Automotive History

Megan McArdle offers a comprehensive description of TheBigThree's troubles, and some dark predictions for their future outlook. In addition to the familiar oligopoly story, there are quite a few new details that I had not considered: the function of the dealers, the incentive structure during the oligopoly days, and the double-edged sword of profitable financing divisions:

But perhaps more importantly, Detroit turned from making money on cars to making money on financing. Detroit didn't make a big profit by selling you a Ford Taurus. It made money on financing your Ford Taurus; often, the car was sold at a loss in order to get the finance business. The Big Three were banks manufacturing cars as a loss leader.

That's why they could afford to pay their workers above market wages. They were not trying to make a profit on the manufacturing process. The UAW wages and benefits were not compatible with profitability in the auto business five years ago. Or ten years ago. Or fifteen years ago. The UAW is not being asked to bear the pain of returning the company to profitability in a tough market. The UAW is being asked to get their wages back to where they would have been in the first place if they hadn't been subsidized by the now-unprofitable financing arms. Detroit has spent decades buying labor peace with increasingly desperate ploys that have finally run aground.

Good stuff! Hat-tip: Instapundit

Economics and Markets Posted by John Kranz at December 20, 2008 11:48 AM