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Welcome To The New American Auto Industry

by @ 11:54 am on December 6, 2008. Filed under Auto Industry, Business, Economics

If the Democrats in Congress get what they want, the real headquarters of Ford, GM, and Chrysler won’t be in Detroit any more:

All three restructuring plans are heavy on promises to build the “green” cars that a Democratic Congress wants built. GM promises 15 hybrid models by 2012 and 37 miles per gallon on average for its cars. Chrysler commits to putting flex-fuel engines, which can run on ethanol or gasoline, in half of its cars. Ford promises to save 16 billion gallons of gas by using “advanced technology” and to invest $14 billion to improve fuel efficiency.

All three CEOs also drove to Washington in hybrid vehicles as penance for their private-jet flights back in November. This bit of political obeisance was supposed to show that they’d gotten religion both on their perks and their carbon footprint. But it may not have been enough. One Congresswoman wanted to know why they couldn’t hit a 50-mpg fuel-economy target by 2015. Another asked whether, maybe, they weren’t selling enough cars because everyone in America was waiting with baited breath for the coming revolution in fuel economy.

After Barney Frank was done roughing up the CEOs, he hustled them out to hear from David Friedman of Union of Concerned Scientists and Jeffrey Sachs of the Earth Institute. Mr. Friedman warned the Members not to give one inch on fuel-economy standards and not to relax the environmental strings attached to the $25 billion Congress has already made available to the car companies.

You get the picture. If there was ever any question whether Congress actually wants to “save” Detroit, this week dispelled it. This is not a bailout that Congress is debating. It is a federal takeover. We don’t mean that in the sense that the feds will own the companies on paper, although that can’t be ruled out. What Congress wants to own is their business plan, and Detroit seems prepared to oblige.

And one can see the beginnings of that plan in the bailout that will apparently be voted on next week:

The government would order a major restructuring of Detroit’s struggling Big Three auto companies in exchange for a multibillion-dollar bailout under a plan circulating in Congress.

Skeptical lawmakers are weighing whether to dole out as much as $34 billion in aid to the automakers as the once-mighty companies make their second round of pleas for government help to keep them from collapsing by year’s end and potentially deepening an already painful recession.

With several lawmakers in both parties pressing them to consider a pre-negotiated bankruptcy – something they have consistently shunned – members of Congress and the Big Three both were contemplating a government-run restructuring that would yield similar results, including massive downsizing and labor givebacks.

As Stephen Green notes, there’s really no reason to believe that this “government oversight” will do what needs to be done to make any of the Big Three viable again:

[D]o you really see Congress axing thousands of dealers around the country, eliminating 8.5 car brands, or busting the UAW?

No, I don’t see it either. Instead, every decision about how to “save” the car companies will become politicized and the concern will be with satisfying interest groups rather than making the economic adjustments needed (i.e., brand-stripping, termination of dealer contracts, and even more massive down-sizing) to make these companies competitive.

Moreover, as both Bruce McQuain and Dave Schuler note, the amount of money being contemplated now is little more than a stop gap measure designed to keep the companies alive until sometime after January 20th when Barack Obama is President, the new Congress is in power, and those on the Hill who believe in free markets become even less able to affect the agenda.

Which is why I think these words will end up proving prophetic:

Two economists testified that the ultimate cost of this bailout would certainly be much, much higher than $34 billion. Mark Zandi of put the number at up to $125 billion — and he supports the bailout. NYU’s Edward Altman said the company proposals were “doomed to fail.” He proposed a prepackaged bankruptcy for GM and Chrysler, with the government providing the debtor-in-possession financing if necessary. His point, which ought to be sobering, was that outside of bankruptcy there is no way to make these taxpayer loans senior to existing secured debt — meaning the government might never get paid back if the companies go bankrupt later.

We’re about to give tens, and eventually hundreds, of billions of dollars that we don’t have to companies that have been dinosaurs for 30 years and, in the end, it’s quite likely that we’ll have absolutely nothing to show for it.

Anyone on Capitol Hill who votes in favor of this deal should be ashamed of themselves.

2 Responses to “Welcome To The New American Auto Industry”

  1. Matt the Great says:

    “Another asked whether, maybe, they weren’t selling enough cars because everyone in America was waiting with baited breath for the coming revolution in fuel economy.”

    No, it’s because Toyota and Honda make more reliable, efficient cars. It’s not like Americans haven’t been buying cars over the past several years, they just haven’t been buying domestic cars.

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