Don’t junk the U.S. auto industry

November 19, 2008

eugene-ludwigMr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of  consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.

The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.

General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.

This raises the question, why not just let them go bankrupt?  The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.

Our economy has been badly battered in recent months, and has become increasingly fragile. The erosion of our industrial base already presents real security risks to our nation. Why would we accelerate this sorry state of affairs at a time of national crisis by sitting on our hands and letting a signature American industry collapse?

The American auto industry is well worth saving, for many reasons.  One reason is that for the past decade Detroit has made heavy investment and steady progress in improving its competitiveness, what it calls “altering the DNA” of American cars.  US automakers spend $22 billion annually on plants, equipment, research and development. Breakthroughs are at hand in developing alternative fuel propulsion systems, and our national well-being and security depend upon seeing them through to completion.

If we allow U.S. automakers to go under out of anger, resignation, or ideology, it will only mean all the work and investment of the last decade will be ceded to our foreign competitors instead of being plowed back into the U.S. economy.

Another reason is the industry’s importance to the job market and the wider economy.  Automobile manufacturing directly employs a quarter of a million workers and indirectly about one in ten U.S. jobs are related to some degree to the automotive sector, according to GM estimates.  So the effects of a collapsed U.S. auto sector would not be limited to Detroit – they would be magnified as the ripples spread to related industries.

If we allow U.S. automakers to fail, millions of retirees depending on auto company pensions will be at risk and auto manufacturing jobs will disappear. The ripple effect won’t end there; millions of jobs in related sectors, such as  U.S. manufacturers of steel, aluminum, iron, copper, plastics, rubber, electronics, and computer chips, will also feel the pain.

Worse yet, the promise of a meaningful future for American manufacturing would fade. As that promise dims, the role played by manufacturing jobs as a passport to the middle class would likewise disappear.

The auto manufacturers did not cause this crisis; they were working hard to reinvent the quintessential American invention when high oil prices and economic upheaval hit, dragging them into the vortex. There is a tendency to think that an example must be made, that someone must be allowed to fail.  But do we really need to cut out of the heart of the real economy? When the patient is in the middle of a full blown coronary, it’s no time to discuss lifestyle changes.

We can and should revisit subjects like executive pay scales and expense controls when the industry isn’t at death’s door.  For now, we should recognize the gravity of the moment, and use the TARP funds and pass necessary auto-related financial stabilization legislation to avoid digging a bigger hole for the national economy.

83 comments

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Seems to me that the US auto industry has been actively resisting building cars people want to buy since the 1970s (coincidentally, when I entered the auto market). And at this point, all their experience and expertise is about conducting downsizing operations, since that’s all they’ve done this generation.

What’s to save?

With united auto workers at $76.00per hr. i think it time for them to take pay cut and aline more with rest work force.

People seem to think that bankruptcy is the end. It’s not. The airlines have proven this several times.

Chapter 11 will allow the auto makers to restructure their costs. Hopefully that restructuring would go from the factroy floor to the board room. In fact the feds should use the $25B loan as leverage to make a few changes.

There is no point putting Americans further in debt to finance the foolishness of high paid execs. It’s time to pay the piper.

Posted by Eric | Report as abusive

I agree with your article. I also strongly agree to your point of executive pat scale adjustments but also include their BONUSES, which by the way are out of line. The contracts these execs write and the Boards of Dir, approve, should be approved by Stockholders, not BoD’s, and this goes for ALL other companies that have created this situation.
Now, Let’s also put blame on the UAW and other unions that have raped the companies, stcokholders, and perspective consumer’s of the auto industry. I would have no problem going along with a LOAN, but ONLY if the UAW steps up to the plate and admit they have caused the auto industry great pain. They’ve not given up anything, and feel they are entitled to every penny their contract gives them. I disagree as I’ve seen work ethics of union personnel cause waste and greed. These folks need to pay for more medical costs, pay more towards their healthcare insurance premiums and scripts, a reduction in pay is warranted, and a reward payment at year end for showing up at work with out taking time off is totally absurd. No one ever paid me extra for showning up for work and putting extended hours when necessary. It appears the only way they will understand the problem is if the companies fail, and they are left without a job at all.
Unions are very helpful and can protect, but more times than not, they proctect in the wrong direction. You do your job, or lose it. Unions have made many people lazy.
By the way, I’m a retired Salary Autoworker, and witnessed many UAW members in action, so I am not fantasizing about anything I’ve noted here. I do not want to lose my pension, by almost every benefit I’ve ever earned and enjoyed, have been removed over the past dozen or so years.

Posted by Jim S | Report as abusive

Thank you for your comprehensive remarks, people need to understand all the relationships that our automotive and manufacturing. Perhaps had we solved the healthcare issue long ago, this situation would have been different.

I will try to feature some of your points on our blog.

P-L-E-A-S-E !

When you loan someone money its usually secured by something. In this case what? The future sales and profits of the big three! ha ! If they are “too big to fail” what’s to stop them from doing this again and “extorting ” more money. Showing up to beg for money from you and me in private jets (google abc news 11/19/20080) and telling of the cost cuts. If the government bails them out, then my 1040 will become the biggest lie in history next year.
Are you listening Congress ?

Posted by No Way Jose | Report as abusive

“People seem to think that bankruptcy is the end. It’s not. The airlines have proven this several times. Chapter 11 will allow the auto makers to restructure their costs. Hopefully that restructuring would go from the factroy floor to the board room. In fact the feds should use the $25B loan as leverage to make a few changes. There is no point putting Americans further in debt to finance the foolishness of high paid execs. It’s time to pay the piper.
-Posted by Eric”

Excuse me, Mr. Eric… the automakers ARE NOT like the airlines AT ALL. Airlines provide a service. Automakers, on the other hand, PRODUCE REAL GOODS (not services) and have a supply chain in which parts move from smaller suppliers to larger suppliers and finally to the automakers themselves. Supply chains depend on a steady flow of raw materials, manufactured parts, lead time for planning and a relatively stable customer base.

If an airline goes bankrupt, it restructures, catches its breath and starts again. Airline passengers can take a bus, train or car to get to their destination in the meantime.

If an automaker goes bankrupt, the supply chain falls like dominoes and the supplier companies go bankrupt left and right. By the time the bankruptcy process is over, there are NO MORE SUPPLIERS left in the supply chain because automotive suppliers live on slim margins and have done so for years now, and can’t survive shutting down.

By the way, who would want to buy a car from GM, Ford or Chrysler once they declare bankruptcy? Who would trust investing $20 or $30 thousand dollars in a Big Three car after bankruptcy? Who would take the chance that the Big Three would go on and survive, even IF they somehow found new suppliers following a bankruptcy?

Posted by Tim | Report as abusive

I prefer to give directly money to all the workers including suppliers than giving money to the three companies. Even If you pay 25 billion to these three wont
guarantee job is still exicited. They continue to cut
the workers transplant to other countries. My and other
people tax money is not for tansplant or pay for Excecutives. They have to cut the salaries and other perks for those executives and fire those in the board of directiors and appoint new people.

Posted by santhosh Mathews | Report as abusive

$76 dollars an hour!!! To strap a bumper on a car?

Think about this, my fellow Americans: Experienced Nurses
make about $25 dollars a hour, and they are the on the front
lines when it comes to saving your life.

Now, do you think that the high school drop out who puts
4 bolts on a bumper of a car that will fall apart before you
finish paying for it should earn 3 times what a nurse does?
Should they make 4 times more than Police Officers? How
about 4 times more than what Teachers make? Firefighters?

I think we can now all agree that the UAW and the Big 3 are
their own worst enemies.

Posted by Keith | Report as abusive

This is an industry that has staunchly resisted both consumer wishes / needs and government attempts to make them change their ways. To say that American auto manufacturers did not cause this crisis is like saying that investment banks had nothing to do with the current financial crisis.

Consumers want well styled cars that are more fuel efficient and reliable. Detroit gave us gas guzzling monsters; Strike One.

Consumers need car companies that invest in zero-emissions technology – electric cars – to reduce the industry’s reliance on carbon fuel. Detroit has killed off several promising electric car technologies, that may have provided sustainable jobs for thousands of North American workers in the future. Strike Two.

Detroit has long allowed the CAW union to manipulate the costs of assembly and parts manufacturing to the point where American cars are unprofitable. There is a good reason why Toyota and Honda factories are non-union: they partner with their employees for mutual benefit. You’re Out!

Posted by Wendell Y., Toronto, ON | Report as abusive

Please, with the airline industry example. Two went into bankruptcy court, emerged, and were promptly allowed to merge (Northwest and Delta.) There has been no demonstrated increase in their profitability or efficiency. Also, if you have flown an airline lately, you must have noticed that you are paying through the nose for everything from pillows to a can of soda. Or, you are being left behind when your flight is cancelled for no reason, or left on the tarmac for hours. This is your idea of an example that the auto industry should follow? Give me a break.

Posted by Curtis | Report as abusive

Eric is totally right, and what is the point of giving them 25 billion tax dollars when they will probably just go bankrupt later anyway? Workers and retirees will still lose their jobs and pensions, just not until after the executives run off with our money

The infuriating thing about this to me is that American car companies have the resources and technology to make good cars that people want to buy, they just don’t feel like it. They do not want to make the necessary changes to become competitive and profitable, and giving them a bailout won’t give them any incentive to do so.

Posted by Tina | Report as abusive

I wonder when people will start talking about “synergy”. To me, it is the only way out – not only for the carmakers but also to all other industries.

I suggest to unite all three big boys and furnish a common plan. This will help expenses to be reduced tremendously and create a great deal of synergy not only in cutting expenses but also in engineering as well as restructuring the whole organization and plants.

Posted by Yaman Yalcin | Report as abusive

I am a consumer who believes it is important to have an American car industry in this country. Critics call helping the American Auto Industry a bailout. I strongly believe this is an investment to rebuild our nation’s economic engine. If we do nothing, the future is clear. We will see even more economic upheaval, communities will lose businesses and revenue, and thousands of jobs will disappear. Give the car companies a chance to make a turnaround. If it wasn’t for the credit crunch, these companies would be on the road to succeed. If Congress does not act, it will be the shortest and fastest road from recession to depression. Our economy is suffering enough. Please help prevent further job losses and devastation to our communities. Allow the car companies to make the electric vehicles so we can stop depending on foreign oil. We cannot afford to lose this cornerstone of our economy. We should not depend on other nations for our manufacturing capabilities or new technologies. And we do not want to contribute to an even deeper collapse that will leave too many people facing further economic uncertainty.

Posted by Mary Maiorana | Report as abusive

Saving the auto industry is not about saving the american auto manufacturing coorporations, it’s about saving the livelyhood of the millions of American’s who are dependent on this industry. Why was it appropriate to save wall street after they made 30-40x their assets in bad investments but when the auto industry is in trouble, the “slick-dressed,” “all of one, and none for all,” “free-market will fix all” mentallity wins out? The auto industry has known for a decade that they are in trouble which is why they were taking such major strides to buy out contracts and downsize. They took a proactive approach to solving their problem but were blindsided by the banking industries unimaginable stupidity. So again, why should we allow an industry who is trying to improve fail, while bailing out another?

Posted by Dis-enchanted | Report as abusive

Define “breakthrough in alernative fuel”
are you talking about Gm’s hydrogen fuel cell cars, estimated to be in production around 2012? BECAUSE Honda has one entering Pilot Markets in 2009. Are you talking about Hybrid technology? Because Honda realized that in the 90′s. Are you talking about E85? Because Detroit tried that in the 70′s and it watched it fail?

Posted by John | Report as abusive

A restructuring of the industry seems the only route to take, given our world-wide inter-dependence upon each other’s economies. Our imports and our exports are vital in restoring strength to our economy. The Big 3, like e’m or hate ‘em, are major players in our export markets. A sensible approach would seem to be the extension of loans to the companies that came with conditions that limited Top-Executive pay, benefits, and bonuses, that reduced the influence of the unions, and that brought auto worker wages in line with jobs held in other sectors by persons of similar education and experience levels. The Big 3 seem very quickly to becoming the Big 2, and these in turn may become the Big 1. With frozen or trickling credit to consumers, a large boom in car sales in the immediate future does not seem likely, and so profits within these companies seem slim. If we are to save them, then they need to either merge, streamline, or restructure, or some combination of the three. In a free-market setting, this is what is expected of companies that find themselves in trouble. Either sell out to the highest bidder and liquidate, get together with someone to strengthen your base, or rethink your game and start over. Chapter 11 has it’s benefits, but also would doom those sectors that rely on the auto-industry for their survival. Where does the bail-out stop? As one industry goes, they all go. Where the US economy goes, so too the economies of China, India, Japan, Norway, the Middle East, as well as Brazil and Venezuela, to name a few. We need to save as much as we can, and in the process, restructure for future strength. Reducing dependence on foreign oil will be only marginally impacted by the conversion of gasoline burning engines to alternatives. The larger picture dictates that not only our economy, but all economies find a replacement for ‘petrodollars’ and the instable credit that has been propped up by them. This is a hard road to walk for emerging economies such as Hungary, as one example. As the oil producing regions, like Norway, Saudi-Arabia, Russia, for examples, feel the credit and economic crisis, their dollars are being brought home, and further weakness are felt around the world. We can only bail out so many, for so long. Let’s get it right when we do it.

Posted by Ursula Stanton | Report as abusive

The only way you do this deal is to attach strings to
this corporate welfare request. Absolutely no bonuses
or dividends will be paid until the bailout money is
repaid in full by these so-called corporations. Next,
all of them have to meet much higher mpg benchmarks than
the pathetic number our great government has required of
them in the past. Not the estimated mpg but actual mpg!
Third, all employees, hourly or salaried; union or non-
union, will face a minimum 10 % cut in pay. Fourth, all
auto industry employees will pay 10% of their medical insurance premiums. Fifth, all retirees, also face a 10%
reduction in pension payments and medical coverage. Last
of all, no raises shall be given until these companies have repaid all of the “taxpapers” bailout money. You want to stay in business, here our the terms. You don’t
like this deal, see ya!!!

Posted by Mack Targoyne | Report as abusive

The basic purpose is transportation in optimum manner. If the competition is in the area of individual transportation and the buyers are individuals, concentrating on products for mass transportation where buyers are not individual should solve the problem.

The auto dealers did not have a difficult time telling lies about their vehicles and using tricks to sell cars. How can anyone become concerned with their well being considering.

There are lots of car manufacturers, choose a honda or other type.

Their lavish lifestyles are rediculous, in my opinion.

Posted by stan | Report as abusive