Big Three Automakers' Cars Continue to Lag in Resale Value

A smart businessperson will tell you the route to financial catastrophe is to produce low-quality products at inflated costs.  The blogosphere is dotted with posts detailing the high labor costs of the Big 3 automakers (see this Mark Perry post in which he details the excessive pay of Detroit autoworkers relative to those of Toytota).  And yesterday's Wall Street Journal had this article detailing one facet of their cars:  their low resale value relative to their competitors.

Kelley Blue Book, a well-known vehicle appraiser, plans to announce Wednesday its annual ranking of the top 10 brands for projected resale value -- and not a single one will be American. Kelley, which ran its calculations before the big car makers began pushing for government financial help, defines resale value as the amount of a vehicle's sticker price that is retained after five years of ownership. The typical Chrysler car, for example, is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The U.S. industry's poor showing bodes poorly for its ability to win back consumers to American brands after years of slipping market share. Resale value, also known as residual value, is a factor consumers consider closely when buying or leasing a new car. Because monthly lease payments cover the difference between a vehicle's sticker price and its expected value at the end of the lease, cars that hold their value better have lower lease payments.

The first letter to the editor here is instructive about how the policies of automakers and the work rules obtained by their union has led to the crisis they now face.

David Yermack makes a solid, albeit academic, argument against furnishing Detroit with funds with which to continue its foolish ways ("Essay: Just Say No to Detroit," Weekend Journal, Nov. 15). However, as a guy who has made his living selling Fords for over 30 years, I disagree with his conclusion.

We're all loath to reward bad behavior, and Detroit has a long history of it, including making lots of money and doing dumb things with it: bringing out products nobody wants and then paying customers inordinate amounts of rebate money until they buy them; and building vehicles far in excess of current demand simply because it's cheaper to incentivize the vehicles' sales than idle a plant. That behavior alone results in a cheapening and erosion of brand and resale value, two very serious consequences that we deal with on a daily basis as dealers.

This perverse behavior is a result of letting the manufacturing tail wag the marketing dog. Toyota, Honda and other foreign competitors appreciate that the tail-dog analogy needs to be the other way around. They build what people want to buy, regardless of whether it's convenient or cheap to do so. The arcane, uncompetitive and stifling work rules that have evolved in the organized plants that Ford, Chrysler and GM operate have caused that disconnect. They need incredibly long production runs of any product for it to be profitable. Their costs to produce are so high and so fixed that most "new" vehicles are almost always variants of old ones. Nimble they are not, nor can they be, under those conditions.

Mr. Yermack is correct that we taxpayers are throwing money away by rewarding this bad behavior. But were the government to do what generations of auto executives have not and find a way to bring the unionized production of vehicles into a competitive position with nonunion plants in the U.S., then the bad behavior would abruptly end, and literally millions of jobs would be saved, including mine and those of my 100 employees.

Jim Graham
Rancho Santa Margarita, Calif.

If the Big 3 are to become competitive, they must provide better value for their customers by providing a quality product at a competitive price.  A bailout would do no good because it doesn't improve the incentive to be competitive.  In fact, it may diminish it by sending a signal that future bailouts will be forthcoming.

In addition, the government can tear down restrictions on foreign auto trade, such as reducing tariffs and eliminating quotas, to encourage more competition in the US market for automobiles.  If the Big 3 can't compete, then they need to fail and they, and their "resources" need to move to alternative industries.  Bailing them out and shielding them from foreign competition simply encourages the same behavior that got them in trouble in the first place.