March – April 2014 Commentary

Illustration by James Yang

Automotive – Global Vehicle Watch

Vehicle sales around the world are trending upward, and sales in the United States rose 7.6 percent, to 15.6 million cars and light trucks, last year. While Europe’s auto market has shown monthly gains since last fall, a prolonged recovery is far from certain. In Asia, vehicle sales have been growing by double digits in several markets.

inside the numbersBut those advances could be for naught, especially in North America, if various automakers follow through on adding capacity at new and existing plants. During the 2014 North American International Show in Detroit, Volkswagen said it planned to spend $7 billion in the United States, Canada, and Mexico over the next five years, including a new plant at an undisclosed location.

Already, Volkswagen has a factory under construction in Mexico, while a two-year-old plant in Chattanooga, Tenn., is currently operating at about half of its capacity. If other planned expansions play out — Mazda and Honda are adding new factories in Mexico, while Infiniti and Daimler may co-build a plant there — overcapacity becomes a real concern. What’s more, General Motors, Ford, Toyota, and Honda are planning to add production at existing plants in the U.S. and Canada. 

When automakers make too many vehicles, price wars break out — which diminishes the value of cars and trucks. Factories operating at 100-percent efficiency generate strong profits for automakers, but if the utilization rate falls below 80 percent, losses mount considerably. Given that overcapacity contributed to the 2008 global financial crisis, along with the 2009 bankruptcies of GM and Chrysler, the auto industry must keep a keen eye on balancing supply with demand.

In Europe, overcapacity, along with a string of past government incentives, has contributed to a decade-long slump in vehicle sales. GM, Peugeot, and Fiat, along with other automakers, are operating at low production levels. 

While data from IHS Automotive projects the U.S. market could top 16 million in light vehicle sales this year and peak at nearly 17 million in 2016, sales are expected to flatten in 2018 and beyond. If all of the planned production gains are completed, a million or more additional vehicles will enter the marketplace.

Clearly, people remember what they went through. They also want absolutely
to hold the value of these great vehicles, and you don’t do that by discounting them.
— Alan Mulally, CEO, Ford Motor Co.

To stem potential losses, some of the new plants may assign output outside of the North American market. IHS reports global auto sales will reach 85 million units this year, and potentially 100 million in 2018. If automakers can balance overcapacity in North America, and treat new and more efficient factories as export hubs into Central and South America, the market can avoid contributing to another economic recession.

Labor – Check the UAW

When the next round of contract talks between the Big Three automakers and the United Auto Workers begins next year, the union should consider that a prolonged strike would cause significant harm to the economy. Most recently, UAW President Bob King proposed raising member dues by 25 percent in a bid to strengthen the union’s strike fund, which today stands at roughly $600 million.

The UAW says it agreed to a two-tier wage structure during the 2007 talks to help GM, Ford, and Chrysler better compete with foreign competitors, and they extended the practice during the 2011 talks to assist the Big Three’s recovery from the 2008 global financial crisis. In the next talks, the union wants to do away with the entry-level wage structure. Left unclear is whether members will support the dues hike.

While the UAW isn’t the big force it once was — current membership is at 382,500, down from more than 1 million in 1987 — a prolonged strike among one or all of the Big Three automakers will open the door to increased vehicles sales among foreign competitors. That will hurt Michigan’s economy and the union itself, as members agreed to profit sharing over wage hikes during the 2011 talks.

The UAW has moved aggressively to expand its membership base, and it has made some marginal success, but its plans to organize transplants operated by Volkswagen, Nissan, and Mercedes has been a struggle. In mid-February, the union saw its goal of organizing a VW plant in Chattanooga, Tenn., fail as workers rejected the initiative. The UAW says it will continue with its organizing efforts, though most labor analysts say it will be increasingly difficult for unions to enter private-sector workplaces. 

 Education – Students Rule

The educational system in Michigan too often favors teachers and administrators over students. In some cases, ineffective teachers are allowed to remain in the classroom due to seniority, outdated laws, and union interference. While most teachers do an excellent job of preparing students, some are allowed to stay in the classroom even though they are ineffective or unwilling to teach.

It’s time students took matters into their own hands by filing suit against Michigan’s public schools. Consider the case of nine schoolchildren who recently filed suit against California’s public schools in a bid to overturn teacher-tenure policies. 

The case, if successful, would put the best teachers in the classroom — not just those with the most seniority.

What’s more, the Michigan Education Association has been complaining for more than two decades that per-pupil funding is too low, even as every governor in recent memory has directed more money to classrooms, according to Michigan Capitol Confidential. Current spending is $7,545 per pupil, and it’s up to $12,644 when federal money is added. It’s the highest per-pupil spending in Michigan’s history.

The complaints fall on deaf ears. In good times and in bad, there’s never enough money for education, the MEA maintains. While Gov. Rick Snyder has cut spending by $100 per pupil, the difference was directed to the teacher pension fund, which has an unfunded liability of $24.3 billion. Snyder has since increased funding to classrooms, even as the MEA says it’s not enough.