First-time readers, the dialogue in this blog is set in the future (sometime after the year 2020).  Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution.  More about Revenge Revolution and author, Entry #1.  List and general description of entries to date.  Annual assessment if Revolution plausible.

Note: most characters appear in a number of entries, with many entries building on previous conversations.  Profile of characters.  You’ll catch on quickly.  Thanks for your time and interest…and comments.

Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011.  Section starts Entry #235.  (Primer will be available as PDF in another week or so.  Then the primer download will be updated regularly.) 

Gelly: “Jordan, I have a request.  You know I’ve been trying to edit the Primer on Economics and do my regular job.  Well…”

Jordan: “Well, you’re having a tough time, right?”

Gelly: “Yes.  With all the upheaval in Washington and all the calls you’re getting after the Revenge Revolution, finding extra time has been very difficult, ya’ know?”

Jordan: “Look, I understand.  We’ve both been incredibly busy lately.  Why don’t you edit the primer as time permits and we’ll just add it to the primer website page.  By the way, is the primer page on the site?”

Gelly: “Actually, no.  But give me a few more days, OK?”

Jordan: “You’ve got a deal.  Now, please let me read the chapter on why a strong domestic auto industry is important.  That’s near-and-dear to my heart.”

—————– Text of Primer Chapter 8 ——————

(Written originally: June 2009, as the US was mired in a deep recession) In the last few months, a number of ordinary citizens, government officials and media pundits have ranted and raved, asking, “Why should we use government money to bail out Chrysler and General Motors?” The comments continue, “Management at these companies has made bad decisions, UAW wages are too high and no one wants to buy their cars. Besides, Toyota, Honda, Nissan, Hyundai and Mercedes all make vehicles in the United States.”

The question about validity of government bailouts is valid…but the conclusion is not correct. The U.S. needs a healthy domestic auto industry but for reasons that many people may not have considered.

Why write an article defending the domestic auto industry?  I’m writing because a number of people asked me to do so. Once I explained my views on a strong domestic auto industry, most people responded with something similar to, “I never realized how important it is to have strong domestic auto companies.”

What makes me an expert? My comments are based on some fundamental laws of economics and 40+ years in the auto business.  The auto experience includes being inside a large auto company as well as starting several companies offering hybrid-electric or 100%-electric drive systems. I’ve been in technology centers, on factory floors, in boardrooms, in design centers and in dealership showrooms and service bays. I’ve been involved with some good, some bad and some ugly projects.

So why is a successful domestic auto industry so important? Three fundamental reasons: (i) ensuring advanced technology is readily available inside the country to auto and other industries; (ii) stimulating growth in other industries (iii) helping ensure national security.

What makes the auto industry different from most other industries is a combination of large-scale, complex manufacturing and demands for extremely high levels of reliability and durability, especially compared to other products. Everyone I have ever met who entered the auto industry after time in another industry makes the same comment after 2-3 weeks, “The auto business is much more complicated than I realized.” And the comment usually includes several expletives.

The degree of complexity does not mean “outsiders” should not enter the industry. Far from it. But outsiders need to be cautious about ignoring staff who have toiled inside the companies for many years. Institutional knowledge is very valuable and should not be taken lightly. Clean the water and be careful not to throw out the babies. (If you think the comments about complexity do not apply to such companies as Tesla, think again, and read more about how Tesla saved itself from bankruptcy.)    

ENSURING AVAILABILITY OF ADVANCED TECHNOLOGY.  What does the auto industry do that cannot be done by the defense or aircraft industry? The answer is volume. High volume drives down cost and lower cost makes products affordable for many more consumers. While much new technology is developed in defense and aerospace industries, neither industry generates the volume necessary to drive down cost significantly.

Think about the number of military and civilian aircraft built each year. The total number built for the entire year is equal to about one day’s production at one auto plant. And there are more than 20 auto assembly plants in the US. Auto companies produce 15-17,000,000 new cars and trucks in every year, just for the U.S. market.

Thus, for technology to be introduced in cars and trucks – even very expensive vehicles – cost must drop 1 to 2 orders of magnitude, or more than 90%, from cost acceptable for a defense or aerospace application.

Further, parts on cars must function with essentially no maintenance. Think about how little you maintain your car or truck vs. the number of hours you drive. Yes, you may refuel every few days, or every few hours, but how often do you change oil, have a tune-up or overhaul the engine compared to hours driven? Would you fly on a commercial airplane with the same minimal maintenance schedule as you have for your car? Of course not.

Despite the limited maintenance schedule, cars and trucks are expected to operate and last 15-20 years, or more. What other major piece of equipment so widely used in so many different environments lasts that long?

Well, you say, “I still don’t understand why we need to bail out GM and Chrysler. Seems like the government is pouring money down a hole.”  As a point of clarification, when I talk about the auto industry, I mean more than just assembly plants.  The core of the auto industry is primarily component design and manufacturing. The assembly plants get all the glamour but industry guts are in components – electronics, robots, batteries, wheels, frames, tires, steering, foundries for engines and brakes and many other components.

Manufacturing of components creates value.  In addition, knowledge gained in manufacturing can be transferred to other industries. As a country we often overlook the need to remain competitive in producing components. The US does not need to produce all components for all cars assembled in the US. But is does need to maintain the capability of producing a high percentage of each key component.

STIMULATING OTHER INDUSTRIES.  The technology used in autos is directly applicable to many other industries. The demands of the auto industry for lower cost and high reliability force many suppliers to improve their technology and quality processes. A strong domestic auto industry increases the likelihood, although does not ensure, the U.S. is creating, receiving and utilizing the latest technology.

Will foreign auto companies with U.S. assembly plants transfer the latest technology to the U.S.? No, just as the U.S.-companies do not export their latest technology to other countries. If there is any question about countries keeping technology at home first, one should study technology available on cars sold by Toyota and Nissan in Japan compared to technology available in the US. Frequently the technology is not available in the US for 2-3 years after being introduced in Japan.

Further, some technology breakthroughs have a long-lasting impact. An example is the effort by GM in the early 1990’s to develop and introduce an electric vehicle, known as the GM EV1. While GM was praised for introducing the car, and skewered when stopping production, the advances in technology developed for the EV1 program became the foundation for many of the electronics available in cars and trucks today, 20 years after the EV1 concept car was introduced at the Los Angeles auto show.

Yes, GM deserves criticism for canceling the program. But GM deserves praise for advancing automotive electronics, which in turn led to the use of advanced electronics in many non-automotive applications. The strong domestic auto industry creates advancements in technology that benefit the auto industry and all segments of industry and everyday consumers.

Advanced technology applied in non-auto industries keeps US companies competitive worldwide. Exports create jobs. If you think transportation-driven technology is not important to other industries, think about productivity in agriculture, raw materials, manufacturing, distribution and other industries. Most of the productivity gains were greatly influenced by demands first met in the auto industry. Without such productivity, the US output and incomes would fall toward lesser developed nations.

Yes, I know, Silicon Valley is great. But the country needs to translate the ideas to generate wealth for US society. Manufacturing generates wealth, services do not. Knowledge without manufacturing does not create wealth.

NATIONAL SECURITY.  Since foreign-based auto companies do not transfer the latest technology – and why should they – without a strong domestic auto industry, the U.S. will fall behind in technology development for everyday products and manufacturing efficiencies. This in turn will lower potential GDP growth and personal incomes.

More importantly, however, without a higher-volume domestic auto industry to spread cost, will the country be able to afford the cost for developing new technology used primarily for defense and aerospace applications? Probably not unless we raise taxes and lower incomes.

Finally, and let’s hope this never occurs again, but what happens if the U.S. needs manufacturing capacity for a large-scale ground war? A domestic auto industry, both assembly and component manufacturers will be critical for rapid conversion from automotive production to defense materiel. Having only assembly plants without domestically sourced components – engines, transmissions, axles, electronics, and so forth – offers no benefit for national security. (For insight into how the auto industry contributed to production of war materiel in WWII, visit Auto Industry in WWII. One of many websites.)

SMART INVESTMENT.  Taxpayer dollars to ensure a vibrant domestic auto assembly and component manufacturing industry are dollars well spent – a smart investment. What would the hue and cry be from these same critics of the GM and Chrysler bailout if the defense and aerospace industries began outsourcing critical defense weapons systems to such countries as India, China and Japan?

If you still have doubts, name one country worldwide that has sustained growth in GDP and real growth in consumer incomes without a strong manufacturing base built around a strong automobile industry? Call me when you can name one.

Supporting a strong domestic automobile industry is smart economics. Charles E. Wilson was correct, when he said many years ago, “What is good for General Motors is good for the country and vice versa.”