Ed Wallace

Strange Bedfellows

If there’s one thing that’s certain about our political cycles and aging, we all know that as we age, time goes by faster. When we were young it seemed like summer vacation lasted a long time, but now a 90-day note comes due the day after you signed it. It’s like that too with our election years: Once you cross 50, the next election will be here before you know it.

What is truly amazing about this upcoming administration is how there seemed to be no real enthusiasm from the heads of the major automakers for the president-elect during the campaign. But guess which group now has its hands extended for a freebie from the new guy? Yeah, the United Auto Workers. Really. This historically Democratic leaning group is now led by Dennis Williams. Williams fell in love with Mr. Trump’s position that NAFTA was a truly bad deal for the American laborer; Trump’s suggestion of a 35 percent tariff on all vehicles built in Mexico and sold here in the U.S. is something Williams seems to agree with now.

Mr. Williams was quoted in USA Today on November 10 as saying that our free trade policies have “in many cases destroyed lives and destroyed the middle class.” First, I’m far more sympathetic to our auto union than most people reading this column. Factory work, while easier than in the past, is still a long, hard grind of a career; hats off to those who build our vehicles. Second, however, automotive production, beginning with parts manufacturing, started moving south of the border long before NAFTA became law.

Moreover, Detroit has only itself to blame for at least some of the automobile factories in Mexico. They lobbied for and successfully got inserted into the trade agreement the provision that a manufacturer could not export vehicles from the United States into Mexico unless that manufacturer also had a factory south of the border.

Nissan already had a factory in Mexico. Thus, companies like Honda and many others had no choice but to open an assembly plant south of the border. Likewise, General Motors had built its first factory in Mexico to build Chevrolet trucks in late 1936; the first one rolled off a very primitive assembly line on January 18, 1937. Volkswagen’s Puebla, Mexico, factory produced its first car in 1968 and from that location Volkswagen ships almost as many vehicles back to the European market as it does to the U.S.

Also, it should be remembered that since the NAFTA became a reality, many automobile manufacturers have opened new factories in the United States, too. There’s BMW in South Carolina; Mercedes, Honda and Hyundai in Alabama; and VW in Tennessee. And the failed Saturn plant in Spring Hill, Tennessee, is once again up and running — building the exceptional Cadillac XT5 and GMC Acadia.

The question is whether or not NAFTA has truly cost American factory workers those 1 million UAW jobs that have disappeared over the past 37 years. The answer? Probably not. First, one should remember that in the peak year for UAW membership, 1979, GM, Ford and Chrysler together controlled virtually all of America’s auto industry. Because of the Second Energy Crisis that would not be the case within just a few years; in short order Toyota, Nissan, Honda, Mitsubishi and Mazda all opened U.S. factories, either on their own or in joint ventures with American manufacturers.

I may have witnessed first-hand the real reason why labor, not just in American automobile factories but in all factories, has been in serious decline. It was in Allison, Ontario, Canada, in 1998. It was a private trip to Honda’s facilities there, where both the Civic and the upcoming 1998 Odyssey were built. And at the very start of the production line, robotic arms lifted the top, bottom, sides and structure of that minivan into position; there, guided by lasers, the arms quickly put those panels perfectly into place and other robotic arms welded them into one solid body.

Honda’s engineers proudly told us that their laser-guided system would continue to ensure perfect alignment of the minivan’s body, even as the years wore down the tool and dies producing them. I seem to remember a tolerance, even after five years, far superior to what was allowed on brand-new cars 20 years earlier. The point is that, for decades on end, that one job used to be done by who knows how many autoworkers.

Moreover, it wasn’t the only automated system at that plant. The only person I remember seeing that day was a young man on a rolling chair; he waited for a new Honda minivan to come to his station, suspended off the ground, where magically the engine and transmission came out of the floor and into exactly the right place in the chassis. He quickly rolled under it and bolted the power plant to the chassis. It was amazing.

Today, I would guess, that state-of-the-art technology could be found at any automobile factory across the world, much like each bank would require fewer cashiers since the introduction of the ATM. Come to think of it, how many companies have gotten rid of switchboard operators for the (far more infuriating to customers) computerized phone systems?

Then again, there’s every possibility that, by averaging out the net cost of vehicles sold that were produced in two locations, having low-cost factories in Mexico allows automakers the leeway to continue to operate factories here in the States. For the record, Ford is planning on shipping more of its small car production to Mexico, but isn’t getting rid of American jobs. They will use their space here for producing higher-profit-margin trucks and SUVs. (Although to be fair, if the price of oil skyrockets again, trucks and SUV sales will fall, meaning those American jobs will again be in peril. And offset by new employment in the oil fields.)

As for lower cost factories offsetting higher cost ones elsewhere, this is little different from the late Seventies, when many GM and Ford dealers also owned imported car franchises. In fact, until 1979, dealers often sold Detroit’s products and Hondas off the same showroom floor. And make no mistake, when Detroit nearly failed during the Second Energy Crisis, in many cases their dealer bodies survived and continued to order American-made products because — since many also had an imported car line on the same lot, if not in the same showroom — they were still profitable. Had they not had those imports, many new car dealers could have failed in that period, potentially leaving Detroit’s manufacturers without enough dealers to survive themselves.

Maybe even more important to the argument is that Detroit’s new car dealers in that period were far more loyal to the Big Three than to their import franchises. Sure, they loved the profits off those small cars, but they were extremely loyal to Detroit in a patriotic sort of way. Because those dealers remained profitable, they had the luxury of being able to order American-made cars that frankly were not selling that well.

The point of all this is that it is actually all interrelated. Just as imported small and fuel-efficient cars helped save Detroit during that Energy Crisis, today being able to shift car production to Mexico to save on production probably gives automobile makers the luxury of keeping many plants here in the U.S. open, too.

In any case, politics can be outrageous during campaigns. But some pragmatism is required: Corporations with billions of dollars invested overseas, not to mention 18,000 new car dealers, won’t like having a 35 percent tariff slapped on some of their most popular cars. This leads one to believe that a certain level of blowback will occur if the winner keeps certain campaign pledges. Of course, this is in no way unique to Mr. Trump; this same dance happens with almost all new administrations. After all, just 21 years ago the Clinton administration threatened a 100 percent import tariff on Japanese luxury cars if Japan didn’t open their market to U. S. parts and cars.

Maybe a better discussion for the UAW to have with the American public is how, before the Financial Meltdown of 2008, they agreed to two-tiered wages and later to handling the benefit packages, such as healthcare, for their retirees. If you recall, Detroit claimed that if those agreements were kept, it would allow them to keep window sticker prices from soaring. True, Detroit got its way on forcing those changes to its workforce, but really didn’t keep its promise of lower prices as a result.

Doesn’t matter. Because Detroit and the other automakers have something they want from our new administration, and it’s being lobbied by the Alliance of Automobile Manufacturers. This time they want the fuel efficiency standards revised much lower, to save them the billions of dollars in research money they’re using to hit that 54.5 mpg ruling for 2025. Of course, the automakers have a strong point right now. Remember those critical words, “right now.” Because today the public is absolutely in love with trucks and SUVs, the larger the better, because gasoline is cheap again.

Yet, because apparently we all suffer from collective amnesia as to what can happen with gas prices, one should be reminded that we’ve been here before: In 1972 before the First Energy Crisis, in 1978 before the Second Energy Crisis, and in 1999 before the price of oil went through the roof over the next nine years. Not to mention the fall of 2005, when gasoline spiked to $3 a gallon after several hurricanes hit the Gulf and our refineries. What are selling today are those vehicles that deliver huge profits for automakers. And, because they’re in demand, those are often the same vehicles that have the smallest incentives on them. As a result, automotive CEOs are being championed in the business media for their brilliance in finally connecting with the market in profitable ways that all of their predecessors missed.

Again with the historical amnesia. The business press said the same thing about those predecessors — until the market was completely disrupted by things like gasoline going to $4 a gallon, when billions in automotive profits immediately turned into billions in losses.

If one doubts that statement, read the book, Comeback, by Paul Ingrassia and Joe White, published in 1995. First, it’s a brilliant history of how Detroit nearly failed in the early Nineties. But the book also states that automakers learned their lesson, brought in the best and brightest in management and were now ready for whatever the future brought. Yet all of those brilliant CEOs they mentioned were gone within years. And barely over a decade later, two of the three automakers were in bankruptcy.

I have been around the auto industry through the presidencies of Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush and Obama and now stand on the cusp of the age of Trump. I have seen our government make massive mandates on new cars, for the sake of safety, the environment and fuel conservation. All were loudly condemned by the automakers, pundits, and many members of the public when they were announced. Yet the vast majority of car buyers would end up loving all of those mandates on their vehicles, and those changes helped save the auto industry when the unforeseen happened.

And therein lies the real secret of all of this: An individual can easily move in any direction in our society — if he or she is adaptable. When the second energy crisis came, I shifted from General Motors to Honda; and when luxury cars started to really show strong volume expansion, I moved again. When a line of automobiles goes cold, dealership employees can move to a stronger franchise. The flexible individual is everything in our economic society. It’s survivalism.

It’s tougher for new car dealers, because of the sheer expense of owning a franchise. Yet if their best-selling trucks and SUVs suddenly go cold because gasoline jumps to $4 a gallon, they will tighten up the ship until the market returns — and even in the worst times, it starts coming back fairly quickly. But a manufacturer is a large bureaucracy. Its lead time and investment to adapt is counted in years, and in billions of dollars. This is why those who have strong investments in their businesses don’t care for change, yet most can deal with it. Large corporate bureaucracies detest change if they think it’s happening far too quickly because their perceived cost to deal with the new reality might well devastate the bottom line.

Thus endeth today’s lesson: This is why lobbyists run Washington and why populist political campaigns rarely translate into reality later.

© 2016 Ed Wallace

Ed Wallace, a member of the American Historical Association, 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 7:15 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: wheels570@sbcglobal.net

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