Parsing “it’s the cars, stupid” explanation for Detroit’s troubles

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Whenever I write about the burden that pension and health care costs place on the Detroit-based automakers, I hear from readers who think that’s a sorry excuse for Detroit’s problems. Here’s a thoughtful example from my e-mail inbox:

Your article on the buyout of Chrysler did a great job highlighting the high costs of healthcare for retirees being shouldered by Chrysler and the other members of the Detroit 3. While this adds to the cost of a vehicle from Detroit, isn’t weak sales the key issue driving the current situation? The Detroit 3 has done very little to address fuel efficiency and the low quality of their products. Aside from sales gimmicks such as Employee Financing, little effort has gone to address the key reasons why Americans don’t want to buy Detroit cars. It doesn’t take alot to see that having your product line geared toward fuel-inefficient SUV’s and trucks aren’t going to increase sales with these gas prices. It’s time for Detroit to stop hiding behind the healthcare bogeyman and start taking concrete steps to reverse these trends.

In a subsequent e-mail, the same reader goes on:

I read that estimates of retiree pension & healthcare expenses add approximately $1,500 to each car sold for the Detroit 3. This would adversely impact sales for entry level models, but shouldn’t have a significant impact for $40K+ SUV’s, $30K+ vehicles, etc… Detroit needs to include the cost of these obligations to the price of its vehicles and then make the needed investments to bring its quality and fuel efficiency up so American consumers have a reason to buy their vehicles.

Profit margins on small, fuel-efficient cars are tiny–even for the Japanese automakers. So with that $1,500 per car health-care burden, isn’t it kind of understandable that Detroit has focused on big, fat, high-margin pickups and SUVs? That’s not making an excuse, it’s just pointing out that there’s a connection between Detroit’s high legacy costs and its product choices. Better, more forward-thinking management in the 1990s would have set aside some of the big profits the Detroit Three were making then to pay for retiree health care now, and done more to prepare for the day when gas prices rose again. But that’s asking an awful lot of executives of publicly traded companies with impatient shareholders.

Also, it’s wrong to say that Detroit has done little to address the quality of its products. As far as defects and durability go, the Detroit Three have made up lots of ground on and in some cases surpassed their foreign competitors. It’s in styling and fuel efficiency where they’ve generally remained behind the curve.

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