21 December 2008

Auto Bail-out

Here is a good article from Megan McArdle's blog at The Atlantic.

At first I thought the insane labor costs of the Big 3 were the reason they are unable to generate profits in an era of true competition against foreign manufacturers that are efficient and producers of quality products. Then I learned that labor costs are only 10% of total costs for these companies. After reading this post I've changed my mind.

An oligopoly exists in domestic auto manufacturing and the labor supply to this oligopoly is monopolized; this isn't new information to me. What is new information to me is the way these two elements interact. It's not so much about them being able to make money by reducing the cost of generating quality output, but the lack of incentive to actually produce quality products. If they actually made good cars that people wanted to buy they could make money given current costs. Hell, they've done it in the past. Their brand is now so tarnished and there are so many better alternatives available that demand for their products is finally diminishing. Quantity demanded has fallen at every given price level.

It's pretty clear to me now, and I don't know why I didn't realize it earlier. Common sense: if you build a crappy product people won't buy it...period. It doesn't matter if you produce it inefficiently or efficiently. If sales revenues are zero then you're going to lose money. I'm now a believer that people just don't want to buy American cars any more (at least not as much as they used to). And that changes the whole business model.

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