Capital Insights with Jack Kern: Automakers Driven to Failure

Jack Kern
Are we bailing on the automakers? Any astute observer of the auto industry will tell you that there is pretty direct correlation between auto sales and housing starts. It's likely that the home equity mortgage withdrawal from the wealth effect is part of the cause, but more importantly the auto industry has created millions of jobs and helped to create the middle class. Taking a moment to look at the history of the industy, since the 1950s, the unions have held an iron grip on labor negotiations, forcing the big 5, now the big 2 (you gotta wonder about Chrysler) to pay ever rising costs in salary, benefits and union dues. In what is the essence of intermediation, the foreign car makers figured out how to build better, more reliable cars and that was the beginning of the end of business as usual for the U.S. car business. There is a long history of how Japan, after World War 2 and W. Edwards Deming helped to transform the island nation into a world manufacturing power and now the U.S. auto industry is struggling to catch up.

Should taxpayers be responsible for giving the excesses of the industry a pass in order to keep jobs and economies in the midwest from further decline?

I think the Congress ought to hold the industry accountable for past failings and make them demonstrate what they're doing to stay competitive. It should mean, selling corporate jets, closing plants, reducing the number of low selling brands, dramatically restructuring the benefits going to retirees and autoworkers and facing down the unions. I don't think bankcruptcy for all of them is out of the question either. A major fiscally responsible re-organization is about the only strategy that will save them long term. The use of tax dollars to help an inefficient industry, especially one that cannot effectively compete against better built cars from Japan, is not in the best interests of the American people. There isn't as much of a distinction anymore when you look at the content either. The components that make up cars are sourced all over the world, and over 70% of the cars are all built with the same parts. The difference is the assembly and tooling.

In the end. U.S. auto manufacturing is an important and meaningful part of the U.S. economy and a critical strategic resource what cannot be allowed to disappear. The Congress needs to put any stimulus package involving automakers on a par with the strictest regimen for future survivability, with meaningful benchmarks and a long term option in shares for the taxpayer, so the credit lines are fully secured.

International trade has blurred the lines between what is an American car and a foreign car, terms not typically used much these days. In a global economy, with foreign cars assembled in U.S. plants in Ohio and Kentucky, we don't want to send the wrong message to the other nations, that direct foreign investment isn't welcome here, and that's the hard part of the balance Congress faces. We can only hope that the car companies will ultimately learn their lesson and bring out best in class, energy efficient vehicles consumers want to buy.