Death Knell For The Detroit Dinosaurs

by Jerry Gordon (Nov. 2008)

Senator Lieberman’s office sent a copy of the proposed auto bailout legislation that will be the subject of a Senate hearing on Wednesday (Nov. 19) and possible vote this Thursday.  An AP report noted:

A Senate auto bailout bill unveiled Monday noted that 355,000 U.S. workers are directly employed by the auto industry, and an additional 4.5 million work in related industries. That doesn’t count the 1 million retirees, spouses and dependents that rely on the companies for retirement and health care benefits.

Sounds like the ‘too big to fail argument.’ Not really, when the facts are revealed.

Senate Democrats, Big Three auto executives, UAW union leaders and the Michigan Governor were beseeching Congress to, once again, bail out the ‘dinosaurs’ in Detroit. As if the experience of the Chrysler Loan guarantees of 1979 and the Reagan Administration ‘voluntary export restraints’ of the early ‘80’s vis a vis Japanese auto exports hadn’t taught us that Detroit’s demands have cost us dearly and delayed their inevitable restructuring. Note this comment from a FrontPage Magazine article, “Car Trouble in Congress” by Jacob Lakshin about what the Congress and White House didn’t learn from that prior experience:

After posting a record loss of $1.7 billion in 1980, Chrysler that same year received $1.5 billion in government loan guarantees, courtesy of the Congress and President Jimmy Carter. Auto makers also found a patron in the Reagan administration. In 1981, President Reagan negotiated export quotas on Japanese cars to the US, freeing the way for Ford and GM to sell older and less efficient cars at higher prices without the burdens of competition. Although a boon for the Big Three, the quotas were very much a burden for American car buyers. The International Trade Commission later estimated that between 1981 and 1985, the four years in which the quotas were in effect, American consumers paid $15.7 billion in higher auto prices.

Given the tussle between the White House and Congress as to whether the funds for a Detroit bailout would come from the Department of Energy loan program or the TARP program of the Emergency Economic Stabilization Act, the chances for adoption of this Detroit bailout appear dim in the final days of the 110th Congress.

Note this comment from Sen. Lieberman’s staff on the Senate proposal introduced by Democratic Majority leader Harry Reid:

The legislation requires the Treasury Secretary to provide $25 billion in loans to the Big Three U.S. automakers and component suppliers from Treasury’s $700 billion Troubled Asset Relief Program (TARP).  In allocating loan amounts, the Treasury Secretary is directed to distribute loans based on the magnitude of the impact of the applicant’s U.S. manufacturing operations on the overall economy of the United States and other segments of the automobile industry, including the impact on levels of employment, domestic manufacturing of automobiles and automobile components, and automobile dealerships.

The AP reported on the House alternative.

A House version drafted by Rep. Barney Frank, D-Mass., goes further, requiring that U.S. automakers immediately repay the loans next spring if they don’t give the government an acceptable restructuring plan that shows they can survive, including details on how they will transition to making vehicles that use less gasoline.

Do we really need a thinly disguised nationalization of Detroit to restructure the US auto industry when foreign owned competitors with American assembly plants, US workers and suppliers seem to be doing well without aid? 

Witness these comments from those beseeching Congress to save Detroit:

“There’s a high degree of urgency for federal action if GM is going to stave off a financial crisis,” Rick Wagoner, GM chairman and chief executive, said Sunday in a joint appearance with United Auto Workers (UAW) President Ron Gettelfinger on WDIV-TV in Detroit. “It’s really time to move on this,” Wagoner said.

President-elect Barack Obama said he believes aid for the auto industry is needed but that it should be provided as part of a long-term plan — not simply as a blank check.

“For the auto industry to completely collapse would be a disaster in this kind of environment,” Obama said in a “60 Minutes” interview aired Sunday night on CBS. “So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of the stakeholders coming together with a plan — what does a sustainable U.S. auto industry look like?”

The White House demurred:

In her statement Monday, White House press aide Perino said, “The auto industry is an important part of our manufacturing base, and we want the industry to succeed and compete in the global economy.” But she also said that media reports have erroneously depicted the administration as taking too harsh a stand on financial relief.

“We believe this assistance should come from the program created by Congress that was specifically designed to assist the automakers — from the $25 billion Department of Energy loan program,” Perino said.

She said the $700 billion rescue program “was never intended by Congress to assist automakers or other sectors of the economy. It was solely intended to deal with what is an ongoing credit crisis in our financial sector.” Perino also said that any new legislative effort to help the big carmakers should require that those manufacturers are viable companies, ones willing to restructure themselves for the long term.

There is a rising clamor in opposition to the bailout plan across the political spectrum, ranging from New York Times columnist Tom Friedman on the left to Sens. Richard Shelby (R-Alabama)  and Jon Kyl (R.-Arizona)) on the political right.  

Friedman on NBC Meet the Press trenchantly hit the nail on the head about another Detroit bailout. 

TOM BROKAW: Tom, let’s begin with you. Can Barack Obama, the newly elected Democrat, as president of the United States look Detroit in the eye and say, “Drop dead.”

MR. TOM FRIEDMAN: I think he can. He may have to, Tom. You know, Carl Levin, what did he say? He said, “You know, just give us this $25 billion and, and we’ll be OK.” Tom, if I thought with $25 billion we could save this industry, I’d be for it, OK? But I see no plan right now, no reason to suggest that these people who have driven this industry into a complete ditch have a plan to get it out in the long term and not come back three months from now, for another $25 billion. Show me that plan.

Remember, what was Detroit’s plan two years ago when they confronted this problem? It was to subsidize gasoline at a $1.99 a gallon if you bought a Hummer or Suburban or a big truck–that was their idea of innovation. So, you know, it was like a crack dealer offering subsidized crack rather than, you know, going to a clinic to get off the drug. And who is the enabler of that? The enablers of that were Sen. Carl Levin,  and all of the Michigan [Congressional ] delegation who didn’t go to these people. The outrage of these people, “Now they say we have to save these jobs!” Where was their outrage two years ago, OK, about getting them to be more innovative, getting them on top of the energy efficiency question? They have been enabling the destruction of this industry. So show me a plan. Show me a plan that says if we give you this $25 billion you’re actually going to change. Absent that–remember, Tom, we’re going to charge this $25 billion on our kids’ Visa cards. This goes on our kids’ Visa cards, and we have a moral obligation to make sure this is spent wisely.

Alabama’s Sen. Shelby, ranking Republican Member of the Senate banking Committee, whose state has benefitted from foreign auto concerns building assembly facilities there, said:

“The financial straits that the Big Three find themselves in is not the product of our current economic downturn, but instead is the legacy of the uncompetitive structure of its manufacturing and labor force. The financial situation facing the Big Three is not a national problem, but their problem. 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.”

Fellow Republican Senator Jon Kyle of Arizona joined Shelby in opposing the bailout plan of Senate Democrats:

“Companies fail everyday and others take their place. I think this is a road we should not go down,” said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee. “They’re not building the right products,” he said. “They’ve got good workers but I don’t believe they’ve got good management. They don’t innovate. They’re a dinosaur in a sense.”

Added Kyl, the Senate’s second-ranking Republican: “Just giving them $25 billion doesn’t change anything. It just puts off for six months or so the day of reckoning.”

Americans evince little support for a bailout of the ‘iron men’ of Detroit. They have no solidarity with an industry that needs to be re-organized because allegedly it can’t make a profit selling fuel efficient cars and has a very rich noncompetitive labor cost structure. This is after the decade long joy ride of gas guzzling SUVs for soccer moms produced a cash hoard estimated at over $100 billion, only to be squandered because Detroit didn’t listen to consumers.  On top of that there is the lush UAW legacy contracts for retirees who outnumber active union workers. The UAW legacy contracts for retiree health and retirement amount to additional cost of $3,500 per vehicle manufactured by the Big Three. To add insult to injury, UAW members are at the top of the blue collar wage scale.  Note this comparison of average hourly wages paid:

Total Compensation per Hour, 2007-2008 (includes wages and all benefits):
Big Three automakers — $73.08
Toyota (US) — $48.00
All manufacturing workers — $28.48

Did UAW President Gettelfinger offer to curtail wage demands to assist in improving costs for Detroit auto makers caught in the throes of possible bankruptcy? Note this CNN Money.com report:

The prospect of concessions from the union came up during a meeting involving executives of Detroit’s Big Three auto makers and Democratic Congressional lawmakers on Capitol Hill Thursday. But UAW President Ron Gettelfinger made clear that concessions were out of the question, union lobbyist Alan Reuther said in an interview with Dow Jones Newswires Friday.

“Workers and retirees have already made significant sacrifices,” said Reuther, paraphrasing remarks that Gettelfinger made to House Speaker Nancy Pelosi, D- Calif., and others in the meeting, including renegotiated contracts. “We feel we’ve already stepped up.”

Nationalizing Detroit would cost us a pretty big penny and would entail putting in a czar to ‘order’ restructuring and cost savings.  Doesn’t work. Look at what the Brits did when they nationalized British Leyland. Most of the fabled British brands no longer exist and even luxury brands Bentley and Rolls Royce were bought by Volkswagen A.G. in 1998.

We learned about the arrogance of the ‘iron men’ of Detroit with Chrysler corporation, via their ad agency at the time, Y&R International back in 1978, on the development of the independent Mitsubishi Motors car line in the US. Chrysler had ‘cherry picked’ and badge-engineered Mitsubishi product under a profitable 1971 minority investment deal. They simply stuffed out-moded, poor quality, gas guzzling products down the gullets of auto dealers and those ‘silly geese,’ their customers. We advised Chrysler to consider third country assembly of vehicles, including China, to stay cost competitive.  Mitsubishi got its own  franchise, dealer network and assembly plants in the US. Chrysler got a government guarantee loan in 1979, but it didn’t get the message about foreign competition and changes in consumer tastes given the oil boycott and demand for fuel efficient cars. The K-car developed under Lee Iacocca in early 1980’s saved Chrysler briefly.  From that high point, it was down hill, including the failed $38 billion dollar merger with Daimler Benz in 1998, buyout by private equity firm Cerberus in 2007, and the recent GM break off of merger discussions with Chrysler, LLC.
 
Honda, Toyota, Hyundai, Mitsubishi, Nissan, Subaru, BMW and Mercedes Benz who own auto manufacturing facilities in the US aren’t asking for a handout. They are making vehicles that Americans and the world buy. Foreign manufacturers are expanding operations in the US. Witness Volkswagen building a $2.0 billion assembly plant in Chattanooga, Tennessee.  Also witness, a $2.9 billion plant being built by German giant Thyssen Krupp in Mobile, Alabama. This plant will produce cold rolled steel to supply foreign owned auto manufacturing facilities located in the South.

The floundering Big Three are trading on American patriotism by saying we need them to build American cars, when they are building cars globally and even making a profit in the EU and China, where they have to compete or die.  Moreover, components of the Detroit vehicles often come from Canada, Mexico, Asia and the EU.

What to do?  I think an inspired suggestion was made in a Wall Street Journal op Ed by Robert Hahn and Peter Passel, “Stimulate Car Buyers, Not Car Makers.”
Hahn and Passell  proposed a meaningful alternative given some predictions that we are now in the midst of a lengthy recession:

Since a big fiscal-stimulus package for fighting the recession — some combination of tax cuts, extended unemployment compensation, infrastructure grants and assistance to states — is coming soon, why not stimulate consumers to buy cars? Why not offer eye-popping rebates — say, $3,000 — for a limited time to buyers of cars and light trucks? It would probably make sense to phase out rebates for the most expensive cars, and as a treaty obligation, it wouldn’t do to discriminate against foreign makes. 

How much downstream benefit this would generate and for whom is hard to predict. Still, it is a fair bet that most of the money would be quickly recycled in the form of demand for everything from auto parts to car mechanics’ salaries — just what you want to happen in a recession.

If, say, 12 million non-luxury vehicles were sold in the next year — similar to 2007 — the rebates would total $36 billion. Of that sum, about one-half would go for cars built by the Big Three. Better yet, more than 80% could be expected to go for vehicles actually manufactured in North America, even if the auto maker is from overseas.
The Congressional auto industry bail out hearings should be a real media circus and eye opener for Americans who wonder why our government is bailing out the Detroit Dinosaurs. If the Congressional plan fails to pass the Big Three would have to go through a long overdue reorganization under Chapter 11. Those fat executive compensation deals and labor contracts would be ‘greased.’ The restructured Big Three might be forced to sell off valued brands to those manufacturers who can do a better job of manufacturing cars at lower costs that would keep customers, workers and suppliers happy.

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