Thursday, January 22, 2009

A Self-Repair Strategy for the Auto Sector

22 January 2009

When in doubt - question your assumptions.

Canada is presently facing an extensive debate about how to manage the looming bankruptcy of the North American Big Three Auto Makers.

The unquestioned assumption?

We're going to fix this by arranging for the government to throw taxpayer money at the problem.

Thus the debate is not really about whether to bail out the sector, but about how to bail it out.

In my view, this is exactly the wrong kind of thinking.

What is the problem?

In a collusive strategy of mutual self-reward, both executives and unions have been engaging in self-indulgent behaviour for decades.

Let's start with the executive side.

The unquestioned assumption is that executives are worthy of receiving high salaries, exorbitant benefit and stock option arrangements, and luxurious perks - let's not even start talking about the Lear Jets.

How about the unions?

In Canada, auto workers' wages are 50% higher than the average for assembly line workers in the industrial sector ($34 versus $22 per hour). Add in the benefits, and auto workers surge still further ahead. The rationalization is that the Canadian Auto Workers are "pushing the envelope" for Canada's other industrial workers.

The logic on both the executive and the union sides is entirely self-serving.

How about shareholders?

Exploited investors have paid for these failed strategies with at least a decade of declining stock performance. The markets discerned years ago that the North American auto sector was not a source of reliable profit increase - for exactly the reasons I have just described.

When the North American economy surged due to shared government and central bank policies of sustaining rather than short-circuiting a succession of debt-based financial bubbles, both the executives and the unions in the auto sector were able to exploit this illusory "blue sky" financial environment to "get away" with their bad behaviour. Investors - who have consistently been the first to be punished, particularly over the past decade - did not do well, but the companies stayed in business.

Now that the bubbles - save for the current taxpayer and central bank-funded "bailout bubble" - have popped, self-indulgence is no longer a viable business strategy.

Question your assumptions.

Hey, isn't competition in the automotive sector a good thing?

What is my proposal?

Leave the auto sector alone to sort out its own problems. Based on fundamental free market principles, let the executives and the unions decide together how much or how little they are willing to cut back - to live lives a little bit more like the rest of us. If they retrench sufficiently, maybe they can stay in business - and, if it has truly gone too far for too long, perhaps they can't. That is how free markets work.

If you have seen Francis Coppola's film, Tucker, then you know that in their heyday, the big three were not kind to competitors who wanted to build different kinds of cars.

What does a free market do? It engenders competition. If the big three can't compete, then some of their existing competitors very likely can - or alternatively, it is likely that in the event of actual dissolution of the big three, new automakers will arise in an uncluttered environment which permits renewed competition - perhaps out of such sectors as green energy, lightweight materials, aircraft technology, light vehicle manufacturing, etc.

Certainly the big three have failed in the mission of building "different kinds of cars." If the present market truly demands a different car - smaller, greener, lighter, more economical, alternative fuel-based, whatever - then a free market will generate solutions to fill the void that the big three have been unable to address.

Permit me to add another note, addressed to Canadians.

I do not know how well Canada's manufacturing sector will fare in the future. I do know that throwing government money at the sector will produce no lasting solutions - in fact, it is far more likely to perpetuate the existing culture of "self-indulgence all-around."

But Canada is a commodity-producing country. We live in a world where essentially all of Asia, much of the Middle East, enlarging sectors in Latin America, and even isolated parts of Africa, have joined the global consumer economy. It takes little prescience to appreciate that this reality will create an unprecedented international bull market in commodities, no matter how tough our present economic environment.

As it happens, Canada is the world's leader in the field of nurturing small capitalization mining ventures. Right now, while Canadians dither about the fate of our manufacturing sector, and to a lesser degree, our forestry sector, many small cap miners with excellent potential are facing dissolution or bankruptcy, while our larger mining companies are shutting mines, suspending exploration activities and shedding jobs.

Our eyes are fixed in the wrong place.

The Canadian economy has always surged when commodities are in demand, and contracted when they are not. The Canadian economic cycle is no mystery to anyone who has studied it.

The 21st century is therefore Canada's century.

Canada's mining and mineral sector is set to soar in response to the greatest commodity boom in human history (fuelled by 7 billion global citizens). And we have so far responded by dithering about how to save jobs in our sunset industries.

I assert modestly that Canada's commodity sector has the capacity to create ten jobs for every one that will be lost in manufacturing or in forestry. But Canadians do not see this because we are looking backwards, not forwards.

If subsidies are warranted, it is certainly not in the over-indulged automotive sector, but in our neglected crown jewel - the mining and mineral industry.

So I propose - also - that if we really just have to spend some of our taxpayers' hard-earned money, lets invest it in development loans for small mining companies and in training Canadians for employment in the soon-to-be booming mineral and mining sector.

Let's take off our blinders, and think in terms of real opportunity instead of in terms of rescue, salvage and "bail-outs."


  1. Well put!

    When will "the public" realize that "government money" is not mined in some far off northern mythical place but rather out of the pockets and banks account of "us".

  2. Money comes from two places.

    Real money in government coffers is paid by taxpayers.

    Play money - also directed to government coffers - is created out of thin air by central banks with full government consent.

    Real money costs us by draining our pocketbooks.

    Play money costs us because it devalues our currency, lowers interest rates for savers, increases costs for pensioners (and everybody else), and is never distributed fairly. Virtually by definition, expansion of the money supply leads to combined problems of over-production and under-production.

    The communist governments attempted to be fair to everyone by printing money out of thin air and distributing it to "the workers." Of course, much of it went other places, but virtually none of it went into the increase of productive capacity for the things that citizens needed, thus assuring the communist nations of poverty for decade after decade.

    When will Canadians realize?

    1. When taxes are raised excessively.
    2. When government spending is curtailed due to playing the game to its inevitably painful conclusions.
    3. When the cost of living rockets beyond incomes.

    Will Canadians understand that that deficit spending and monetary inflation caused the problem?

    Well, they haven't yet, and it's been happening since before John A.'s time!

    I wish there were a way to communicate these messages, but politicians of the left and right agree today that "stimulus" is needed when times are tough.

    In the old days, we believed that such conditions called for restraint.

    We are living in a changed world, that's for sure!

  3. Well put Laurence. I couldn't agree more.

  4. Two thoughts....

    1. The present thinking is classic "corporate" (and union) welfare.

    2. There are other ways we can invest billions to create more, better and longer-lasting jobs in Canada!

  5. Canada's mining and mineral sector is set to soar in response to the greatest commodity boom in human history (fuelled by 7 billion global citizens). And we have so far responded by dithering about how to save jobs in our sunset industries.

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  6. Looks like we agree exactly on this one. Well said on your part.