Putting U.S. Cars on the High Road to Recovery

Howard Wial
Howard Wial Former Brookings Expert

March 4, 2009

Chrysler and General Motors have now presented their recovery plans to Washington. The plans, like the public debate about the future of the industry, focus mainly on short-term issues such as financial restructuring.

However, it is crucial that the automakers and the government also address the underlying impediments to their long-term viability.

During the grilling the automakers received on Capitol Hill in November and December, commentators on both the right and the left misdiagnosed these impediments.

To some on the right, the Detroit firms’ biggest problem is labor costs. But these labor costs are less than 10 percent of vehicle cost. In any case, the companies and the United Autoworkers Union are already addressing retiree health care and pension costs, the major source of the labor cost difference between the Detroit Three and Japanese manufacturers.

Some on the left assert that the major problem is the firms’ failure to make fuel-efficient cars. During the long era of cheap gasoline, though, it was wrong to blame the companies for making the SUVs consumers desired.

Instead, the Detroit automakers’ long-term problems lie in two areas that have rarely entered the public debate: uneven product quality and lagging innovation.

Although their defect rates are now similar to those of Japanese models, Detroit Three cars still lag in other dimensions of quality, such as quality of ride, cabin noise, vibration, and harshness. Reflecting these deficiencies (plus lagging consumer perceptions), the average Detroit Three car sells for $2000-$3000 less than a Japanese car in the same size class.

Simply put, Detroit has a price problem, not a cost problem.

More consistent quality, achievable by reducing costly and unnecessary steps in production and design, would make consumers willing to pay more for Detroit’s cars.

In the area of innovation, the Detroit Three were latecomers to hybrids and continue to lag in developing the next generation of alternative-powered cars. If market forces, public policy, or both create long-term upward pressure on the price of gasoline, then the companies that are ready to bring those cars to market soonest will be positioned to be the industry leaders.

If federal government assistance to the auto manufacturers is to ensure long-term viability, it must address these issues.

For the quality problem, the federal government should create a manufacturing assistance program dedicated to helping aid-receiving automakers implement world-class manufacturing and design practices in all their operations. Those practices involve using knowledge from a variety of sources—including production workers and suppliers—to eliminate waste and increase quality. Japanese companies have used them for decades.

The administration’s auto industry task force should understand those practices and staff up to implement them. Automakers receiving federal loans should be required to accept the new program’s recommendations, working with suppliers to ensure the quality of auto parts and with the UAW to ensure that workers’ knowledge is tapped. For example, automakers would be required to develop with suppliers and workers action plans to address the top 10 warranty concerns in each plant. Measurable performance improvements would be required to continue receiving taxpayer funds.

To spur innovation, the federal government should offer automakers funding to form a precompetitive research consortium to identify and resolve the short- and medium-term technological obstacles to the development of viable alternative-powered cars. The consortium should be open to all interested automakers, suppliers, universities, and research labs.

Federal funding for the consortium should be conditioned on participating firms submitting a credible research plan that includes specific outcomes that can reasonably be expected to result from the research.

The auto task force should assemble a team of experts who, in conjunction with industry and academic advisors, would suggest improvements in the plan. Consortium members should be required to respond to these suggestions and to contribute financially to program costs. Funding should initially be for three years, with renewals in three-year increments subject to demonstrated progress toward the consortium’s goals.

Finally, to ensure a market for these alternative-powered cars—and thereby give automakers an incentive to make the consortium’s research a top priority—the federal government should phase in an increase in the federal gasoline tax. To offset the tax’s impact on low- and moderate-income Americans, other taxes paid by these households should be reduced and the earned income tax credit increased.

Putting the U.S. auto industry on the high road to recovery will require more than a quick financial fix. It will require sustained cooperation between government and the industry around fundamental issues: what kinds of cars are made and how they are made.