Toyota and Obama

Remember when Toyota was the best car company on the planet? They made great cars, stylish automobiles that worked well, didn't have many problems, and got great gas mileage. It was just a better company than any American car company. When was that? Oh, yeah, a couple of months ago. How long had that idea been firmly planted in America's cultural consciousness? 25, 30 years? Something like that.

Amazing how a narrative can change overnight, isn't it? In a month or so, Toyota has gone from being a great company, one of those uniquely special companies that do almost everything right, to just another company, with its share of dysfunctionality, arrogance, and just plain stupidity.

Remember when Obama's presidency was in trouble? A Republican won a special election in Massachusetts, after a couple of Republicans won gubernatorial races in 2009, and suddenly Republicans had the momentum, and Democrats, particularly Obama, were in trouble.

I am so not worried about Obama. Really, really, really not worried about Obama. Tomorrow is the start of the health care summit. I don't know what's going to happen, but I am starting to get the sense that Obama and the Democrats are going to take advantage of the fact that, you know, they have massive majorities in Congress to pass legislation that they want. Great idea.

Obama is also taking advantage of the fact that, you know, he's president and all, and he has a lot of power to get what he wants through a Congress with both houses held by his party by those massive majorities.

But a couple of the reasons for my optimism about Obama stem from Toyota's current trials and tribulations. First, Toyota's fall from the pedestal reminds us of how fickle media/cultural narratives can be. Toyota isn't a very different company from what it was 3, 4, 5, or even 10 years ago. Most of the problems that have been cropping up have been happening for years. But something clicked, and suddenly the narrative changed. There were some stories about problems with Toyotas and sudden acceleration (the LA Times, to its great credit, was working on this story for months before it hit the rest of the national media). The suddenly there were stories about other problems with Toyotas. Then suddenly there were stories about how Toyota has serious structural problems, or how the management team has its share of incompetence and arrogance. All of those things were true for years. But something changed, and now people are willing to listen to those stories. Comedians crack jokes about Toyota, and politicians call them on the carpet. Someday the narrative will change again, and Toyota will have recovered from these episodes, and come out swinging, or they will be back on top again, or something.

The same thing has happened, and will happen, to Obama. His campaign, election, and inauguration were historical, and very hyped. The letdown was inevitable. The narrative has changed, but it will change again, just like it has for Toyota. The Democrats lost two governor's races, in Virginia and New Jersey. But neither of these were surprising, and neither really points to a national trend for or away from Dems. Virginia is a fairly conservative place, and, in New Jersey, the Democrat incumbent, Jon Corzine, was a former chairman of Goldman Sachs, rather substantial baggage right now. Scott Brown won a special election, but my impression is that Martha Coakley didn't run a great campaign, and Democrats took victory for granted.

There's also a specific reason why Toyota's stretch of bad news has implications for Obama. What's bad for Toyota is good for GM, Ford, and Chrysler. GM and Ford will pick up sales from disillusioned Toyota customers.

More importantly, but less substantive, GM, Ford, and Chrysler's reputations will start to recover. For years many people made a clear national distinction among car companies: American car companies were arrogant and incompetent; they couldn't make cars the way the Japanese companies could. There was, of course, an element of truth to that myth - the Big Three made most of their money on their big trucks, while the Japanese made solid, if not very exciting, small cars and sedans.

One detail that got lost in that mythologizing is that each of the Big Three has at least one iconic car in its stable. GM has the Corvette, Ford has the Mustang and the Lincoln Town Car, and Chrysler has Jeep. Each of those has been around for decades, and each has many, many hardcore, devoted followers.

I don't think the Japanese have some genetic predisposition for making better cars; I think the Big Three had each reached the point of being so bureaucratic that they were not very capable of being particularly innovative, while the Japanese companies were still smaller, more nimble, and more entrepreneurial.

Note my use of the word "were" referring to the Japanese. Toyota clearly has some problems with arrogance and failing to acknowledge voices of dissent.

All of this is significant for Obama, because Obama made the decision to save GM and Chrysler, and spent billions of dollars on doing so. People in Detroit had known for years about the problems afflicting GM: too many brands, too many models, too many dealerships. The problem was that no one at GM had the power to solve the problems. Even the chairmen couldn't close the brands they needed to get rid of, or close the excess dealerships. It took the power of the President of the United States to make that happen.

But Obama did it. He saved GM, and he saved - for now, at least - Chrysler. As Toyota's sales fall with its reputation, the reputation of the Big Three will start to improve. GM still has a lot of issues to deal with, and a lot of detritus to purge from its system. It will take some time for it to close down Pontiac and Saturn, and to sell Hummer and Saab. Those old dealerships will eventually be transformed into new buildings, but that will take time, as well.

Once all of those things happen, however, GM will be a leaner machine. Same with Chrysler. They will start once again making good cars that customers want to buy, and they will start making money. And many, many people will be working at them. Most of those people will be Americans.

And Barack Obama will be able to claim that he saved General Motors and Chrysler, and, with them, hundreds of thousands of American jobs. To say nothing of pride in American manufacturing.

And he will have done it with virtually no Republican help, and in the face of strong opposition from Republicans.

Really, really, really not worried about Obama.

GM, Chrysler closing dealerships

GM and Chrysler are closing lots and lots of dealerships, roughly 2,000, all told.

No one is surprised by this. Many people have known for years that GM and Chrysler have too many dealerships. GM has several thousand more dealers than Toyota, but sells roughly the same number of cars.

From a political perspective, what's bizarre about this is that this failure is actually an argument for the conservative principle that excessive government regulation is bad for the economy. In this case, dealers across the country were protected by state and local laws that made it difficult for them to be closed. Dealers obviously wanted to be protected from the vagaries of the market. The free market. So they relied on government regulation to protect them. And yet I somehow don't think that many of them were Democrats.

My guess is that many of these dealerships were profitable for themselves, but not profitable for GM and Chrysler. Let's say you have a dealership that has been around in rural Kentucky for 50 years. The dealership probably owns the land and the building, so there is no mortgage or rent. That saves a large chunk of overhead right there. They probably have a great credit history, so their cost of capital is low. They pay taxes, sponsor Little League teams, and are generally good citizens in the local community. The police department buys their cars from this dealer. The wife of the dealer is on the board of the local hospital. So that dealership has no incentive to close, even if they are not profitable from the perspective of the manufacturers. But they and the local politicians have every incentive to make it difficult for any car manufacturer to close them.

When a parent does too much to protect their child from the unpleasantness of the real world by, for example, buying them expensive toys or paying their rent after they have graduated from college, we say that the child is spoiled.

It's a very harsh thing to say, but these dealers were basically spoiled children. Their parents, GM and Chrysler, were protecting them from the unpleasantness of the real by absorbing their costs, by, for example, taking their unsold cars back.

The great irony is that if everyone involved had let the free market work properly, many of these dealers probably would have gone out of business a long time ago, and others would have either taken up their business or bought them out. The process of winnowing out the unprofitable dealers would have been much slower, but also much less painful. Instead of taking place over years, however, the process is now taking place over months. If dealers had gone out of business when GM and Chrysler were financially healthy, they could have individually negotiated good buyouts from them. GM and Chrysler could have easily handled 50 to 100 or 200 dealers closing over the last 10 or 15 years. At $1million a pop, 200 dealers would be $200 million a year. That's probably what GM spends on laptops in a given year. Or, rather, spent.

But now that Chrysler is in bankruptcy, with GM likely to follow, the dealers may get nothing or very little. Bankruptcy changes the game. Imagine a spoiled child whose parent is suddenly unemployed. The kid's support is cut off, but she is totally unprepared for it, having never had to worry about it before. So she whines and complains and slams her fists. Guess what the Chrysler and GM dealers are doing.

I don't have a lot of sympathy. Yes, it sucks that many people who were responsible, hardworking people will lose their jobs. I have sympathy for them. They've done everything right, and now they are victims of forces beyond their control. But so are all of us.

But I don't have much sympathy for the dealers. They knew the rules of the game: if you open a business, you agree to play by the rules of capitalism. One of those rules is that the better competitor will win.

If this is an example of the conservative idea that excessive regulation is bad for markets, it is also an example of one of the core failings of conservatism. Conservatives argue that the free markets work because individuals are allowed to act according to their own best interests, and they understand what those best interests are better than the government.

What this argument ignores is that in every capitalist transactions, there is both competition and cooperation; the parties both have an interest in common, and an interest in conflict. If I buy a car, the car dealer and I both have an interest in me buying a car. But the dealer has an interest in charging me the highest price possible, while I have an interest in paying the lowest price possible. So each of us has an interest in distorting the rules governing the transaction to fit our needs. The dealer has an interest in blocking competition; this is why we have antitrust laws. I may have an interest in hiding the fact that I have, for example, a bad credit score, or the fact that I just lost my job (speaking hypothetically here).

That's what happened here: the dealers distorted the free market. They acted according to their own best self-interest. But what was in their best self-interest was contrary to the best self-interest of the car manufacturers. The manufacturers didn't object, because they had no reason to suspect that they would have to close down several hundred dealers all at once. They assumed this because they assumed that the free market would work as it is supposed to. Which, ironically, it did. Just not the way conservative theorists think it does.

The final irony is that this is one of the basic organizing principles of liberalism. Markets encourage efficiency, but, left to their own devices, capitalists will distort just about any market. One essential purpose of government is to regulate competition so that the distortions do not ultimately cause the markets to cease functioning properly. In this sense, the government is taking a capitalist role: the government represents the people in the country as a whole acting in the best interests of the country as a whole. There is no other mechanism for all of the people in a particular area, or affected by a particular industry, to act according to their own best interests, except through government.

So conservatives are right: if free markets had been allowed to work perfectly, this would not have happened. But conservatives are the starry-eyed idealists here, who live in their own fantasy land. Liberals are the grounded realists, and, essentially, the better capitalists.

I've said it once, I'll say it again: Irony is 9/10th of the law.

Chrysler declares bankruptcy

Chrysler has declared bankruptcy. Not unexpected, but kind of a bummer. Megan McArdle takes a look at it; she thinks the unions won a Pyrrhic victory, sort of. She thinks that they got a better deal than the hedge funds, which will work out for the unions in the short term, but not in the long term, as it will make it very difficult for Chrysler to raise capital. The logic is that if you have a lot of money to invest, but you run the risk of losing your money to unions, then you don't have much incentive to invest your money, unless you get a really high rate of interest. Good point. I'm not sure how much I agree with it, but I think she has something there.

Dan Neil is not terribly optimistic. He doesn't see a lot of synchronicity between Chrysler, which makes a lot of money - or did make a lot of money - selling big trucks, and Fiat, which makes small, fuel-efficient cars. The one bright spot might be California's greenhouse gas regulations, which would benefit Fiat and, therefore, Chrysler.

Ironically, California's pending waiver request to the U.S. Environmental Protection Agency that would allow the state to regulate greenhouse-gas auto emissions would actually play in the new company's favor.

The state's request would in effect raise fuel efficiency for new cars by 30% by 2016. A dozen other states and the District of Columbia have said they would hew to the new California standards.

If California succeeds in imposing its own auto emissions/fuel economy rules, the Chrysler-Fiat alliance would be well positioned to quickly deliver smaller, more fuel-efficient vehicles to market.

After years of fighting California's clean-air rules, Chrysler may in the end depend on them for its survival.

I have a cousin who does PR for Chrysler in the western United States. He has an interesting job these days.

My thots are that if Chrysler does survive this, it will be in diminished form. One long-standing problem that Chrysler has had is that of finding and retaining top talent. I don't know any of this in detail, and I don't have any facts to back this up - it's pure speculation on my part. There are, I'm sure, lots of great people at Chrysler, like my cousin. But there are far more people at Chrysler who are, I suspect, merely good at their jobs, or maybe even not that good. Anyone who is essential to a car company and who is very good at their job - engineers, car designers, manufacturing experts - has a strong incentive to work for another car company. Traditionally, that would have meant Ford or GM. In the last twenty or thirty years in this country, it has also meant the Japanese companies. If you have skills that are not industry-specific, you have even less incentive to work for Chrysler. If you're a crackerjack software designer, and your options are working for Google or Chrysler, you're going to work for Google. If you have a Harvard MBA in finance, chances are somewhere between slim and none that you are going to choose Chrysler over, say, JPMorgan. The same could very well be true to a lesser extent in dealerships around the country.

Speaking of whom, the LA Times interviewed some Chrysler dealers around LA. These guys are masters of spin, but I am not encouraged by some of their comments. Some of them actually seemed to suggest that bankruptcy was a good thing, because it ends the speculation.

"It's all for the better to get the mysteries and question marks behind us."

I've got news for you, dude: the mysteries and question marks are not behind you. They are in front of you. One question has been answered: will Chrysler declare bankruptcy? Answer: yes. Two far more important questions have not been answered: one, can Chrysler make enough cars that Americans want to buy? and two, will Chrysler emerge from bankruptcy as a stable, flourishing company? Those questions have not been answered, and the first one in particular is going to take a long time to answer. Chrysler did not get into this situation overnight. It will take a long time for Chrysler to convince lots of the American people that it's a good idea to buy a Chrysler. This is particularly unhelpful:

"We've all been zigging and zagging these last few months, but now we're talking about facts," Gray said. "Everybody has a bounce in their step now. It's a good day to be a Chrysler dealer."

No, it's not. Chrysler has a huge, some would say impossible, task ahead of it. It's not just about negotiating between the UAW and hedge funds. It's not about negotiating the minefields in Washington, DC.

It's about regaining the faith of customers. The Big Three having been losing mindshare for at least a couple of decades. Chrysler has made some interesting cars lately - the PT Cruiser, the Viper, the Crossfire. But it has to make beautifully ordinary cars. It has to make cars that fit the average American like a great pair of jeans - utterly comfortable. It has to make them really, really well. And dealers have to provide world-class service on a constant basis and as if their jobs depend on it - because they do.

The one thing the UAW can do to help the process is stop whining. The whole "Buy American" argument is, at this point, an albatross. The idea that Americans should buy American cars puts the interests of the American car worker ahead of the interests of the American car consumer. I should buy a car because a guy in Flint made it? Great, is that guy going to read my blog, just because I'm an American? If I make a movie, is he going to watch it just because I'm an American? No, he's not. He's going to read my blog or watch my movie because he finds my blog interesting or my movie funny. You want me to buy a car because I should be proud to be an American? Fine, then make a car that makes me proud of American cars.

UAW workers get a great deal. They work hard, but they also have the "30 and out" thing going - they can retire after 30 years. Imagine this: a guy starts working for GM in 1930 at the age of 20, and retires at 50 in 1960. He could be alive and well, 49 years later, at the age of 99. He has been retired for almost half his life. Most Americans do not get anywhere nearly that good of a deal from their employers, and they feel no special affinity for people who do. And don't get me started on the jobs bank.

I would like to see Chrysler succeed, but my hope is fading. Many people - several hundred thousand - would suffer if Chrysler went under. But many more people - many, many more people, like tens of millions - wouldn't miss it.