The ultimate challenge to Detroit culture
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.
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.