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Fisher Investments Analyst’s Book Review: Overhaul and Crash Course

November 26, 2010 Leave a comment

Crash Course: The American Automobile Industry’s Road from Glory to Disaster by Paul Ingrassia

Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry by Steven Rattner

Well, Halloween passed, and I couldn’t let it go without doing some reading of the macabre variety. So I read about the history of US autos. There’s enough zombies, witches, and Frankensteins (The Ford Expedition! It’s alllliiiivee!!!) in there to keep you from sleeping for a week.

Of particular, gory interest is the way US autos came to be politicized and unionized through a decades-long decline. It’s not atypical for big industries, closely thought of as national assets to become so. Pundits hemmed and hawed over this in the US the last few years, but on the global scene nationalization and “protection” of jobs via big companies is about as old as the corporation itself. Still, the plight of the US auto industry is truly a unique tale. Make no mistake—these companies should have been bankrupted, totally refashioned, de-pensioned and de-unionized, and generally revamped years ago, and would be far more competitive today if they had. We’re not talking 3 years ago, we’re talking 25 or 30. The ironic part is that while politicization surely contributed to the inexorable decline of US autos—awkwardly and lumberingly and often bizarrely—it also helped these undead zombies stave off true death for a very long time.

The US automakers—between CAFE laws and scores of costs heaped on by the United Auto Workers (UAW)—just don’t have a fighting chance and haven’t for a long time. Foreign automakers totally missed the SUV craze of the ‘90s, and Toyota dealt with braking system fiascos in the last couple years—a misstep means lower earnings for them, not doom. These days, a bad product offering or an economic downturn means utter catastrophe for GM. So when you hear auto execs and politicians saying they need tariffs or better negotiations to buy parts to remain competitive, or when they whine it was the recession and financial crisis that caused their ruin…don’t believe any of it. US automakers’ cost per car manufactured is higher than basically anywhere else because of politicization and the costs of unionization. Toyota makes a lot of cars here too—they just don’t have the same UAW-related costs GM does.

All of this is starkly apparent in Paul Ingrassia’s Crash Course. The book’s bulk centers mostly on the last 10 years and emphasizes the bailouts, but the first few chapters are a sort of “CliffsNotes” to US auto manufacturing history—tightly written and often entertaining. This concise history provides a necessary framework for understanding the bailout. Crash Course argues the seeds of US auto death were planted decades ago and calls the “corporate oligopoly and union monopoly” of US autos a “recipe for disaster.” Indeed. Ingrassia adeptly recreates the feeling that so many still hold: the very fabric of the US economy is tied to GM, Chrysler, and Ford. That view hails from when the US economy was less diverse and manufacturing still king. These days autos aren’t all—not even close—but our attachment to the auto legacy drives them to be heavily politicized.

Crash Course is filled with fun details. To read about Robert McNamara’s start at Ford before he got to the Pentagon, the Corvair debacle and the rise of Ralph Nader as a political persona, important industrial innovations like the catalytic converter, the machismo and hubris of Lee Iacocca—these and many other tidbits we all know but don’t frequently remember are vital to understanding the state of automakers today.

By contrast, Steven Rattner’s Overhaul skips those details and speaks directly to the transactions and politics of the 2009 auto bailouts. Put the two books together, and it’s a ripping good (but often harrowing) tale.

Malcolm Gladwell recently reviewed Overhaul in the New Yorker. He points out that Rattner, the “Car Czar” of the Obama administration, is two things: A finance guy (a dealmaker) and a political wannabe. A third thing: As the Car Czar, he was the Van Helsing to GM’s Dracula. But those two facts explain a lot about Overhaul. As accounts of financial deals go, Overhaul is adequate. But it’s a very “safe” book. It reads like a political memoir of someone who expects to hold office again. To Rattner, Larry Summers and Tim Geithner are really nice guys, Obama is nothing but brilliant and courageous, and no one is much of a bad guy except Rick Wagoner—the former GM CEO whom Rattner deposed and the safest guy to trash. Maybe it’s all true, but don’t we read these “insider” accounts to get insight on how these folks really operate and speak? It’s too much to believe they’re all angels.

Those who’ve written professionally know that editors can sometimes give odd instructions to gussy up the prose (finance writing isn’t generally as exciting as romance novels). One envisions Mr. Rattner’s editor asking for more gritty details folks will relate to. Rattner seems to have complied by recounting the things he and his colleagues ate. Every couple pages we’re told about McDonald’s sandwiches that were scarfed or breakfast burritos consumed in the wee hours. But otherwise, personal detail is scarce. That’s probably because Mr. Rattner published this book in the midst of a personal legal battle, so he sticks to the facts.

All this no doubt defangs the book some, but doesn’t fully nullify it. Big Macs aside, Rattner describes complex capital structures, negotiations with unions and bondholders, and the process of finding a new CEO for GM precisely but in terms non-finance wonks will understand. It’s striking, in fact, how similar Rattner and Ingrassia’s adjectives describing the nonchalance and arrogance of GM management are.

Chrysler is now basically owned by Fiat and the unions, a revamped GM will go public soon, and Ford managed to survive and seems to be okay. A frightful tale. Autos have done pretty well in 2010—at least they’re on the mend—but I’d wager trouble’s in their future again. Maybe the next recession, maybe not. But sometime. Defined benefit pension plans and powerfully influential unions rank among the most ambitious social experiments of the 20th century, but they’re still far overwrought today. Unless US autos can reform those parts, they’ll rank among the undead again.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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