Why The Auto Industry Is Failing – Part 6

In this installment we tackle excessive government regulations.

This might seem like a repeat of part #2 of the installment (emissions regulations) – it sorta is.  All of the regulations that surround cars are part of the problem.

But, perhaps, not in ways you might expect.

The term “Big Three” evolved with the purchase of American Motors Corporation by Chrysler.  This brought the Jeep lineup of vehicles under the Chrysler umbrella.  Before then, you had AMC, Chrysler, General Motors, and Ford as the big players in the US.  After AMC was absorbed, the Big Three was “officially” formed. 

Since the 1950s, the number of vehicle makers headquartered in the US has slowly dwindled.  Some went out of business, and some were bought-out by larger companies.  However, for the last thirty or forty years, there has been no homegrown competition popping up to challenge the dominance of the Big Three automakers.  The only competition we’ve seen during that time has been foreign-owned: Toyota, Honda, Kia, Hyundai, VW, and so on.  Saturn was a GM-based company from the outset, as was Geo.  The only real domestic competition per-se, these days, comes from a small outlets such as Tesla.  Tesla makes electric cars exclusively.  The Smart car was developed by Daimler Chrysler, and the Hummer brand is a niche product that was initially started to develop military vehicles.

Tesla, I might add, isn’t doing so well these days.

Some might conclude that this is some sort of conspiracy.  That the Big Three doesn’t want competition…which they don’t.  However, it isn’t the Big Three that’s caused this sudden drought of competition in our domestic auto market.  The driver for this stagnation is, and always has been, the US government.

A free market economy thrives on competition.  In fact, companies themselves are best served by having healthy competitive forces driving their product development.  We no longer have that in out present economy; this has caused our US automakers to atrophy, and become uncompetitive.

They are uncompetitive because, since the 1960s, they have faced no new competition that would demand that they produce a better product, or wither.  They have not faced this in an open market, with natural market pressures.

What they DID face was a government-subsidized foreign invasion of Japanese autos.  This was good in the sense that we now have domestic vehicles that are as good – if not better – than Japanese alternatives.  It is bad in that the Japanese, Korean, and European automakers do not face the same economic pressures as US automakers, and are either actively or passively supported financially by their governments.  Thus, if sales drop for Toyota, the Japanese government WILL step in to help Toyota out.  As I’ve shown already, the Japanese government basically subsidized the Prius in its own home market, as well as outright protecting its own home market from foreign competitors.  So, what we have here is an off-kilter playing field that favors foreign competitors.

It’s clear that we have a problem in the market, and it directly affects competition.  How do regulations fit into all of this? 

Its easy to assume that because the federal government demands that an automobile be produced to meet certain standards, that this levels the playing field.  And to some extent, that’s true.  Honda’s cars have to meet the same basic standards for safety and emissions as to every other automaker.  Each time Congress passes new CAFE standards, or tightens emissions on a car, the cost of R&D for that vehicle goes up; I’ve already covered this in a previous post.  The overall effect is that more money is required when developing a car, especially when the automakers are constantly shooting at a moving target.

While this is problematic for companies like Ford and GM, in the past they were large enough to absorb these costs.  They could dump a vehicle line to save money, cut production, layoff workers, or whatnot to adjust to the regulations.

Foreign competitors could go running to their home governments for help (which many of them do), and are not under as much threat as domestic automakers because their home markets are essentially protected.

However, all this emphasis on high regulatory standards makes it nearly impossible for a domestic start-up to get off the ground.

Because of CAFE standards, a start-up domestic automaker would have build a fuel-efficient vehicle as their first offering; a market already dominated by the Japanese and Koreans.  Otherwise, because their fleet consists of ONE vehicle, were they to build a luxury car or SUV (that provide higher revenue), they’d be hit with a fine.  The alternative is to build a medium or heavy truck, a market already dominated by the domestic automakers (and with lower volume).  Now while there exist volume exemptions to CAFE standards (something like 10,000 vehicles), once those limits are broken all bets are off.

Car sales run on low margins.  So, in order to make money to fuel more R&D, you have to sell a lot of cars.  A paltry 10,000 cars a year isn’t going to achieve that goal.

Furthermore, if this same automaker does not implement automotive safety standards, not only will they come under attack by the National Highway Transportation Safety Administration, but they’ll be attacked by a cadre of lawyers looking to cash in on the fact that this new automaker is making cars that do not live up to accepted government safety standards.

So, in order to start a new domestic auto company, investors have the grim prospect of sinking what could be billions of dollars over the course of several years just to develop a single vehicle that may or may not survive in the US auto market.  They will also probably need to spend billions more to float that vehicle until the brand becomes accepted by the domestic consumer.  No guarantee exists that, just because you create a product or start a company, you’ll be profitable in your first year.

In short: because of costs involved in meeting regulations, no one in their right mind would even think of starting a new domestic auto company; it’s been like that since the 1960s.  Consequently, it was around the the 1960s when government started getting more and more involved in regulating the automobile.  This literally choked-off new homegrown competition, which then led to the atrophy we saw in the Big Three during the 1970s.

Progressive taxation works the same way.  The more money you make, the more the government takes.  The net-effect of this is strangling wealth creation in lower income brackets, and firmly ensconcing a wealthy elite (because they already make more than they need in order to get by) – the exact opposite of the implied intent of the taxation.  One need go no further than look at the Kennedy family – who is all for progressive taxation, and has been obscenely wealthy for some time now – to see how this is indeed true.

The other dangerous aspect to excessive government regulations are a bit more obvious: the Law of Unintended Consequences.  With the increase of CAFE standards, this has forced the all of the auto makers to lighten the weight of their vehicles, and remove harder (but denser) steel with aluminum components.  Sturdy body components, which require higher impact speeds to cause excessive amounts of damage to a vehicle, are replaced with less adequate “crumple zones” which are more prone to cause damage to a driver or passenger’s legs during an accident.  Additionally, air bags supplement the loss of more rigid components, while introducing brand new problems when it comes to vehicle safety.  Air bags have a small, but existent, failure rate.  They also basically work on the principle of a controlled explosion, and are a known hazard to children and the elderly.  Lightening the cars also makes them more dangerous in slick and/or winter conditions as they no longer have the weight to keep them stable on the road in these environments.  This is just a small example of the comedy of errors that is each new increase in regulations.  Not to mention that with each turn of the regulatory screw, vehicle cost increases.  This isn’t such a big deal to the foreign automakers, many of whom are subsidized.  But is causes enormous problems with domestic automakers as their one competitive advantage (being cost) is stripped away.

Government regulations, historically, have all but killed what was a healthy domestic auto sector.  They are also now strangling the life out of the Big Three who – up until now – have been on their own in facing government-subsidized competition.

Congress and liberals, with their “forward-looking” view of regulations have impeded market forces that caused the Big Three to become unprofitable and weak in the first place.  Throwing money at the automakers will only delay the inevitable.

The better solution is to get the government OUT of private industry.

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