What will become of American Automakers?
On Monday, the U.S. Senate will take up a bill to extend $25 billion in emergency loans to the auto industry.
The numbers are grim. In the most recent quarter, General Motors lost $6.9 billion dollars, which is over $3 million an hour. Compared to GM, Ford's loss for the quarter was "only" $3 billion. GM sales are down almost 50 percent from a year ago, their U.S. market share is down to 22 percent (from over 40 percent in the 80's), and its stock is trading at a lower price today than it did in 1946. CEO Rick Wagoner warns that GM will run out of cash in early 2009 if something drastic doesn't happen soon.
What to do? One group, including NY Times columnist David Brooks, argues that the government should let them fail. As one Republican senator put it, "I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes." But with the economy likely in recession, as many as three million lost jobs is not easy to stomach for even the most dedicated free marketeer.
Many opinion makers identify the automakers' biggest problem as being expensive union contracts and pension liabilities. These are what makes it impossible for Detroit to make a profit building high-quality small cars — the sector with the most resilient sales.
Honda, Toyota, and Nissan all build small cars in North America profitably, but they run non-union factories. So while the employees in those factories are paid wages competitive with Detroit run plants, they have medical plans that are much more austere (think higher co-pays) than those provided to United Auto Workers members and 401K retirement plans rather than more expensive guaranteed-benefit pensions.
If that diagnosis is correct, then an important question is this: Will the Democrats who control Congress or the new Obama administration, whose political campaigns received significant financing from labor unions, have the courage to stand up to the UAW and ask them to renegotiate their contracts with the Detroit Three?
Only one thing seems certain right now: This is a story worth paying careful attention to the next few months, not only for its immediate relevance to the U.S. economy, but also for its potential to affect global trade and labor relations both domestically and abroad for years to come.
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Bailout of The Big Three
Dean Baker, an economist and co-director of the Center for Economic and Policy Research, brings up an important point when discussing the possible bailout of the U.S. auto industry in his blog, Beat the Press:
US Automakers: A Lot to Learn
As mentioned, Northern states, such as Michigan and Ohio, would face the burdens of lost tax revenue and increased unemployment should the Big Three fail.
Interestingly, Southern states, such as Alabama, give incentives to foreign auto manufacturers. Alabama, for example, is home to manufacturers such as Toyota Motor Corp., Honda Motor Co., Hyundai Motor Co. and Daimler AG's Mercedes-Benz.
The argument about the tax double standard is at the crux of the matter: how much and in what way should both the state and the corporation benefit from business, what are the long-term priorities for both, and what is the bottom line. Still, it is certainly not taxes that have created this crisis. Lower wages and a lack of unionization for foreign automakers are indicative of their lean and mean competitive advantage.
Not surprisingly, the face of the Big Three's opposition is that of Sen. Shelby of Alabama. He proposes his model of a corporation-state government relationship for success. Naftali Bendavid (December 12, 2008), of The Wall Street Journal reports:
"Foreign auto makers have favored the South in part because of its nonunion, low-wage tradition, and these senators argue that if the Big Three's labor relations more closely resembled those of the Southern plants, they wouldn't be in such trouble.
Mr. Shelby held a news conference Wednesday to call the $14 billion plan a "travesty." It was just a "down payment" on what would probably become billions more in taxpayer-funded aid, he predicted, and without major restructuring, the Big Three would fail anyway.
Mr. Shelby denied that the collapse of the U.S. auto industry would help the foreign-owned plants in his state. 'No, no, no -- failure is never a good thing for anybody," he insisted, adding, 'If I had five GM or Ford plants in my state, I would oppose this bailout.'
United Auto Workers President Ron Gettelfinger recently suggested a double standard in opposition to federal assistance for domestic auto makers while foreign manufacturers reap benefits from state subsidies. 'It just seems odd to us that we can help the financial institutions in this country and that we can offer incentives to our competitors to come here and compete against us but at the same time, we are willing to walk away from an industry that is the backbone of our economy,' Mr. Gettelfinger said during a late-November news conference. He said states have given foreign auto makers more than $3 billion in incentives since 1992 and singled out Mr. Shelby's home state of Alabama as a major benefactor."
Given the opportunity to restructure, the US automakers could be inclined to adopt labor practices similar to their competitors. Whether governments, unions and laborers will follow suit is yet to be seen.
Auto Bailout: Only After Restructuring
GM is hemorrhaging money. Even with their share of an emergency bailout, it is unlikely that the company will be able to stay out of the red for more than a couple of months. Bankruptcy, in one shape or form, seems given. That being said, it would be highly irresponsible for the White House to use part of TARP, the $700 billion financial rescue package, to fund the last throes of a dying industry that was not a part of the original plan. Before any money is doled out, Washington must devise a prearranged bankruptcy contingency plan for the Big Three.
Bankruptcy will not be the end of these companies (except perhaps Chrysler, who has already been down this road before). Their brands are as much a part of the American experience as are baseball and Fourth of July fireworks. In order to continue as respected businesses, however, there will have to be many concessions made. First, the government must ensure outstanding warranties for customers. One can not fault the Jones' for the errors of Rick Wagoner and company.
Second, it must be mandated that 100% of the vehicles produced by these three companies be powered by an alternative to petroleum-based power after a five year grace period. The interim period will allow for a smooth transition. The companies will have a revenue stream while having an ample, but set amount of time in which to do research into new technologies.
Third, union members must make some concessions. Waiting two years to accept pay cuts is unacceptable. Ron Gettelfinger, president of the UAW, must convince his members that it is in their best interest to accept a lower wage, more in line with workers at Toyota, et al. Losing two dollars an hour in pay right now is much better than losing a job and having few prospects.
Fourth, for every $1 billion given to these companies, twice the amount of money must be invested into American auto companies that are already focused on alternative fuel technologies. These innovators, much like Shai Agassi's Better Place, must be rewarded for their forward thinking green ideas.
Compromise is a hard word to swallow for those whose hubris has guided them blindly for years. GM, Ford, Chrysler and the UAW must bite the ever distant bullet, recognize their fate and start over.
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