Ed Wallace

Interesting Times

Wallace
Wallace

If someone were to ask you how things are different today from how they were 17 years ago, or 25 years ago, what would you answer? We have way more toll roads than we used to have, but for the most part you can’t say our public infrastructure is substantially better. And you certainly can’t say the Middle East has become destabilized; that would betray a spectacular lack of knowledge of Middle Eastern history. Let’s face it; the primary improvement to the lives of most American consumers has been the iPhone, the iPad, the flat-screen TV and a bigger computer screen. Other than that, things are remarkably the same.

However, today our automakers are hoping that the incoming administration will play with the corporate tax code more. As Ford head Mark Fields told Bloomberg on January 6, he is looking for Trump to deliver a more competitive tax code, which would alter Ford’s investment decisions. Huh? That article covered Ford’s recent decision to back away from building a new $1.6 billion factory south of the border; yet, in prior years, even without any consequential change in the U.S. Treasury’s corporate tax code, Ford seemed quite capable of both planning to build that factory and then canceling it.

So, why do automakers want to build factories in Mexico? Because no matter how hard they try, in the four decades I’ve been around the auto industry Detroit has consistently failed to build a small car profitably in America.

That’s right, it was hard for Detroit’s automakers to turn a profit in the days of the Ford Pinto and the Chevy Vega, hard in the period of the Ford Escort and Pontiac T-1000; and it’s been hard for Chrysler with its Horizon, Neon and lately its Dodge Dart and Chrysler 200. Just as Ford has struggled with its Focus or Chevy with its Cruze. It’s equally true that in every decade since the early Seventies, Detroit has improved its engineering quality, its production quality and the engineering and value of its smaller cars.

But we live in a country of fluctuating gasoline prices — as compared to other industrialized countries, which have only extremely high and unbelievably high gas prices. Because of that, sometimes Americans buy small, fuel-efficient vehicles like crazy and at other times dealers can’t give them away — typically, when gasoline prices drop like a rock, like they did recently. And it was that slow-down in sales of smaller, extremely fuel-efficient vehicles that forced Ford to walk away from building yet another new factory in Mexico. Then Mark Fields popped off with the corporate line, about how a better tax code could influence planning decisions in the future.

Wow, if that were true one would think that General Motors would be all over it. Keep in mind that last year, USA Today pointed out that GM was one of 27 major U.S. corporations that made tons of money in 2015, like $7.7 billion, and did not pay one penny in corporate federal tax. So, with zero tax liabilities, on January 8, GM’s CEO, Mary Barra, said the company has no plans to change where it builds its small cars in response to Trump tweets. Oh, and for what it’s worth, GM manufacturing employs nearly twice as many people in Mexico as Ford does.

As for the discussion about where automakers ought to build their vehicles — and attempting to turn it into a political discussion, instead of a corporate business decision — there’s nothing new about this either. Remember Ronald Reagan’s negotiations with Japan, and the voluntary import quotas they agreed to, which helped Japanese automakers decide to build production facilities in the U.S.? There’s a second part to that story; because it’s highly doubtful that Japanese automakers would have rushed to build factories south of the border in the Nineties if Detroit hadn’t had language inserted into the NAFTA agreement mandating that no automaker could take advantage of the zero tariff for products crossing the border unless they also manufactured in Mexico. Now, Nissan and VW already had plants there; Mazda, Honda and Toyota didn’t, but do now.

But it wasn’t just Reagan who pushed and pushed under the guise of helping those here employed in the auto industry. Bill Clinton in 1995 seemed to be ready for the nuclear option, demanding that Japan buy more American-made cars and more American-made auto parts, or else. Clinton then threatened Japan with a 100 percent import tariff on Japanese-made luxury cars; the currency exchange rate between the dollar and the yen was then manipulated, which immediately increased the window sticker prices of higher-end Lexus, Infiniti and Acura models by 25 percent. All that to force Toyota to buy 20,000 Chevy Cavaliers and pretend Toyota and other Japanese automakers were going to buy more U.S.-made parts than they were already buying. In the end, Toyota sold those imported Cavaliers for half price to get rid of them.

But Japanese automakers were already buying tons of American parts, because they were manufacturing here. Worse, those 1995 ad campaigns showing Dodge Neons and Saturns on cargo ships heading for Japan, which didn’t do one thing to sell more of those vehicles here, apparently did nothing to get them sold once they reached Japan, either. Oh, and the moment the smoke cleared on this political campaign to show how tough we were with our international competitors, GM and Ford both dumped their parts divisions anyhow.

Then came the big one. Five years ago, Clint Eastwood starred in one of the finest Super Bowl ads of all time, Chrysler’s “Halftime in America,” with the tagline, “Imported from Detroit.” And of course, that campaign was suggesting that Detroit’s darkest days — the period right after the Financial Meltdown, when both GM and Chrysler went bankrupt — were finally over. Several TV pundits responded by suggesting that Eastwood, renowned for his moderate Conservatism, was actually a closet Liberal hawking the value of President Obama’s bailing out Detroit.

I would have been more concerned about Eastwood talking to the empty chair at the RNC convention than about this ad. Then again, that televised moment wasn’t scripted. The Chrysler ad was.

Well, in any case the “Imported from Detroit” ad missed the mark completely. The standout Dodge Dart and Chrysler 200, both first-class examples of what that ad campaign was referring to, did not perform well on dealers’ lots across America. As much as anything else, collapsing gasoline prices killed them. That same scenario, though, has made the hot Jeep brand even hotter, and so the inexpensive Jeep Renegade is still being imported from Italy to U.S. dealers. It would make more sense for Eastwood to do commercials for that Jeep, since his career was launched on spaghetti westerns imported from Italy. But that’s not likely to happen.

The point is that the auto industry seems to have had a major crisis in every decade. Politicians step in and pontificate, automakers scream that they need the government’s help or they will fail; and, no matter what the politicians do, the public always ends up paying more for vehicles. And then, the very moment car companies are back to making record profits, they start crying about how government regulations and interventions are the reason they aren’t doing better.

But here’s the reality on sending small car production into Mexico: Detroit has never made much money on small vehicles, assuming they made any money at all, because they cost almost as much to produce as the most profitable full-sized vehicles. In my first year in the auto industry, an article explored the cost difference between building the 1975 Chevy Nova and the Cadillac Seville, which was introduced that year. Both shared platform components, but the Nova could be sold for under $3,500 and the Seville for $11,000 — and yet the total cost difference to produce them was somewhere under $1,000. There was a similar cost story between the Ford Granada and the Lincoln Versailles, except that the Versailles looked exactly like a Granada, at least the Seville was completely different from the Nova. This is Detroit’s curse: Do you build the vehicles that are in high demand and always bring top dollar, or keep trying to find ways to build your exceptional, but lower demand vehicles — and to maintain a profit doing so?

Or do you ship some production out of the country to try and bring down the overall cost of production? Everybody forgets, but this was a problem long before Ronald Reagan, much less Mr. Trump. The auto industry is and always has been an intensive, low-margin, high capital cost, large-scale consumer-manufacturing industry selling to an extremely fickle public.

In fact, the only thing that has changed about this political discussion is where and how it takes place. We used to read about it extensively in the business section of the newspaper; now we hear about it on Twitter.

© 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: wheels570@sbcglobal.net

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