share loss has accelerated over the past decade. (Also note that Michigan has already lost more than half of its auto manufacturing jobs in the last ten years, so lots of current Big 3 jobs will likely be “lost” even if they continue to operate outside Chapter 11.)
A dollar invested in GM shares twenty years ago would today have a face value of about 7 cents. There is no five year period that I could find in the last thirty years for which GM’s stock price outperformed the S&P 500. The market capitalization of GM is now under $2 billion, which is substantially less than that of such icons of our economy as Cognizant Technology Solutions, DaVita, Inc., Freeport-McMoRan Copper & Gold, and the Potash Corporation of Saskatchewan. GM is in danger of becoming a small-cap. Investors apparently don’t buy (literally) Cohn’s thesis.
In the face of all this evidence, Cohn wants us to believe that this time it’s different – that in spite of the forecast of the stock market, in spite of the judgment of consumers voting with their own money, and of in spite of the actual financial results, we can put tens of billions of dollars of taxpayer money at risk based on the opinion of some academics and interested parties that really, things are about to turn around.