Europe, Japan Must Restructure Too

DETROIT'S AUTOMOTIVE COMMUNITY has gone through a most brutal restructuring over the past three years.

Tens of thousands of jobs have been slashed. Several million units of capacity have been cut. But as bad as that is, it was necessary. Now, Europe and Japan are going to face their day of reckoning.

For the last two decades, auto makers and suppliers have complained about the excess capacity in the global industry. The general rule of thumb is the industry is capable of building 20 million more vehicles than there are customers to buy them.

This is a key reason why so many auto makers and suppliers have been barely scraping along on unacceptable margins. A surfeit of supply drives prices down, which drags down profits with them.

The brutal restructuring in the American market has cleaned up a lot of problems. Not only have the Detroit Three eliminated almost all their excess capacity, they also have gotten rid of the Jobs Bank, slashed union wage rates, pared paid days off and eliminated inefficient work rules.

General Motors, Ford and Chrysler now claim they can be profitable even if the American market only reaches an annual sales rate of 10 million units. If the market hits 13 million or 14 million units, they could really rake in the dough.

Meanwhile, in Europe, none of this happened. Despite the biggest drop in car sales since the Great Depression, not one European assembly plant has closed, leaving the industry to continue shouldering the crippling burden of carrying excessive capacity.

I don't blame the Europeans for not wanting to go through the kind of bloodbath that Detroit has seen. A lot of innocent people have been burned in the process. But the longer the European industry puts off the tough decisions it has to confront, the harder those decisions will become.

The same applies to Japan. Not only does it have excess capacity, but despite being the world's largest vehicle-producing country, not one foreign auto maker builds cars in Japan.

Even a mild bout of protectionism in Japan's key markets will leave the country with a lot of idle plants.

China still is building automotive assembly plants as if its market will grow forever. While there is plenty of growth left, it too is on a trajectory to have more capacity than customers.

China, Japan and Europe seem to believe they can export excess capacity to other markets, especially the U.S.

But if the Detroit Three are able to use restructuring to gain a competitive advantage, they may be able to defend their home market better than they have at any point during the last 40 years.

Indeed, if the dollar continues to weaken against foreign currencies, it wouldn't surprise me to see the U.S. become a strong export base.

The bottom line is that American-style capitalism is as brutal as it gets. But brutality is what it took to undo a half-century of entrenched bad habits and inefficiencies.

If I'm right, and Detroit's auto makers enjoy a sudden and vigorous recovery, there will be enormous pressure on others to swallow the same bitter medicine.

John McElroy is editorial director of Blue Sky Productions and producer of “Autoline” for WTVS-Channel 56, Detroit and “Autoline Daily” the online video newscast.