This I Believe

Balkrishna - Bangalore, India
Entered on October 3, 2006

Rational Exuberance and Revival of the U.S. Automotive Industry—Part II

The first step of the exuberance endeavor involves raising a staggering amount of seed money for under-writing pension and health-care costs. The U.S. government should consider squeezing capital out of disparate sources to realize this huge sum. An obvious source to start with is the tax revenue collected by the government. The overwhelming foreign investments flowing into U.S. debt securities could also qualify for this purpose. Trading commodities and technology with hungry emerging economies could also offer a portion of the seed money. The U.S. private sector could be enlisted for help with entreaties to oil and aerospace companies for generously funneling some of their high profits to this noble cause. Philanthropic organizations led by industrial tycoons could be beseeched to contribute generously for this cause. A source already existing would be the stock of capital invested in Social Security Trust Funds for the present manufacturing workforce. Of course, the government would have to stand guaranty for such a risky proposition. Any attempt at raising the seed money would require the U.S. government to redeem locked sources of useful capital. The sources outlined in this editorial are just some of the myriad alternatives to save a critical sector in poor health. A thorough analysis of all the sources is beyond the scope of this article.

The debt so incurred could be honored at a suitable period in time by taxing the companies and workforce of a then thriving manufacturing sector. A value-added-tax (VAT) could be levied on finished products wherein a small tax could be added at those stages of fabrication where manufacturing processes are employed. However the best redemption plan would be a new manufacturing sector armed with innovative techniques, products and quality-consciousness to reap rich rewards for the U.S. economy by exporting its wares to the rest of the world. In any case, after procuring the stock of seed capital, and redeeming the necessary debts, a federal body should be empowered to maintain this capital through prudent investment strategies.

The second stage of the exuberance endeavor involves funneling the seed money through traditional government organizations such as the Pension Benefit Guaranty Corporation (PBGC) that posses the wherewithal to dispense money to companies comprising the manufacturing sector.

The automotive and aerospace divisions have been two of the major representatives of the U.S. manufacturing sector with the latter being well-heeled. The automotive bloc has accounted for about 1.6 % of the total U.S. GDP in 2003. Therefore from an economic viewpoint it stands to gain from a revamp. For its revival, the advent of rational exuberance should be followed by the U.S. automotive division infusing “quality”, in addition to innovation, into its cherry-picked brands. Improving the quality of a few selected automotive brands will make this division competitive and, maybe, even supplant the products coming from their foreign counterparts. The case for fewer brands is corroborated by the sweeping success of the Japanese carmaker Toyota which has 4 brands as opposed to about 5 and 8 by General Motors and Ford respectively. This notwithstanding the monetary exchange-rate that has been benefiting the Japanese car makers. With the looming energy crisis, quality will become a significant issue affecting fuel efficiency. Moreover, innovative technologies such as alternative fuel systems will be dependent on quality for these products to compete head-on with their foreign counterparts. This is because high quality automotive vehicles using standard or innovative technologies will consume lesser fuel and require lesser maintenance. Innovation without quality will result in novel U.S. technologies being put to extremely good use in the hands of a foreign competitor who has a workforce that believes in quality. In this regard, as mentioned previously, U.S. automotive companies will have to encourage their tacit workforce and develop training programs for the lower-skilled ones. But the entire workforce will have to be encouraged in being quality-conscious. The latest wave of car models churned out by the American big three have excelled in their aesthetics of appearance. It should be easier to cherry-pick a limited number of these brands that have been well received by customers and continue working on them with innovation- and quality-based efforts to fortify their market share. In such a scenario, a U.S. automotive company’s limited brands, with some using innovative alternative fuel technologies, would work so well that both domestic and foreign customers would help them gain top rankings in terms of global production and operating margins. A flourishing automotive division will in turn spawn innovative business opportunities for automotive parts makers such as Delphi. The combination of government’s-rational-exuberance, innovation (new fuel systems and other novel technologies), fewer brands and quality can aid in the timely revival of the U.S. auto industry to capitalize on the demand foreseen both in the U.S. and in emerging economies such as China and India.