Opinion

Gregg Easterbrook

The ultimate challenge to Detroit culture

August 4, 2010

OBAMA/

Last week President Barack Obama visited a General Motors factory to proclaim the auto bailout a success, and today calls at a Ford Motors facility to proclaim the car industry recovered. Sales of U.S.-made vehicles are rising, while Ford – which, bless its internal-combustion heart, refused government money – just announced a $2.6 billion second quarter profit. That makes it time to assess the car companies.

The country benefits from the saving of GM, but at the cost of yet more debt.
Converted to today’s dollars, the 1979 Chrysler bailout – hugely controversial at the time – cost $4 billion. All of it was repaid within three years. The current General Motors/Chrysler bailout – enacted with almost no debate in Congress – has cost about $110 billion, when subsidies to both companies, their parts makers, finance arms and pension plans are taken into account.

Taxpayers are on the hook for General Motors and Chrysler warranty claims should either company still fail, which might cost nothing or many billions. Plus, General Motors received a hidden handout of tax exemption for the first $16 billion of future profits. That brings the current auto bailout to around $120 billion – 30 times the inflation-adjusted expense of the 1979 bailout.

We’ll be lucky to get back half the cost of rescuing General Motors.
The peak market capitalization for GM came in 2000, when it was worth about $70 billion in today’s dollars. For taxpayers to get their investment back by selling the 61 percent of GM the public now owns, General Motors would need to rebound to somewhere around its peak value. This seems improbable given that valuation came when General Motors had almost twice the market share it commands now. GM may return to profitability, and investors might make money on its expected IPO. Taxpayers will be fortunate to recover 50 cents on the dollar, while big banks are returning to the public 90 to 105 cents on their bailout dollars.

We’ll be lucky to get anything back on Chrysler – but Italy benefits. Taxpayers hold only a small equity stake in the revamped Chrysler, and likely can kiss their $8 billion bailout goodbye. Fiat paid close to nothing for (essentially) taking control of the company, giving the Italian automaker a readymade U.S. distribution network. It’s a great deal for Fiat – either the company rebounds in the United States market at little capital cost, or gives up and folds Chrysler, having put hardly any chips on the table.

The General Motors bailout seems intended to rescue that company, in part because the GM product line is pretty good. The Chrysler bailout seems intended to shift the blame for the company’s condition onto whatever president follows the current administration.

I am both a supporter of Barack Obama and an aficionado of nutty statements made under high formality at the White House. Here, Obama praises the “cutting edge technology” supposedly brought by Fiat into the bailout. As mechanics know, Fiat stands for Fix It Again Today.

For points that didn’t quite make the column, click here.

Will the UAW demand raises?
While General Motors and Chrysler shareholders and bondholders were wiped out by the restructurings, United Auto Workers members made relatively modest concessions. UAW members did not, for instance, get the Monday after Easter as a paid holiday this year, and won’t in 2011, but will again in 2012. Does your employer give you the Monday after Easter off with pay?

Already, taxpayers who don’t earn anything near the $50 an hour in pay and benefits enjoyed (post-restructuring) by most UAW members are being taxed to keep UAW wages and benefits high. While stocks and bonds vaporized in the restructuring, UAW contracts remained – normally labor deals are annulled by bankruptcy – because the UAW is among the nation’s most politically powerful organizations, and its party holds the White House and both chambers of Congress.

If a feeling develops that the American automakers are out of the woods, the UAW may begin pressuring for higher pay. Speaking last October, at Lordstown, Ohio, stronghold of the UAW’s left wing, President Obama said he looked forward to the moment when the UAW “can get back to bargaining for higher wages.”

With General Motors and Chrysler now wards of the state, “bargaining” would mean twisting arms in Congress, demanding more special favoritism. (Bargaining at Ford would be actual bargaining, though bear in mind Ford pays market rates for corporate financing, while GM and Chrysler are running on government-issued funny money.)

General Motors and Chrysler workers would be jobless were it not for the taxpayer. If they receive a round of raises underwritten by taxpayers who earn much less than UAW members, the Democratic Party, and liberalism in general, will look as sold-out to their interest group as Republicans and conservatives look sold-out to Wall Street.

Will there be hanky-panky with fuel efficiency rules?
After health care reform, arguably Obama’s next leading accomplishment is the first improvement in automotive MPG rules in nearly a quarter-century. Obama’s rules will cause a roughly one-third rise in auto fuel efficiency, moderating oil demand and reducing greenhouse emissions. Why the White House doesn’t trumpet this achievement is beyond me.

But the rules contain an ominous congressional waiver clause. Once serious MPG standards draw close, will Congress yield to lobbying and quietly wave the rules? That would sustain oil waste and all but beg buyers to defect to Honda and Toyota, pushing the Big Three back off the cliff.

Can all carmakers adjust to the new reality?
Auto sales peaked at 16 million units in 2007, declined to 10 million in 2008 and are on track to finish at around 11.5 million this year. The market may stabilize at 12-14 million vehicles, even with population growth. As manufacturing quality and reliability continue to rise – Ford and General Motors have a big presence in the latest J.D. Power quality rankings, one of the auto industry’s leading indicators – cars last longer. As cars last longer, people need new cars less often.

The auto market is entering a phase in which even successful manufacturers will move fewer units than they once did, at least in Western nations. Can General Motors, Ford and Chrysler learn to think in terms of selling fewer cars of higher quality? That may be the ultimate challenge to Detroit culture.

Comments
11 comments so far | RSS Comments RSS

US tax payers will be lucky to get 50 cents on the dollar in the end

http://storyburn.com

Posted by STORYBURNhere | Report as abusive
 

I agree with that, lucky as you say. The UAW is among the nation’s most politically powerful organizations.

http://www.junowebdesign.com

Posted by liamjones | Report as abusive
 

And now they have the b@lls to actually start making political contributions again. So now our tax dollars are being funnelled into specific Congresspersons’ campaign chests.
http://www.washingtonpost.com/wp-dyn/con tent/article/2010/08/04/AR2010080407086. html?hpid=topnews

Posted by nadie | Report as abusive
 

IMPORTANT QUOTE: taxpayers who don’t earn anything near the $50 an hour in pay and benefits enjoyed (post-restructuring by most UAW members) are being taxed to keep UAW wages and benefits high.

Time to put the dirtbag union gangsters out of business and the politicians that they have bought should be thrown out of office, including all Democrats who are part of the sleazy Obama tax-and-spend crowd. This is moral, ethical and criminal corruption on the greatest scale, and will no longer be tolerated by the taxpayer.

Posted by losttourist | Report as abusive
 

“Obama praises the ‘cutting edge technology’ supposedly brought by Fiat into the bailout. As mechanics know, Fiat stands for Fix It Again Today.”

You have no clue what you’re talking about. Fiat is a completely different company from when they last sold cars in the States. They build the “greenest” (lowest emissions, highest-mileage) vehicles of any European make and their 1.4 liter MultiAir 4-cylinder just won the “Best New Engine of the Year” award for its combination of technology and efficiency (http://www.ukipme.com/engineoftheyear/w inners_10/bestnew.html).

Fiat brings state-of-the-art, high-quality small- and medium-sized platforms, drivetrains and manufacturing methods to Chrysler, something the latter company doesn’t have but needs to be a viable automaker. Fiat CEO Sergio Marchionne heads and young and smart executive team that rescued Fiat early in this decade when they, like Chrysler, were on life support due to previous bad management.

Was the Fiat takeover of Chrysler a good deal for the former? Sure, but it was for Chrysler too, as they had no other interested buyer and would have been liquidated if Fiat hadn’t taken control.

Do some proper research next time before misleading your readers.

Posted by raywode | Report as abusive
 

The whole US economy is challenged…

http://nbyslog.blogspot.com/2010/08/us-p ayroll-numbers-equivocal-if-you.html

Posted by nbywardslog | Report as abusive
 

I don’t see that American companies are doing all that much right. There are still a lot of recalls and the UAW still has a sense of entitlement. I just see temporary mistakes by the likes of Toyota.

I audited GM and Toyota back in 1989. Even back then, any outsider knew that GM products didn’t appeal to a younger market (I was the younger market then). In the car shows, people would crowd around German or Japanese models. Now I’m in my 40s, and guess what – I still think of them like Wrangler jeans.

Posted by JohnZNYC | Report as abusive
 

The auto industry is moving slowly forward. The culture is not changing, in that, there is too many dollars spent on advertizing and not enough on the product. I think that in this time we need vehicles that are more durable, last longer, and are more in tune with the country. When I see pickup trucks with plastic bumpers I know something is basically wrong.

Posted by fred5407 | Report as abusive
 

A couple missing points:

- If GM had been allowed to go bankrupt, it would not have disappeared. It would have been broken up and sold, and those parts with good “product lines” would have been bought by investors — as was SAAB. The upheaval would have been considerable, but it would have occurred quickly instead of this slow, costly torture of government intervention.

- In the government bailouts the secured creditors of GM had their collateral seized by the government. In the years leading up to the crisis, GM could only borrow money by offering assets as collateral, but those lenders who stepped up when GM needed help were wiped out as “speculators”. Now we see Trillions of dollars in cash sitting on company’s balance sheets as the companies hoard their assets. Maybe if they could loan it in secured loans without the fear that their collateral would be seized if the government decided it didn’t like them, they wouldn’t be hoarding so much cash.

- Finally, you state that increased mileage standards are BHO’s second greatest accomplishment. Unfortunately, like healthcare, he has no idea how to accomplish this. Don’t criticize the Fiat 500 — it will be a full-size car if these crazy mileage standards aren’t repealed. The problem won’t be pickups with plastic bumpers, it will Trabants as state-of-the-art transportation.

Posted by JBinNC | Report as abusive
 

The UAW is among the nation’s most politically powerful organisations.

http://www.reynoldsdigital.com

Posted by ReynoldsDigital | Report as abusive
 

It is easy to see that you are impassioned about your writing. I wish I had got your ability to write. I look forward to more updates and will be returning.

Posted by sarahsam | Report as abusive
 

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