Comment & Debate
The automotive industry crisis of 2008 is a financial crisis facing primarily the United States automobile manufacturing industry as of November 2008. Other automobile manufactuers, particularly those in Europe are also suffering from the crisis. The Big Three U.S. manufacturers, (General Motors, Ford and Chrysler), have indicated that unless additional funding can be obtained over the short to medium term, there is a real danger of one or more companies declaring bankruptcy. Significant debate surrounds whether the US government should “bail out” the US automotive industry. The controversy surrounds a number of critical questions. Is bailing out the US automotive industry sound on principle? Do the automakers “deserve” a bailout or are they “undeserving” of one? Are the automotive producers responsible for their own demise, or were there outside factors such as the failure of the economy and high oil prices? Is there a moral hazard in bailing out the auto industry? Does it teach the wrong lessons, possibly rewarding mismanagement and discouraging sound management? Does it unfairly disadvantage the competition? Can a bailout help revive the collapsing US automotive industry, or is the fate of this industry already determined, making it a waste of money? Will a bailout cause the automotive companies to avoid reforming? Is the failure of the US automotive companies unacceptable? Will it jeopardize a much broader financial collapse? Or is chapter 11 bankruptcy exactly what the US automotive companies need to regroup, reform, and get back on their feet? Will bankruptcy deter consumers from buying their cars? Are low-interest government loans to the auto companies a good idea? What about nationalization? In general, is it a good idea to bailout the US automobile companies?
“The ideological hard-liners have now cast their collectively jaundiced eye on Detroit’s automakers. Their response to the very real danger that General Motors might crumble into bankruptcy is: C’est la vie […] But in the current environment, allowing one or more of the Big Three to go bankrupt would be like offering up your nose to Sweeney Todd to spite your face […] It’s not just General Motors or Chrysler or Ford. The U.S. auto industry is the cornerstone of American manufacturing. It supports millions of jobs, directly or indirectly, in a vast array of businesses.”
“The frustrating part about auto executives’ presumptuous attitude toward a taxpayer bailout is that they are probably right — they are too big to fail[…]here’s the problem: a collapse of the domestic auto industry will cost the public much more than a short-term bailout.”
“why, many people are asking, must the American taxpayer once again pay to subsidize companies that just couldn’t compete?[…] Should Congress fail to act decisively and support the auto industry in its time of need, whole towns in the Midwest will become ghost towns. A great swath of the United States will be left with little to no means of supporting itself. Henry Ford helped shape modern American industry and, until now, many families are still reaping the benefits of the that vision […] We in Northwest Connecticut know well what happens when industry shuts down. Cities and towns like Torrington and Winsted struggle to grow decades after a mass job loss, and the questions of how to revive local economies is still on the forefront of the agendas […] Torrington, using its redevelopment plan, is trying to reinvent its downtown. But how can literally half the Midwest reinvent itself? How could all of those jobs be replaced? […] They could never be replaced, and so they must be guaranteed by taxpayer dollars, however hard that might be.”
“It has happened repeatedly in the last several weeks — well-paid, well-known journalists questioning the wisdom of ‘bailing out Detroit,’ of helping an industry whose union-represented workers have substantially better wages and benefits than other manual or skilled laborers, or, more precisely, who are better compensated than their nonunion counterparts working at foreign-owned rival companies building cars and trucks in the United States.[…] Might I suggest class bias?”
“Prices? When the home team goes down, watch those foreigners push up their car prices. It’s just what they are waiting for.”
By sustaining the automakers, a bailout will sustain government revenues from the automakers. In this sense, a bailout is a government, budgetary, and taxpayer investment in future tax revenues from the companies.
“Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity […] But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.”
“When the current economic crisis passes – and it will as all other crises have in the past – Americans will still want cars, trucks, and maybe SUVs to drive. But that does not mean that the suppliers have to be American automobile manufacturers. The whole purpose of open, competitive markets is to find out who can “deliver the goods” better and cheaper, and to take advantage of the resulting cost savings and improved qualities of what is being offered.”
By showing heavy favoritism for domestic auto suppliers, the US would cause other foreign governments to become increasingly protectionist, damaging free trade and the broader global environment for foreign direct investment.
“America runs the risk of creating the kind of “political-risk premium” that investors have long placed on other countries — and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.”
“Aside from the cost to taxpayers, a government safety net for companies discourages prudent management. It also potentially puts rivals at a disadvantage, making markets less efficient and ultimately hurting consumers.” That doesn’t mean policy makers should never, ever, step in. But the test should be whether the alternative is disastrous enough to justify intervention.”
The bailout of the auto industry merely transfers wealth from taxpayers to auto companies and their employees. In a free marketplace, this is not a good precedent to set.
“It’s easy to demonize the American auto industry. It has behaved with the foresight of a crack addict for years. But even when people set their own houses on fire, we still dial 9-1-1, hoping to save lives, salvage what we can and protect the rest of the neighborhood.”
US automakers Ford, GM, and Chrysler are all fundamentally productive companies, despite having some poor management and strategic planning in recent years. To leave these companies to die, therefore, would be very wasteful of their productive capacity, as well as their potential to thrive again in the future.
“They’ve got good stuff coming — if they live to bring it out. The Chevy Cruze, a compact that will get 40+ mpg on the highway with a regular gasoline engine, the Volt, the Camaro, the gorgeous Cadillac CTS coupe, the coming Ford Fiesta small car, the coming Focus, next year’s Mustang, the twin-turbo switchover.”
“At the moment, Washington has tremendous leverage over the failing auto industry. The government should craft a rescue plan that is both tough and very, very smart. That means dragging the industry (kicking and screaming, no doubt) into the 21st century by insisting on ironclad commitments to design and develop vehicles that make sense economically and that serve the nation’s long-term energy security requirements. What I would like to see is creative thinking on both ends of the bargain. Let the smartest minds design a bailout that sparks a creative revolution in the industry. Think of it as project synergy. Time’s wasting.”
“Washington has successfully propped up the auto industry before. Car makers demanded tariff protection — and got it. Chrysler asked for a bailout in 1979 — and got it. The bailout worked. Chrysler recovered and blossomed. Harley Davidson was on the block and Washington stepped in. The totemic American motorcycle is now a legend.”
It is wrong to assume that the only way to incentivize the US automotive giants to reform is by withholding a federal bailout or low-interest loan program. Even with a bailout, they will need to reform to survive in the long-run. And, the US government can use a bailout to force the autos to reform.
“It makes no sense at all to give these companies billions just so they can struggle on for a few more months down this disastrous path[…]there is no guarantee that these companies will survive after years of failed management. We are sure they won’t if they don’t make sweeping changes in the way they do business.”
“IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”
“To dampen criticism, Congressional Democrats speak of a bailout “with strings attached.” But even a strings-attached bailout poses problems.[…]First, Congress doesn’t know enough about the auto business to dictate operational conditions. “Strings” that cap executive compensation will chase talent away. Strings that force Detroit to produce high-mileage vehicles when gas prices are plummeting will lead to a repetition of past mistakes. […] Second, strings will make it easier for the Big Three to come back for more federal aid after they blow through the first $25 billion. Their CEOs will be able to say that they complied with the conditions of the original bailout, which happened to make matters worse for them.”
“A One of the examples I’m hearing from proponents of the current bailout is, “Let’s go back to 1979 when Chrysler was bailed out. That was a success story. Chrysler came out of bankruptcy and paid back the U.S. taxpayer with interest after four years.” Well, to me, the fact that the government stepped in back then has been an enabling implicit guarantee for the Big Three ever since. Had Chrysler gone under back then, I am convinced that the unions would not have had as much power as they had during the 1980s, because they would have been dealing with two companies instead of three. So they would have had less leverage. So had Chrysler had gone under then, the “Big Two” might not be in the position that they are in right now.”
By showing significant favoritism, a US autos bailout would increase global auto protectionism and make it harder for US auto companies to find global markets for their products, which is exactly what they need to do to compete and survive.
“If one of these companies is forced into bankruptcy, the other two are almost certain to follow, resulting in massive layoffs and plant closures, a hit to the incomes of millions of retirees and another body blow to wounded banks and credit markets that have lent the Big Three hundreds of billions of dollars. It would also dump tens of billions of dollars in pension liabilities on the federal government’s pension guarantee agency.”
More significantly, Chapter 11 proceedings for GM would be far more complicated than that of a retailer, or of Lehman Brothers. Recent experience shows that for auto companies, Chapter 11 is like the Hotel California. You can check in any time you like, but you can never be able to leave. Auto parts supplier Delphifiled for Chapter 11 in October 2005, and still languishes there. Getting out of Chapter 11 can be tough when (a) the bankrupt companies are capital-intensive manufacturers; and (b) creditors are reluctant to give up on their claims. Among those with the biggest claims on the automakers, and GM in particular, are the United Auto Workers.”
“Some arrant nonsense has been spoken and written about letting the Detroit Three slip into bankruptcy in order to restructure. Who would buy a car from a bankrupt automaker?”
“is a Chapter 11 filing the best way to reach these goals [of reforming of the autos]? Answering yes presumes that the case would be resolved quickly, that the entities would be able to obtain ample debtor-in-possession financing, that parties with legitimate legal claims on the company’s assets and cash flows would give them up willingly. But many of the questions surrounding the Big Three’s future can’t be resolved in law firm conference rooms or in the chambers of bankruptcy court, and won’t center around legal questions.”
People have claimed that Americans wouldn’t buy from a company that declared bankruptcy. The fact is people are already not buying the cars or there wouldn’t be a problem. And how exactly is getting a bailout any different than Chapter 11? Both suggest incompetence.
“The United States created Chapter 11 precisely to help companies that need protection from their creditors while they restructure their liabilities and winnow out the good business from the bad. If the North American businesses of GM and Ford filed for Chapter 11, their activities elsewhere would be largely unaffected. Even in North America, their businesses could continue to make vehicles as they shed costs and renegotiated contracts.”
“The carmakers retort that being in Chapter 11 will poison their business. Buying a new car is a long-term gamble on there being dealers, spare parts and a thriving second-hand market for your vehicle. Drivers overwhelmingly tell surveys that they would not take the risk when Mercedes and Toyota make perfectly good alternatives. But $50 billion is a lot to stake on a hunch. A wiser bet is that whatever consumers say today, the stigma of being in Chapter 11 would fade, obscured by price cuts, advertising and most of all news that the car companies were tackling their remaining problems. Remember that, in many ways, Chapter 11 is more stable and predictable than depending upon the government.”
“Should the government bail out the U.S. auto industry to keep the players from going into bankruptcy?—Bill VanderMolen, Pittsfield Township, Mich […] How about this instead: The boards of Chrysler and General Motors (GM) put their companies into bankruptcy with the clear intent of reorganization and merger. As radical as that sounds, it’s the best road we can see to a viable future for the industry.”
“If the Big Three sought Chapter 11 bankruptcy protection now, one strong company could emerge from the wreckage. Surely the United States would be better served by having one healthy car company instead of three terminally ill ones. But good sense, alas, rarely makes political sense.”
Not only are the Big Three not deserving, but to help them out of their current predicament would also set a lousy precedent in a market-driven economy where the possibility of earning great wealth is supposed to be balanced against the possibility of failure[…] And yet it is probably the wise thing to do. This is a uniquely inopportune time for these three giant companies, with their hundreds of thousands of employees and vast national network of suppliers and distributors, to be forced to go through the painful process of bankruptcy reorganization.”
Opponents argued that a bailout will set a precedent that will cause other companies to seek bailouts for their financial difficulties. Yet, the auto industry is uniquely important to the American economy, jobs, communities, American society, energy security, and even national security. The simultaneous failures of The Big Three, in addition, and the prospects of these failures devastating the US economy, make the case for bailing them out exceptional. No other companies in American are so unique nor will they be able to offer such an exceptional case. Therefore, the bailout of The Big Three will not set a bad precedent.
“Not only are the Big Three not deserving, but to help them out of their current predicament would also set a lousy precedent in a market-driven economy where the possibility of earning great wealth is supposed to be balanced against the possibility of failure. For the government to step in and put up $50 billion in loans to try to save the Big Three auto companies, after having done little or nothing to save the jobs of steelworkers and shoemakers and furniture craftsmen, would be patently unfair.”
If the auto industry is given aid, other industries and companies will have a good case for seeking aid as well, and will take advantage of the opportunity. A bailout of the auto industry, therefore, sets a bad precedent.
“When politicians grant special favors to a certain industry or a particular union, such decisions necessarily mean that market forces are being replaced by special-interest deal-making.”
“while the White House has indicated its reluctance to involve the government in the rescue of yet another industry, it may have a hard time explaining why the automakers are any less deserving of a “bailout” than Wall Street investment banks or Fannie Mae and Freddie Mac.”
“This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends […] Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line.”
“It’s not only politicians who are perpetuating the myth that Detroit just discovered the world has changed […] The facts suggest something different. While the industry initially lagged Honda and Toyota in fuel efficiency, General Motors has 18 models in its portfolio today that get 30 miles per gallon or more, and 11 of the last 13 new products and 18 of the next 19 will be cars or crossovers, and not pickup trucks or SUVs. Its new offerings, including the Chevrolet Malibu and Saturn Aura, have swept the automotive awards the past two years.”
“They didn’t build green cars,” you say? Well, we wanted pickups and SUVS. It just so happens that we liked pickups and SUVs, and they are still the best-selling vehicles. Sure, Detroit should have built better-looking, better-performing and better-quality cars — but how can we blame them for selling us what we wanted? By the way, today’s Detroit cars are pretty good — from the Ford Mustang to the Chevy Malibu to the Chrysler minivan — still the best-selling minivan in the world.
“Automakers have been hit hard by a collapse in consumer spending triggered by the U.S. housing crash and exacerbated by rising unemployment and months of soaring gasoline prices.”
“It is easy to list the lame decisions that brought Detroit to its knees […] True, they did this to themselves, but not entirely. Others can share the blame[…]Detroit didn’t cause the high gas prices, the subprime-mortgage mess or the stock-market collapse. All those led to the collapse of the auto business. Greedy Wall Streeters and bankers and a government that shut its eyes caused the problem. Detroit is paying the price for their mistakes.”
“Washington caused part of the problem by letting Japan manipulate its currency so it could sell cars cheap here. Foreigners have a hard time selling cars in Japan and there are no foreign factories. They kept us out and invaded here and Washington kept quiet about it.”
“many of us contributed indirectly to the automakers’ financial woes by choosing “foreign” vehicles — a choice influenced by a perception, warranted or not, that Japanese and European cars are better than their American counterparts.”
“On the product side, management demonstrated an egregious failure of leadership by never envisioning the day when SUVS and big trucks would fall out of favor. In the 1980s, the Big Three made predominantly cars. And over a 20-year period they have shifted to predominately SUVs and trucks. I think in 2006 about 75 percent of Ford’s output were big trucks and SUVs; slightly smaller for Chrysler and GM. Now those are high-profit margin cars for them, so I can understand why they would want to produce those. But you have to diversify your products and you can’t just rely on trucks and SUVs.”
“Detroit’s problems are mostly of its own making[…]The automakers hitched their fate to gas-guzzling trucks, and they obstinately refused to acknowledge that oil is a finite resource and that burning it limitlessly is harming the planet. They lobbied strenuously against tighter fuel-efficiency standards. That wrongheadedness did them in as gas prices spiked and consumers flocked to energy-efficient cars made by Toyota and Honda.”
There are many successful car companies in the world today that have had to deal with the same factors facing the Detroit automakers. These factors, therefore, cannot be blamed for the failures of the US auotmakers.
“Survey shows that Americans think federal aid for the Big Three is unfair and won’t help the economy.”
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