In the summer of 2008 I was one of three members of the local media asked to meet with Rick Wagoner, then chairman of GM, at a hotel in Dallas for a casual get-together. You may not remember, but at the time Wagoner had a lot on his mind. Gasoline prices had climbed to $4 a gallon nationwide, and GM was having difficulty keeping multiple factories producing full-sized SUVs and trucks full time. Most missed the fact that a major German bank had failed earlier in the year, giving the excuse that they were heavy in U.S. mortgages that had gone bad; but anyone paying attention should have realized that something horrible was coming our way. As the other two left, Rick asked if I’d stay and talk for a while.
We talked first about the upcoming Chevrolet Volt; and, for the first time, Wagoner admitted its window sticker would be close to $40,000. Now, originally though not officially, the prediction was that this super car might have a base price starting around $25,000. Then it became $29,995, moved up to $35,000 and now Wagoner was saying $40,000 — and, if the production volumes weren’t right, it could lose money even at that price.
I knew, but didn’t bring up that day, that a couple of years earlier GM had dropped its plans for a hydrogen fuel-celled car, and Bob Lutz had brought up his concept of a plug-in electric. Wagoner hadn’t liked it at all, saying curtly that GM had lost one billion a decade earlier building the EV-1 electric and he was in no mood to lose a second billion on this concept. We know now that Lutz won the argument using simple American pride: If Toyota could design and build the Prius, and lose money doing so for years to prove its technological brilliance, then it was high time GM reminded everyone that it could do the same.
I questioned the $40,000 sticker, suggesting that even impulse buyers might be reluctant at that price; I thought $35,000 was more in line with how much someone would pay to be the first to buy an all-new high-tech vehicle. But in turn I had a question to ask Wagoner that I thought was important; bear with me.
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Back in the 1990s, when GM needed to move a bunch of Suburbans off its Chevy dealers’ lots, a $1,500 retail incentive was all it took to find loads of buyers quickly. But in the next decade incentives would often go as high as $5 – 6,000, once even much higher than that — and the sales movement was erratic at best. Certainly there was a huge difference in that period: In the late Nineties gasoline was headed toward 99 cents a gallon; but, once all the trading markets were deregulated, an additional $300 billion was put into the futures markets for oil — and another $300 billion into foodstuffs. By late 2005, as gasoline peaked suddenly over $3 a gallon, a massive panic hit owners of large trucks and SUVs. Two years later gasoline was $3 a gallon; that spring Toyota had to put $2,400 in incentive and value packages on its Prius — and even then sales were slow. But as summer hit and gas then went over $4 a gallon, you couldn’t find a new Prius for sale in America.
My point was that, since 9/11, the automotive market in America was only moving because of super-sized incentives. If you have forgotten, the biggest month ever in automobile industry history was October of 2001, when GM offered Zero Percent Financing for 60 months for the very first time. The second biggest month in the history of the industry was June of 2005, when GM offered Employee Pricing for Everyone for the first time. Although the manufacturers were crying to the media, not about rebates, but about their high cost of health care in that period — you’ll remember the $1,500 cost per factory worker they quoted. But, while that may have been a high cost of production item, the critical expense was having to offer $6,000 in rebates just to sell a Chevy Tahoe.
Thus, the question I asked Rick Wagoner was this: If GM were paying the same level of rebates it had paid in the 1990s, given its current volumes where would the corporation be financially today? His answer I already knew: GM would have had the most profitable years in its history.
Just the year before, Detroit had demanded a two-tiered wage system at our factories. The PR campaign made to influence the media was how much unionized labor at a domestic factory really costs; so the union contracts were reopened. The union agreed that new hires would come in at $14 an hour and never quite make the same pay and benefits as current employees; and that one move should lower production costs substantially. The automakers also said if they could dump their high health care costs and get that two-tiered wage system in place, then that would help keep window sticker prices lower for consumers in the future.
The public jumped up in unison and cheered. I was out at GM’s Arlington factory for that announcement for Fox News, but it was ABC that picked up my quote that day about the new lower wages: “For the first time since before the First World War, we will again have factory workers who can no longer afford to buy the cars they build.” That’s not a healthy sign for any economy. Yet beggaring new workers was extremely popular with the most vocal critics of the scene.
The problem was that the automakers were misleading the public. Anyone who has been in large-scale manufacturing knows that the real trick is maximizing your plant’s overall utilization. Meaning if you have 4,000 workers and the plant is running at only 70 percent of its operational capacity, which is about where GM was at the time, you’re losing 30 percent in productivity, which is a cost on the lower volumes being built. At the time, Toyota’s factories were running at 110-percent of capacity. So, if Toyota paid its workers exactly what GM did, including benefits, then the difference in the plant utilization meant Toyota enjoyed a 36 percent advantage in labor costs per vehicle built. Additionally, as factories moved toward more automation, this too dramatically lowered the labor cost per car.
As I’ve pointed out, the Jeep Toledo factory at the time was the most efficient in America. I remember 30 years ago, when Detroit was trying to get down to 30 production man-hours per vehicle and did in many cases. Today everyone in the auto industry dreams of reducing the man-hours it takes to build a vehicle to what Jeep accomplished a decade ago, using around 16 man-hours per vehicle. Again, that, combined with a higher utilization rate per factory, saves more money than their publicly stated cost of health care. Likewise, as more automation is used, fewer workers are needed to build vehicles — which costs jobs but saves more money.
In the end, two things stand out that everyone has forgotten.
Car companies got their two-tiered wages; during their bankruptcies they gave hard capital to the union to administer retirees’ health care; and they’ve automated their factories even more in the interim. But that promise made to the public of being able to keep the window sticker prices way down because of all these savings? Well, let’s file that under Promises Made, Not Delivered.
Even before the current administration was voted into office last November, the car companies were moving to get rid of that two-tiered wage system they begged for just 11 years earlier. Sergio Marchionne of Chrysler was the most vocal about how unfair it was and how it needed to go away. But the new administration also has used its bully pulpit to demand, loudly, that manufacturers quit closing factories here and shipping jobs to Mexico. They have also gone on record cheering every time a company says it will increase employment in America. But here’s the irony that is just too delicious not to point out: Those who cheered for the two-tiered wage system and Detroit’s slashing its costs of doing business back then are the same ones cheering President Trump’s demand for bringing home “high-income” factory jobs.
My head is still spinning from this abrupt reversal.
For four decades they screamed about the high cost of “basically worthless” American factory workers. (Roger Smith, once chairman of GM, tore his factory workers apart in the early Nineties every chance he got, blaming them instead of his engineers for GM’s quality problems.) Then suddenly, in decade five, the new call to arms is, “How can we create more high-quality, high-paying factory jobs to make America great again?”
Well, one piece of ammo in the bully pulpit’s arsenal is an import border tax of maybe 15-percent — down from what the president-elect once threatened Ford with, but still substantial. So last week, as I was making the rounds of many dealers in Dallas/Fort Worth, I asked them how things are going. After all, January had been inconsistent for new car sales against the same month last year, but February was better. So I then asked my friends who run these dealerships, particularly the ones who import vehicles (which in fact is most of them, at least some of their most popular models), how they are going to deal with the proposed 15-percent import tariff. After all, Lexus models come out of Japan and Ram trucks come out of Mexico. Not to mention Volkswagen, Mercedes and BMW models out of Germany.
Immediately all of them said, never gonna happen. So I had to remind them that over 50 years ago the Chicken Tariff Tax of 25- percent was placed on all imported trucks — Mexico was later exempted, thanks to NAFTA — and commercial vans, and it’s still in place. And this was also a retaliatory tariff, because Germany had put a tariff on imported chicken parts. Then I reminded them of the Luxury Tax, signed into law by President George H.W. Bush when he reneged on his campaign promise of, “Read my lips, no new taxes.” Now, that last tax was not insignificant: It was a 10-percent surcharge on any automobile sold for over $30,000. Yes, and it was much worse on aircraft; the start point was $250,000, and a Gulfstream G6 ER owner might pay out an additional $7 million in taxes. (The luxury tax went away five years ago)
These friends may be right. This pledge of a new border import tax may never happen. But if it did, and they have happened in the past, I wonder how long it would be before cases were filed in the WTO against us, or before other countries decided to put a retaliatory tax on things like Boeing or Gulfstream jets, which could price them much higher than their Airbus competitors. Or high-end computers we make here and ship overseas, or MRI machines, and so on. Ultimately, it’s an empty threat — or should be since, if we can tariff what we don’t like, they can too. And in the end, doing so probably costs us those high-paying factory jobs we suddenly love and miss in America.
Many years ago in this column I wrote about political promises dating back to the 1964 presidential campaign. Lyndon Johnson’s big promise was not to send American boys to South Vietnam to do what South Vietnamese boys needed to do for themselves. For the record, LBJ sent in the Marines less than three months after being sworn in again. Richard Nixon promised a ‘secret’ plan to end the war and to be our law and order president. Jimmy Carter was going to bring decency and integrity back to Washington. Ronald Reagan promised to cut taxes, make the government smaller and end deficits. (He did have taxes cut once, and raised six times.) The first George Bush, as stated previously, said no new taxes. Bill Clinton said he would never cheat on his wife again and would get tough on trade. The second George Bush said we should not throw our weight around in the world anymore. Barack Obama gave us change you can believe in; but, to be fair, counter staff at any 7-Eleven also give you change you can believe in, after you buy your Slurpee®.
So, eight presidents pretty much promised to do one big thing, and that one big thing is what the public loved and voted for. And once in office, they did the exact opposite. But then again, we’re a pretty fickle public, too. Ten years ago, we cheered beating the United Auto Workers into submission; and today we’re screaming to bring more high-paid factory work back to America.
How can any elected official keep up with that? But a word to the wise: You’d best follow the debate on that 15-percent border tax. It could soon become standard equipment on the vehicle you really want to buy next.
© 2017 Ed Wallace
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, conferred by the Anderson School of Business at UCLA. He reviews new cars every Friday morning at 7:20 on Fox Four’s Good Day and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: firstname.lastname@example.org