The leadership of the US auto industry traveled from Motor City to Capital Hill yesterday to plead for federal government intervention in their business affairs…as the American economic situation worsened. This was an important meeting for Detroit, for both the corporate leaders of the “Big Three” automakers, and for union leadership.
Consider that one-out-of-six of those of us employed in the United States derives her and his income from things automotive – building, selling or maintaining cars and trucks; building and repairing road and highways; insuring the 130+ million vehicles on the road; drilling, refining, distributing and marketing the oil and gas for this gigantic fleet – you get the picture.
The invention of the motor car is somewhat disputed; undisputed is that [it was] Henry Ford who created the mass production system that put Americans in their cars and on the roads. He created a system so everyone could buy a car – including the men on the production line who built them. Henry put America on wheels.
So we can say that the US car industry is 100 years old, and thoroughly integrated into virtually every element of the American society. That’s why the conversations with Congressional leadership are of such importance.
Think about the infrastructure of the automobile and truck: Oil refineries, gas stations, repair shops, auto dealers, roads and highways; one, two or more cars in many American driveways; tens of thousands of trucks on our highways, delivering goods overnight to tens of thousands of warehouses and retail outlets…
Think of the millions of men and women involved in this commerce; think especially of the men and women who toil in the GM, Ford and Chrysler plants, spread across the breadth of North America.
As part of the current nationalization of some American businesses – OK, the semi-nationalization at this point – the Congress has allocated $25 billion for US carmakers, targeted for new initiatives in building new vehicles that get better mileage, reduce GhG emissions, can use alternative fuels and motive power, etc. The carmakers asked, according to news reports, for $25 billion (more), and this would be un-related to them building “greener” vehicles.
Detroit is in awful shape these days. General Motors has lost $50 billion (yes, a “b”) in the last three years.. Chrysler, once merged with Daimler Benz of Germany, has been cut loose and is privately owned. Ford has similarly been bleeding billions of dollars and its stock is about $2.00 at this writing. (GM is at $5.00). If the [stock market’s] efficient market theory is applied, what is the smart investor saying about the Big Three – that their stock is worth just above pennies going forward?
How did the mighty US auto industry get in this awful situation? The answers are long, varied, complex, and subject to interpretation. But – I recall a conversation with the former director of the Pension Benefit Guaranty Corporation (PBGC), when I asked him why the federal government (which bails out corporate pension funds that fail) is sometimes tough on companies, He explained the theory: Think about, he said to me, the company that we know today is unlikely to be the same company that we knew years ago, and that we will know in the future. In the fast-paced life cycles of companies, sectors, industries, or products, the average company may last 25 or 35 years…but a lot will change in that time, changes that could threaten the existence of that company (and most important to the PBGC, and its pension fund). So the government often has to take a tough line, which is often politically unpopular.
The PBCG did just that with GM a decade ago, pressuring General Motors to pony up the billions in shortfall in its pension funding. GM sold off the E business (the former EDS). Lately the company sold off 51% of the GMAC operations. Ford sold off some of the brands it acquired. All three auto companies, under certain conditions, could burden the PBGC pension funding if they fail (e.g., file for bankruptcy). PBGC is usually first in line to claim what’s due – but what will that do to the thousands of companies that are GM, Ford or Chrysler suppliers. This is a very complicated situation.
The stakes are high in two cities – Detroit and Washington DC – and in the hundreds of towns and cities across the land when the Big Three does business.
Given that the US bankers are now getting hundreds of billions of taxpayer dollars, surely to keep some [banks] afloat and also to attempt to make other institutions stronger, how can the federal government now say “no” to the auto makers?
After, we will have lots of time to sort out the “who” as in “who is accountable” …for the lack of effective leadership in the auto business…in banking…in investment banking…in regulatory oversight…etc etc.…and whatever other businesses we may benationalizing – oops, “socializing”, as in, “after all, this is all for the common good…”.