Nov 22, 2008

On Bailing Out American Automakers

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General Motors CEO Richard Wagoner; Chrysler CEO Robert Nardelli; and Ford CEO Alan Mulally beg for a bailout (photo courtesy Associated Press)

I am no fan of governments wasting hard-earned tax dollars on dubious schemes, and I railed against the $700 billion bank bailout (actually $850 billion after fine print clauses), which I argued was the most blatant episode of corporate welfare in human history. Couple that debacle with the $2 trillion in emergency loans from the Fed to unidentified banking and financial concerns, and it appears that Americans will be on the hook for untold trillions of new debt, monies that will weigh down economic growth for decades.

So I suppose I should fire up my keyboard and scoff at the idea of American auto executives flying on private jets to Washington in search of tens of billions in more government handouts. After all, these are the incompetent corporate leaders - whose lack of vision and seeming inability to produce vehicles that consumers will buy - drove their companies to the brink of bankruptcy, and who might lead the Big Three into complete dissolution.

And yet, I shudder to think of the effects to the American economy should GM, Ford, and Chrysler implode, as millions of workers have direct links to the financial health of American automakers. Moreover, the income and jobs of untold millions more workers indirectly depend on a vigorous auto industry, ranging from waitresses at diners near factories to employees at retail outlets in towns and cities with a heavy automobile industry presence.

Like Toledo, for example.

At least 15 thousand jobs in my community are directly involved in producing vehicles and component parts for American automakers, and perhaps 20 percent of the local economy revolves around this industry. However, the wages and taxes of autoworkers are about all that keeps a city like Toledo afloat, even after three decades of gradual downsizing and outsourcing.

If the American auto industry collapses, you can kiss goodbye the future of cities like Toledo, Dayton, Akron, Detroit, and Flint, which are Rust Belt centers that are already reeling from an over-dependence on auto manufacturing and related industries. Now, those of you in post-industrial power centers like San Jose or Seattle might not lose sleep over the collapse of Midwestern industrial cities, but I do.

Call me selfish, if you like, or call me stubborn for continuing to live in the Rust Belt, but I think that the U.S. auto industry is too important to simply shrug our collective shoulders and allow to wither. Besides, $25 billion pales in comparison with the $2.7 trillion that Congress and the Fed have already committed to "save" financial giants like AIG and JPMorgan-Chase.

Of course, keeping autoworkers and employees in related industries gainfully employed helps prevent declines in consumer demand for big-ticket items like appliances, housing, and electronics. The financial ripple effects of 1-2 million more unemployed auto industry workers would far exceed the the costs of infusing cash to stabilize the Big Three and position the American automakers for success in the coming decades.

Such federal beneficence, however, should come with appropriate conditions, not the least of which could include either a preferred lender status or a substantial preferred stock position. As a taxpayer, I insist that any bailout of the automakers comes with verifiable benchmarks for transitioning to vehicles with higher fuel efficiency and new energy technologies, as the Big Three utterly failed to prepare for global energy challenges, despite over three decades in advance notice.

I still cannot fathom how none of the major American automakers did not have a highly fuel efficient and inexpensive vehicle in a ready-for-retool-and-rollout mode, even after such previous experience as getting pimp-smacked by the Japanese in the 1970s and 1980s in meeting sudden consumer demand for energy efficiency. Heck, Indian automaker Tata Motors figured out how to design and produce a 60 MPG car for $2,300 (admittedly with much cheaper labor costs and lower safety and environmental standards). Why is it that GM, Ford, and Chrysler cannot (or will not) produce similarly inexpensive vehicles with high fuel efficiency?

It seems to me - even with high wage UAW workers and EPA/NHTSA regulations - that an American automaker should be able to produce a car that people can afford to purchase and to drive. In the 1970s and 1980s I owned a few used cars that fit this profile, like a used VW diesel Rabbit that got over 50 MPG in the city, or this rusty 1976 Subaru wagon I bought for $400 that ran for two weeks on $8 (the fuel gauge was broken, but I think I got 40 MPG in this 4-cylinder, 5-speed clunker).

So, I am all for bailing out the Big Three, but we should demand that these companies produce vehicles that meet the needs of American consumers in an world in which rising energy costs will continue to ratchet up pressure to change our ways. To ignore the collapse of American automakers is to sign the death warrant for dozens of American cities.

19 comments:

Middle Aged Woman said...

I am with you 100%, Mike. The one teensy little detail you left out was that the Big Three were very busy producing the big, luxurious SUV's that Americans were demanding. And making truckloads (get it?) of cash doing just that. No problemo, until gas started to climb above 2.50 a gallon. All of a sudden, the consumer didn't want the SUVs anymore. What America NEEDS and what America WANTS are frequently two very different things.

The Big Three needs mobility. As long as it takes 6-12 months to re-tool and manufacture a new vehicle, the auto industry will not survive as it is.

steve said...

One aspect that people are not talking about is the National Security angle. A loss of auto manufacturing capacity in a tangential way = loss of tank / warplane / arms manufacturing capability that would take months to spool back up in, for example, the case of an attack on the 7th fleet by China. China decides to go for broke and invade Taiwan. As part of their plan, just like Japan in WW2, they feel they have to eliminate the US's capability in the pacific. -then war breaks out. The tragedy is, they have all the manufacturing capability now. All those walmart widget factories we built for them, easily convertible to gun factories, go into production for China, churning out tanks night and day. A weakened US, not willing to risk Nuclear war for it's island ally, sues for peace.. sorry Taiwan.

dr-exmedic said...

The big 3 have already failed, it's just a question of what to do with the remains. The airlines are just as important to the American economy but most of the major ones (Southwest excepted) have been in bankruptcy at least once. It's time for the auto manufacturers to do so as well--it's obvious they haven't learned how to compete so far, and a government loan isn't going to encourage them to change that much.

kooz said...

Foreign car companys make cars that look better and last longer. They also market them better.

The big 3 is failing because people like me are sick of paying $25,000 for a new car that is going to fall apart at 70k miles and lose 90% of its value two years after we buy it.

Foreign cars keep their value so much longer. I'm really sick and tired of hearing the UAW workers whining. They made 50k a year to press a freakin button...and now that times are tough...they don't have anything to show for it because they mismanaged their money. They bought boats, motorcycles and overpriced homes...instead of investing and getting an education.

The gravy train couldn't last forever. What other industry can you name that overpaid its unskilled labor...produced mediocre products....and lived to tell about it.

I think America needs to fall on its face....it would be a nice wake up call from our entitlement mentality. If that means the big three go....so be it.

historymike said...

M.A.W.:

Agreed that the Big Three fed (and also reinforced) American desires for gas-guzzling V-8 SUVs and oversized passenger vehicles, which have higher unit profits. The public shares some of the blame for the vehicular excesses of the 199s and early 2000s, though I still struggle understanding how none of the American automakers had any contingency plans to roll out highly efficient vehicles in the event of inevitable petroleum price increases.

historymike said...

Steve:

Good point about natonal defense: US automakers were an integral part of the "Arsenal of Democracy" that helped win the Second World War.

Also, despite the "don't worry, be happy" sentiments of proponents of a post-industrial America, I still wonder how a country that no longer produces anything can compete in the global marketplace. Can a nation of policy wonks, technicians, and IT systems specialists really represent productive labor? What will happen when 90 percent of Americans "work" simply by exchanging information over laptops?

historymike said...

Dr. Ex-Medic:

One interesting possibility that you recognize is that the productive capacity of the Big Three represents value to other corporations, even other auto manufacturers. In the long term, it might be better for a Honda or a Toyota to buy up plants or entire brands than for the American taxpayer to subsidize mediocrity.

Yet I'm also concerned about the symbolic loss of these American industrial bastions, and how the American psyche will be affected by the "death" of American industry. What would it say about us if we allow the disappearance of vital industries in the name of free markets, while other nations step up to the plate to defend their own industrial base?

historymike said...

Kooz:

1. True, American automotive quality and products are inferior to many "foreign" competitors (I'm setting aside the effects of globalization, in which a Honda might be more "domestic" than some Chrysler, GM, or Ford products).

2. Yes, some UAW members are indeed highly paid, but I think your perception is skewed: instead of knocking the few American industrial workers who actually make a decent wage, you might consider the "race to the bottom" that most of the rest of working America is running. At the current rate of outsourcing, downsizing, and union-busting, most American workers will probably be making the equivalent of $10 an hour in another 10-20 years.

3. While there is something to be said about your theory of American entitlement, I'm not convinced that a country can survive without a significant domestic industrial base, and I question whether the U.S. could maintain its position as the largest world economy if we evolved into a nation of little more than 7-Eleven clerks, insurance agents, and revenue-seeking bloggers.

microdot said...

I agree with ex medic that the disaster is not immenent, it is here and has been occurring.
The biggest problem with a bail out of the auto industry is the magnified reality of what we have seen with the banking business....
A lack of over sight.
The interfacing of goverment agencies and the hide bound steel clad resistance of the executives of the industry to change will gaurantee that the bail out will cost more and produce less results unless the rules are radically changed!

The Execs and the knee jerk followers are using this as an excuse to scape goat the unions. That's exactly what it is scapegoating! The starting wage now for a UAW worker and a worker at a foriegn owned USA Auto maker is now the same. They can expect the same benifits in the long run. The Unions have made concession after concession to the auto makers.
The bottom line is, with out the unions to demand decent wages and benifits, the Corporations, as they have proven in the past, would show that they cannot be trusted to be bouind by any innate morality.
We need the Unions. The Unions helped to create the vast middle class of industrial America and with out a great middle class, who could afford to buy the products that Detroit hopes to continue pumping out?

Right, the rising middle class in China...uh huh!

Anonymous said...

From Engineer of Knowledg
Hello History Mike,
What a timely posting. I saw a political ad just the other day showing a working class man in the office of his boss being told that he would love to give him more money because he did his job so well but because the company had a union he had to pay the working class man the same as everyone else. The ad then went on to tell people to call their Congressman to vote on the Free Work Bill that in essence is nothing more that union busting.

Needless to say my “Crap-O-Meter” alarm was going off loud and clear. The power of corporations paying someone a living wage with benefits all came from solidarity collective bargaining. If they can union bust by making some poor worker think that if he dumps the union, that the employer will recognize his talents and pay him more. What a load of crap!

I was traveling to Thurmont, MD to do some onsite consulting work and I was listening to talk radio. A woman caller was talking about how no auto worker was worth $40.00 an hour and that it was the union’s fault that the American auto industry could not compete. Much to the credit to the radio host, he brought up that the CEO of GM paid himself $3.5 million and the CEO of Ford paid himself $9.4 million in annual compensation and bounces. All the while both companies were loosing billions of dollars every year for the last few years.

When the CEO’s of the big three auto companies went to Washington, DC to ask for bailout money, only Chrysler CEO was willing to work for $1.00 for the next year, just like Lee Iacocca did in the early 1990’s. The others wanted to keep their over blown and unjustified salaries hoping the government could keep it coming with the $25 billion bailout.

Dr. W. Edwards Deming, who is the father of Japan’s industrial revolution, said that 95% plus of any companies problems all started at the top of management.

To get back to the misinformed woman caller wanting to blame unionized autoworkers, which by the way now has an average salary of $14.00 per hour through out the whole industry and not $40.00 per hour, needs to educate herself to the teachings of Dr. Deming. You take a good knowledgeable person with an education of Industrial Electricity and can repair the computers that control the assembly robots that weld and paint the cars on the assembly line, are worth the $40.00 per hour to keep the production up and running. The loss to the company should these robotics go down would be much more costly.

I hope people are not stupid enough to fall for this crap but I am also sure the mindless Sarah Palin type supporters are on the phone right now destroying what little quality of life they have right now because they do not have the education to recognize how this Bill is going to harm them in the long run.

Mad Jack said...

Let 'em sink.

Years ago when the government bailed Chrysler out, Lee Iacocca arranged that the US government guarantee loans to Chrysler by going to the government with his hat in one hand and a plan in the other. More recently GM executives flew to Washington DC on an opulent private jet. It's clear that what these executives lack in planning they more than make up for in hubris.

microdot said...

I have to admit, this has me rereading Ioccoca's last book, Where Have All The Leaders Gone?

Anonymous said...

It is unfortunate that we must be subjected to Mad Jack and his gun-toting (shoot-first, think later) diatribes...especially when they derive from the rustbelt region that contributed to our national misery. Like many who would like to cut and run...or drive those foreign death traps like Mike...it is too easy to dispatch our auto industry and pray that we will eventually be able to finance the latest models that China will produce so that we can purchase them from Walmark's nonunion and underpaid labor.

Yes, Detroit must stop producing gas-guzzlers that no one (except hunters and macho-men ) wishes to buy, but we must assist an industry that produces a real product by real people rather than a financial market that produces nothing but a paper trail of debts.

Mad Jack said...

Look! It's the rare yellow bellied gadfly!

Anonymous said...

How puerile that Mad Jack must resort to a name-calling campaign rather than respond to a serious national debate. Holy Toledo!

microdot said...

Anonymous, but what have you got to actually say here?
other than the time release bile capsules you keep producing....
You say in a vague fashion what others in this discussion have said far more eloquently.
I think his his comment on the arrogance of the management of the Big Three is a sentiment shared by everyone.
Do you think that this is a prime opportunity to take out the unions?
I have trouble discerning the vague message you are smoke signalling to us from your lofty mountain top...

Either you need more twigs, or your blanket is wet.

Anonymous said...

Perhaps some of you like the Microdot are suffering from logorrhea as well as lacking a civil tongue. If you think that my comments were directed at labor than you either require an optometrist or a lesson in logic.
What is required in the present circumstance, in plain words, is a simple meeting of minds on handling a financial crisis that has serious human implications. Sorry but the blame game even for the "bad guys" at the top will not solve any problems for rustbelt ruffians with guns in hand. If you persist in your attacks on those of us who seek cooperation rather than confrontation, you will soon find that indeed, the vultures have come home to roost."

microdot said...

Well, if that's what you intended to say, then I agree with you.
Careful with that logorrhea thingie, I hear it's quite contagious.

Anonymous said...

The problem is that too much of what was made in better times have all been pocketed by their respective CEOs. I recalled a trip that the 3 CEOs took, quite a few years ago, to Japan. The purpose of the trip was to tell the Japanese CEOs that there cars are under cutting or under pricing their american counterparts automobiles. Allot publicity was made about how they were going to correct this issue with the Japanese, before they left. Nothing was heard of after their return. Then news was out about their return and what was accomplished. It appears that the Japanese CEOs stated why their cars were cheaper was because their CEOs did not hoard the companys profits into their pockets. Allot of what was made was re-invested into the company. I guess the big 3 could not possibly take that suggestion from the Japanese. That's the mess the big 3 are in now? duh?? The big 3 are making fun at all of us. To say they will only get pay 1 dollar for the year is a farse! With that $1 pay plus what excutive compensation do they get?? Free medical,free car and the servicing of such cars, free mortage payments from their companys for their multi-million dollar homes. Free security for such homes. Well hell, if all my expenses were pay by my company, I'll take the dollar a year pay raise!! Everything the average working man does not have after a life time of employment to the same company! The only one to gain from the bail out are the CEOs which will fill their golden parachutes before closing the doors behind them. I'm sure they have highly compensated accountants that can suffle the bail out funds, once they get their hands on it. Then everyone will be standing around asking "where did it all go". Greed, we all practice it. But we do it with our own money. The big 3 will be doing it with my tax dollars and in sums too great for many of us to every see.