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11/16/08
On Bailing out the Detroit 3
Filed under: Politics and Economics
Posted by: site admin @ 10:33 am

Saving Detroit is not about saving Chrysler, Ford and GM. It is about saving jobs. It is also about saving a large portion of the manufacturing base in the US. The only way to save those jobs is to focus those jobs on making things that people want to buy. Any approach that does not have this as an end result will not solve the problem. And the only way to do this in a reasonable amount of time is to make these facilities available to manufacture things we ALREADY know people want to buy. In fact, given the capital and skills involved, the simplest solution is to make these facilities available as contract manufacturers to the car companies that make the cars people want to buy.

This solution isn’t really as radical as it might sound. The automotive industry is already fairly close to this model due to the large number of suppliers they currently have. This would only take that approach to the next logical step by contracting out assembly of the entire vehicle.

Nor is this approach unusual. Chip manufacturers have moved rapidly to this model in the last decade as the disparity between the cost of designing chips vs. the cost of manufacturing them has ballooned. Taking this approach in the chip making business has enabled continued innovation in design because the risk to manufacturing capital is borne by contract manufacturers who can make any kind of chip. While there are big distinctions between the chip and auto industries, it will still be possible to sort out the allocation of risk. For example, the auto design companies will probably have to supply specialized molds and tooling whereas the contract assemblers will supply plant, workforce and logistics. The point is that such allocations can be made fairly simply as part of contract negotiations.

In such a scenario, Congressional involvement need largely involve facilitation of the process of creating contract manufacturers. The current stockholders of the Detroit 3 are likely to have enough incentive to move forward (given the complete loss of capital as an alternative) with such an approach. Contracting companies such as Toyota or Honda may require some guarantees in order to become involved in such an approach, but that shouldn’t be much since they will be able to expand production without incurring the risk associated with a large investment in additional plants, equipment or personnel.

It may be, given the sudden downturn in the economy, that even this won’t be enough in the immediate turn. If there is anything good that can come out of the war in Iraq, it may be the opportunity it provides to resupply the military. By turning some of that production towards creating swords instead of plowshares, we may be able to find enough work to keep the factories busy until the economy recovers. Absent enough demand there, we can to look at opportunities in a second New Deal - tools and materials for infrastructure, particularly alternative energy.

Complex solutions often don’t work. Complexity breeds error – particularly the first time something is tried. The shorter the time span available, the less room there is for error. Therefore, attempting a solution that relies on many conditions is not wise in the current situation. Converting some or all of the manufacturing facilities currently owned by GM, Ford and Chrysler to the production of other vehicles may prove to be the least complex solution to an otherwise complex problem.

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