Confessions of a Gear Head

by Steven Greenhut by Steven Greenhut

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I love cars, but I also love it when the market weeds out the lousy carmakers.

Being a libertarian, I’m often accused of being pro-business, which is absurd. I’m a believer in free markets, and an essential tenet of free-market thinking is that businesses must be free to fail if they are insufficiently responsive to the needs of the consumer. I love it when lousy businesses fail. Unfortunately, politicians from both parties often try to use taxpayer subsidies and government-enforced protections to help out their favorite businesses or to keep them from falling into the "wrong" hands.

For instance, Missouri’s Democratic senator and Republican governor both recently tried, unsuccessfully, to use their influence to stop the sale of St. Louis-based Anheuser-Busch to Belgian-based booze giant InBev. Anyone who has ever tasted the flavorless pale-yellow concoctions sold by the company known for its Clydesdale horses would be shocked that anyone would want to buy the firm responsible for them, rather than tar-and-feather those who ran it.

I’m interested in beer, but passionate about automobiles. Yet even when it comes to cars, I would in no way want the government to interfere in the market process. Instead of worrying about the ongoing plight of the Big Three American automobile manufacturers, I celebrate it. Companies that have operated more like regulated utilities than entrepreneurial organizations deserve to have tough times. Companies that prefer bean-counters to creative managers and that mortgage their future to give in to absurd union demands deserve to lose market share and to face sinking stock values. Companies that care about other things more than they care about the consumer deserve to fail. Good riddance to them. Better companies will rise up to fill the void, even if they are based in India or China.

"Who shot General Motors?" asked author Roger Lowenstein in a July 10 column in The New York Times. His answer: "The immediate cause of GM’s distress, of course, is the surging price of oil, which has put a chill on the sale of gas-guzzling sport utility vehicles and trucks. The company’s failure to invest early enough in hybrids is another culprit. Years of poor car design is another. But none of GM’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash."

Toyota, which will soon be the world’s largest auto company, is concerned that U.S. government officials will bail out the ailing Michigan-based corporate giant. Toyota officials say they wish GM the best because of the need for competition, but it’s easy to understand the Japanese company’s real fear: political meddling that will hamper better-quality overseas makers and politicians who will exploit nationalism with some absurd "Buy American" campaign. But political meddling will only reward those companies that have made the worst decisions. Why should the government punish those companies that have done the best to serve the auto-buying public?

GM, Ford and Chrysler all deserve their current fate. Ford officials recently announced that they would start designing more fuel-efficient cars. "What we really need to do is tell people that we’re back in the car business," said Ford’s president of the America’s Mark Fields, according to an Associated Press article last week. Yet I recall Ford’s smugness when it was raking in huge profits from its mega-SUVs and full-size pick-up trucks and ignoring the automobile side of the business.

I’ve got nothing against big trucks, but I have everything against foolish corporate officials who are incapable of anticipating market changes. Somehow, Toyota and Honda managed to bring out new lines of smaller cars as gas prices headed north of $4 a gallon. But don’t worry, Ford — which is now losing money, and might soon face Chapter 11 — will start coming up with new cars we might someday want to buy! But it takes quite a while to bring new products to market. Chrysler, by the way, isn’t in any better shape — which will not surprise anyone who has recently looked at the firm’s ungainly offerings. As the blog, The Truth About Cars, explained, Chrysler’s plan is to "become a distributor of cars made by others. Someone. Anyone." That may not be a bad idea, given that GM has been introducing some critically acclaimed new models that are basically European Opels or Australian Holdens. If you can’t come up with a good design in Detroit, you might as well go elsewhere. But corporate innovators tend to do better over time than followers.

Part of the problem, in my view, is that U.S. automakers cannot improve their situation overnight because it takes a long time to create a good reputation for long-term quality and reliability. Even if, say, the latest Pontiac model is better than a comparable Honda, a buyer still might go with the Honda given that brand’s exceedingly high resale values, which are a reflection of Honda’s reputation for building cars that rack up 300,000 miles. In fact, part of the domestic automakers’ current financial gloom is directly the result of their inattention to long-term resale issues.

Last month, Ford wrote off more than $2 billion in losses because the residual values of its returned leased vehicles are so much lower than predicted. With leasing, a buyer pays the difference between the selling price and the residual value (the estimate of what it will be worth when the lease is up) plus some financing and other costs. Domestic manufacturers generally have worse lease deals than imports because of lower residuals/resale values (that means you have to pay a higher amount between the sale price and the residual), but they have been hammered in recent months because the big SUVs and trucks they have so long relied upon are now virtually worthless as buyers turn them in at lease end.

It just keeps getting worse for the Big Three. But, again, this is good news for consumers. First, when the manufacturers can’t get rid of their cars, buyers can negotiate better deals. Just as the subprime housing mess is a blessing for home buyers (it’s only a crisis for sellers and the banks that stupidly handed out loans to the credit-unworthy), the falling value of domestic vehicles is good news for anyone who still wants that Expedition or Tahoe. Second, there’s nothing like failure to force companies to change their ways and make products that respond to the fickle consumer. If the domestic manufacturers were government agencies or regulated monopolies they would behave as such agencies. They would continue to provide less-than-desirable products, offer shoddy service and increase their prices whenever they overspent their budgets. Governments and government-enforced monopolies can do that because consumers have no options. GM has tried to act like a government, but it can’t ignore that the day of reckoning is coming.

The key to capitalism is competition and the potential for failure. That’s why most carmakers keep offering more features and better products each model year. If they don’t, they will lose out to other makers. If they don’t fear failure, then they won’t desperately seek to win over the buyer. In some ways capitalism is an anti-business philosophy, because there’s nothing businesses hate more than fierce competition and the threat of bankruptcy.

Steven Greenhut (send him mail) is a senior editorial writer and columnist for the Orange County Register. He is the author of the book, Abuse of Power. Visit his blog.

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