An interesting year for Detroit

2007 will be an interesting year for the "big three" U.S. auto companies, and thus for Michigan. In 2006 and the first few months of this year:

• GM fought off an attempted take over by Nissan, but only because they are the strongest of the three and improving
• Ford finally fired it's useless namesake CEO
• Daimler has given up on Chrysler and walked away from its $35 billion investment, even paying an extra half-billion to be rid of it!
  

Also, in 2006, all three companies had large lay-off programs.

The essential problem of the U.S. automobile industry has been the evasion of reality in the past. Unionization is primarily responsible for the problems. Of course, management has been less than stellar, but management's major mistakes of the past have been to go along with union demands -- taking the easy (and short-term) way out.

When the Japanese auto companies came to the U.S. they ought to have been moving some large parts of their operations into the Detroit area, for the same reason software companies locate in Silicon Valley. They also ought to have been buying up some U.S. auto-firms. This was politically impossible for a single reason: unions. Those who live in the Detroit area would have seen Union halls with "no foreign cars" signs in their parking lots. Well, the chickens have come home to roost!

While the U.S. auto industry is at rock bottom, all is not lost. They could go under, but there is also a large likelihood that 2007 will be the turning point. The most important change is that auto-workers, down to the rank and file, now understand that evasion cannot go on much longer.... and 2007 is the year when the new union contract is negotiated.

One big liability weighing on the U.S. auto companies is their retiree health-care costs. They're huge, but that's not the worst of it: they're also unpredictable and growing as the cost of health care continues to outpace others costs in the U.S. So, 2007 may be the year that the U.S. auto industry finally fixes this problem. The most likely solution is actually very simple in its elegance: let the union run the system.

Imagine how tempting it is to a union boss to say he gets to run a multi-billion health-care fund. In a sense, the workers would be lambs being delivered to their union bosses, but their trust in the union system is what got them here in the first place, so I would cheer for this approach. The automakers will set up a health-care fund that caps their liability, and the union will run it. This has been tried at Goodyear.

If the 2007 union contract can cap the health-care liabilities, and also close loss-making plants and cut superfluous labor, the automakers may have seen bottom. This would have been too much to expect even 5 years ago, but the mood among workers appears ready for it now.

So, I'm optimistic that it's up from here, and that in 2010, Michigan will no longer be near the bottom of the states in economic metrics.