BretLudwig
December 9th 08, 12:57 AM
Mom, Apple Pie, and Hyundai?
The auto industry has been a bulwark of the American middle class. If Wall
Street warrants a bailout, why not Detroit?
By Pat Choate
>>"In those happy days of the 1950s, my friends and I anxiously awaited
the moment when the local auto dealers began displaying their new car
models. My uncle was a Chrysler-Plymouth dealer, and we always began our
tours there. Then we would go from one showroom to another, collecting the
brochures, sitting behind the wheels of the new Corvettes, Chrysler 300s,
Plymouth Sport Furies, and Thunderbirds, opening the hoods and admiring
the powerful engines. Rare was the teenager of that era who did not know
the specifications of virtually every model produced by General Motors,
Ford, and Chrysler.
“Car people” such as Lee Iacocca, then at Ford, were in charge of
America’s Big Three automakers. They loved their cars as much as their
customers did. The carmakers and their suppliers produced an ever changing
set of engines, transmissions, accessories, and gadgets that made buying a
car a family treat unlike any other. So many different types of hubcaps
were produced that there were hubcap stores in all the major cities. In
Texas, stealing them was a state pastime for teenaged boys.
The differentiated line of cars produced by General Motors was also a
measure of social and economic status. A Chevrolet was for those starting
out. A Cadillac was for those who had arrived. Pontiacs, Oldsmobiles, and
Buicks were stop-offs for those on the way up or down. A jump from a
Chevrolet to a Buick was an event noticed and commented upon by neighbors
as a measure of success—or of someone acting above himself.
In that postwar period, Americans were on the go, and though Charlie
Wilson was ridiculed for commenting, “What’s good for General Motors
is good for America,” he was right. The Great Depression and World War
II were memories, people had well-paying jobs, credit was easy, and a new
car could be bought with a small downpayment. GM and the auto industry
were a major part of the economy and an important contributor to that
prosperity.
The Big Three autos, coupled with the construction of the 42,500 mile
Interstate Highway System and the establisment of a vast network of safe
and inexpensive motels such as Holiday Inns, opened the continent for
inexpensive family vacations. Dinah Shore’s perky signature song
captures the essence of America’s love affair with its cars: “See the
USA in your Chevrolet. America is asking you to call. America is the
greatest land of all.”
But success bred complacency and hubris in the industry. By the mid-1960s
and early 1970s, management of the Big Three had shifted from the car
people to “numbers guys,” who were more interested in squeezing every
possible penny of profit from the vehicles. To avoid costly worker
strikes, Big Three management made major concessions to labor on pensions,
healthcare, and vacations, costs it then passed on to consumers. Meanwhile,
quality slipped. Designs were unimaginative. Buyers would ask whether a car
was produced on a Monday or Friday, fearing that either the workers were
too exhausted and hungover after the weekends to do a good job or too
anxious to leave on Friday to care.
By the late 1960s, the Big Three had become an easy target for Japanese
and European competitors. In 1980, Chrysler faced bankruptcy, and General
Motors’ management seriously considered exiting the auto business
altogether. As part of that strategy, GM bought Hughes Electronics and
Ross Perot’s EDS.
Perot and the GM management quickly soured on each other. He wanted to
manufacture the best cars in the world, and they wanted to enter into
businesses in which they were inexperienced. One of the more interesting
business lectures captured by the Harvard Business School in its case
studies is Perot’s speech to the GM board on the day he concluded his
sale of stock back to the company. He ticked off what he thought was wrong
with GM and what it needed to do assure its prosperity in the auto
industry. The essence of his message was to treat workers well, be
innovative, settle for nothing less than making the best cars in the
world, and sell them at the lowest possible price. His advice was ignored,
of course, and GM continued to lose position in its domestic market.
Eventually, GM, Ford, and Chrysler’s plodding efforts to build better
vehicles began to pay off in the early and mid- 1990s. Quality improved,
styling began to matter once again, and the Big Three produced the kinds
of vehicles Americans wanted—big, comfortable, powerful, and safe. Easy
credit and cheap gas made owning the behemoths inexpensive, and Detroit
seized control of the market for full-size pickups, vans, and SUVs.
A key moment for the Big Three and UAW came after their signing of the
1996 labor contract. GM thought it had bought three years of labor peace.
But the union unexpectedly staged a series of local strikes in facilities
that produced strategic parts, the shortage of which could stop all GM
production. These snap strikes closed GM for part of 1997 and cost the
company billions of dollars. For whatever advantage the union may have
gotten, its actions enraged GM management, which accelerated its
investment in duplicative plants in other parts of the world, staffed with
nonunion workers.
In 1999, GM spun Delphi, its parts division, into a new corporation that
entered Chapter 11 reorganization in 2005. The UAW contract was broken,
and the workers were left with $14 per hour jobs, no healthcare, and no
defined-benefit pensions. President Lyndon Johnson was once asked if half
a loaf of bread was better than none. He replied, “A slice is better
than none.” The Delphi workers got a slice.
Over the past two decades, each of the Big Three has been through
extensive management changes, downsizing, and layoffs. Chrysler even
became part of the German company Daimler, which could not make the
acquisition profitable and eventually sold 80 percent of its interest to
Cerberus, a private investment fund.
It is difficult to teach an elephant to waltz, but it can be done. While
the Big Three have been slow to change, they have adapted well enough that
they still hold half the U.S. market share. It is an amazing turnaround.
Consider quality. In 2007, Ford won 102 quality awards, including
AutoPacific’s Best in Class for three models and Germany’s largest
auto magazine’s Auto 1 of Europe Award for its S-MAX. Forbes awarded the
2008 Chrysler 300 “the highest-quality car in the near-luxury category”
over the Audi A4, BMW 3 Series, Lexus IS, and Mercedes-Benz C Class. Of the
15 global finalists for the 2008 Motor Trend Car of the Year Award, the Big
Three manufactured nine, the Japanese four, and the Europeans two. The 2008
winner was GM’s Cadillac CTS, which Motor Trend described as “proof
that Detroit can still build a world-class sedan.”
As for innovation, General Motors, Ford, and Chrysler invest almost $12
billion annually on R&D, making them a major source of technology
development. In 2007, the U.S. Patent and Trademark Office granted these
three corporations 1,030 patents.
James E. Malackowski, CEO of Ocean Tomo LLC, a merchant bank that
specializes in intellectual property products and services, recently
compared four of the green, clean, and energy efficient patent portfolios
held by the Top 15 global automakers—emission control, catalytic
converters, and related chemistry; fuel cells; hybrid/electric vehicles,
mostly motor and battery innovation; and emerging related technologies,
including solar, wind, and other green inventions.
GM has higher average quality and newer green technology and patents than
the other 14 auto manufacturers combined. Together with Ford it holds
approximately one-third of all green-technology patents and the related
value. Moreover, GM has 70 percent of the patents in the
emerging-technology category. This domestic share increases to 85 percent
if Ford is added. Finally, Ford owns 30 percent of all patents with a
similar related-value measure in emission-control innovation. These Big
Three technologies have great potential for stimulating overall U.S.
economic and job growth and creating a greener and more fuel-efficient
world.
There is much of value to be saved in this vital industry, but relief has
been slow in coming. When Wall Street recklessly gambled with borrowed
monies and lost, federal aid was characterized as a “bailout.” The
present auto crisis was created by powerful economic forces, many beyond
Detroit’s control. Federal efforts to save the U.S. auto industry would
constitute a “rescue.”
The primary causes of the current U.S. auto-industry crisis are threefold:
a financial freeze in which even well-qualified borrowers are denied credit
to buy vehicles; fluctuating oil prices that have driven the price of
gasoline from less than $2 per gallon to more than $4 and then back to $2,
all in less than 10 months; and a consumer panic that has cut retail sales
to 15-year lows.
The failure of the U.S. Treasury Department and Securities and Exchange
Commission to monitor, let alone regulate, Wall Street has created
today’s financial wreckage and the resulting consumer panic. And despite
the obvious need for a far-sighted energy policy, the last four presidents
and Congress have done little but encourage more drilling.
The longer-term inability of America’s auto industry to export
competitive products has its origins in U.S. trade policies that accept
closed foreign auto markets and the payments of massive export rebates by
other governments to their automakers. How can U.S. automakers be expected
to compete in a world where German producers get a 19 percent export
subsidy on every vehicle sold in the United States, China undervalues its
currency by up to 50 percent, Japan keeps its auto market tightly closed,
and the U.S. government allows South Korean automakers to sell more than
700,000 subsidized vehicles in this market annually, but tolerates
Korea’s restriction of U.S. imports so tightly that fewer than 7,000
American-made vehicles are sold there each year? The Big Three and the UAW
are not at fault for these distortions of competition.
The three overarching questions that President-elect Obama and the 111th
Congress face are: what will happen if the Big Three are not saved, how
much will it cost, and what is the best way to execute the rescue?
As to the first question, federal inaction would be costly and destructive
in ways America has not experienced since the Great Depression. The Center
for Automotive Research—appropriately, CAR—projects that a 100 percent
closedown of the Big Three auto producers would result in the loss of
almost 3 million U.S. jobs in the first year. The majority of those losses
would be Main Street jobs distributed across the country that depend on
spending by the Big Three—steel, glass, and rubber producers and the
20,000 dealers, who are major purchasers of advertising in local
newspapers, radio, television, and other small business services provided
by lawyers, accountants, real estate contractors, and landscapers.
A 50 percent reduction in the Big Three’s operations would be almost as
costly. CAR estimates that 2.47 million jobs would be lost in the first
year, 1.5 would still be unfilled in year two, and slightly more than 1
million in year three. The lost revenues from either scenario would
devastate federal, state, and local budgets, creating further economic
upheavals. CAR estimates that a 100 percent shutdown would cost $156
billion in lost tax receipts and increased transfer payments. A 50 percent
shutdown would cost $108 billion.
Job loss is only part of the risk. The U.S. defense industrial base would
be greatly weakened if the Big Three failed. The collection of machine
tools, robots, production lines, and skilled workers of the auto industry
gives the United States the capacity to shift quickly from domestic
production to the manufacture of tanks, airplanes, and other war materiel
as happened in World Wars I and II. The foreign auto transplants are not a
substitute, for they are mostly facilities for putting together kits
manufactured abroad.
As for the cost of the auto rescue, it is impossible to estimate the final
number. Certainly, $38 billion for an operational bridge loan is too little
and will require supplements. GM alone has a cash-burn rate of $2 billion
per month, and will use its portion of the first loans within months. Yet
the earliest that GM says that it can produce its new line of vehicles is
2010. Inevitably, the automakers will be back for more, much like the
banks and insurance companies.
As CAR has documented, however, the costs of inaction will also be great.
Its estimates of a collapse, moreover, do not include the costs of
shifting more than $100 billion of Big Three pension liabilities to the
Pension Benefit Guaranty Corporation, which is currently operating with a
$10 billion deficit. Only about a quarter to a third of the Obama
administration’s proposed stimulus of massive investment infrastructure
expenditures will be felt in 2009, half in 2010, and the remainder
thereafter. As presently defined, it will have little effect on the Big
Three.
They need more sales now. The fastest and surest way to stimulate such
activity is for the federal government to give a massive one-to-three-year
tax deduction for sales of U.S. vehicles with a high U.S. or North American
content, such as 70 percent. This would help clear the dealer backlog and
immediately put people to work. It also would allow taxpayers to get great
bargains on new vehicles.
Some have suggested that Chapter 11 is the only viable option for the Big
Three. But it would create an economic avalanche in which dozens, if not
hundreds, of suppliers and dealers would be forced into bankruptcy. No
institution other than the federal government is now able to provide the
billions of dollars necessary for the industry to operate during
reorganization. And at the very moment that these auto giants need to act
quickly and be flexible, they would be constrained by a federal judge and
trustees to get approval for even the most basic decisions. Those who
advocate bankruptcy need only look at the cumbersome and costly Delphi
experience, which is now in its fourth year.
But rescuing the American auto industry will require more than vast sums
of public monies. Basic policy changes in trade and tax laws are
essential. One of the most difficult, but unavoidable, challenges will be
to end the Value Added Tax discrimination faced by the Big Three in both
their domestic and foreign markets. Soon after World War II ended, U.S.
trade negotiators agreed to allow the rebate of Value Added Taxes on their
exports and the imposition of VAT equivalents on their imports of U.S.
goods and services. Europe was rebuilt decades ago, but 153 nations now
have a VAT, and its average rate is 15.5 percent. Japan has a 5 percent
VAT, China’s is 17 percent, Germany’s is 19 percent, and France
imposes 19.6 percent. The economic consequences to the Big Three and other
U.S.-based manufacturers have been devastating.
When a German automaker exports a vehicle into the U.S. that costs
$50,000, for instance, it receives from the German government a 19 percent
VAT export rebate, worth about $9,500. But when one of the Big Three
exports a $50,000 vehicle to Germany, it must pay the German government a
19 percent, $9,500 VAT-equivalent tax at the dock. Thus the Big Three
products are price disadvantaged in both markets. Moreover, these
discriminatory VAT rules provide a powerful incentive to outsource
production from the United States. In the Tokyo, Uruguay, and Doha trade
negotiations, the U.S. Congress instructed American trade negotiators to
eliminate this tax disadvantage, but other governments refused to discuss
the issue.
In addition to pressing for the adoption of new global trade rules to end
VAT discrimination against U.S. manufacturers, the incoming administration
should focus on eliminating the many protectionist national tariff and
non-tariff trade barriers crippling the Big Three. India, for example,
imposes a 100 percent tariff on imported U.S. vehicles. China’s tariff
rate is 25 percent. Korea has long-run national anti-import campaigns that
include targeting for tax audits anyone who buys a foreign car. Unless
foreign economic protectionism is confronted immediately and at the
highest levels of the U.S. government, the American auto industry cannot
survive.
Three other principles are essential to the rescue. First, taxpayers
should receive substantial equity in these ventures, plus long-term
warrants, whose purchase price is set at today’s stock values. After
all, we are taking the risk. When any public loans are repaid, the terms
and conditions should require a sale of those stocks, hopefully at a
substantial public profit. Taxpayers made almost a 30 percent profit on
the Chrysler loans three decades ago.
Second, demands for a reduction in worker pay should be eschewed. The UAW
and its members have already made massive wage and benefit concessions in
recent negotiations. Delphi is only one example. Almost a century ago,
Henry Ford paid his workers a then unheard of $5 per day so they could buy
the products they were making, and the auto industry led the way in
creating an American middle class. This rescue should not undermine
broader efforts to provide secure jobs and benefits, nor should it allow
the pitting of well-paid American workers against the penny-wage labor of
other countries.
Without question, the UAW has often been smug, arrogant, and inflexible.
But rather than punishing it by requiring reduction in its members’ pay,
we should expect the union to contribute to the rescue. It should enter
into a no-strike agreement until the federal loans are paid and invest its
$1 billion “rainy day” reserve, commonly called its “strike fund,”
in the preferred stock of the Big Three until the loans are satisfied. The
rainy day has come, and if taxpayers are putting up money to save UAW jobs,
so should the union.
While U.S. antitrust laws allowed the UAW to target one company at a time,
those same laws prevented the Big Three from negotiating together on an
industry-wide contract. Any rescue should permit the Big Three and UAW to
negotiate an industry wage and benefit package.
Third, executive pay at the Big Three should be capped at some simple
multiple of the average annual pay of Big Three workers, such as 10 or 15
to 1, with any bonuses being provided in corporate stock, at least until
any federal loans are paid off. Also, the Big Three executive pension
funds should be required to have at least a majority of its capital
invested in Big Three stock. The goal, of course, is to create a common
incentive for labor and management to work together.
As of mid-November 2008, the U.S. Treasury and the Federal Reserve had
advanced $2 trillion to salvage the financial wreck created by Wall
Street. In late November, the FDIC announced that it was ready to loan
another $1.4 trillion to stabilize the banks. The Bush administration and
Congress seem to have no limits to their concern about Wall Street.
The Big Three automakers, their suppliers, and dealers are on Main Street.
They employ millions of workers and provide essential goods for American
consumers. If the Big Three fail, an economic tsunami will quickly roll
across the United States, destroying jobs, incomes, and national
confidence at historic levels. The challenges faced by the new
administration at that point would be similar not to those faced by
Franklin Roosevelt, but to those that confronted Herbert Hoover in the
first years of the Great Depression.
In this instance, what is good for General Motors is good for America."<<
__________________________________________
Pat Choate is director of the Manufacturing Policy Project. His most
recent book is Dangerous Business: The Risks of Globalization for
America.
http://www.amconmag.com/article/2008/dec/15/00010/
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The auto industry has been a bulwark of the American middle class. If Wall
Street warrants a bailout, why not Detroit?
By Pat Choate
>>"In those happy days of the 1950s, my friends and I anxiously awaited
the moment when the local auto dealers began displaying their new car
models. My uncle was a Chrysler-Plymouth dealer, and we always began our
tours there. Then we would go from one showroom to another, collecting the
brochures, sitting behind the wheels of the new Corvettes, Chrysler 300s,
Plymouth Sport Furies, and Thunderbirds, opening the hoods and admiring
the powerful engines. Rare was the teenager of that era who did not know
the specifications of virtually every model produced by General Motors,
Ford, and Chrysler.
“Car people” such as Lee Iacocca, then at Ford, were in charge of
America’s Big Three automakers. They loved their cars as much as their
customers did. The carmakers and their suppliers produced an ever changing
set of engines, transmissions, accessories, and gadgets that made buying a
car a family treat unlike any other. So many different types of hubcaps
were produced that there were hubcap stores in all the major cities. In
Texas, stealing them was a state pastime for teenaged boys.
The differentiated line of cars produced by General Motors was also a
measure of social and economic status. A Chevrolet was for those starting
out. A Cadillac was for those who had arrived. Pontiacs, Oldsmobiles, and
Buicks were stop-offs for those on the way up or down. A jump from a
Chevrolet to a Buick was an event noticed and commented upon by neighbors
as a measure of success—or of someone acting above himself.
In that postwar period, Americans were on the go, and though Charlie
Wilson was ridiculed for commenting, “What’s good for General Motors
is good for America,” he was right. The Great Depression and World War
II were memories, people had well-paying jobs, credit was easy, and a new
car could be bought with a small downpayment. GM and the auto industry
were a major part of the economy and an important contributor to that
prosperity.
The Big Three autos, coupled with the construction of the 42,500 mile
Interstate Highway System and the establisment of a vast network of safe
and inexpensive motels such as Holiday Inns, opened the continent for
inexpensive family vacations. Dinah Shore’s perky signature song
captures the essence of America’s love affair with its cars: “See the
USA in your Chevrolet. America is asking you to call. America is the
greatest land of all.”
But success bred complacency and hubris in the industry. By the mid-1960s
and early 1970s, management of the Big Three had shifted from the car
people to “numbers guys,” who were more interested in squeezing every
possible penny of profit from the vehicles. To avoid costly worker
strikes, Big Three management made major concessions to labor on pensions,
healthcare, and vacations, costs it then passed on to consumers. Meanwhile,
quality slipped. Designs were unimaginative. Buyers would ask whether a car
was produced on a Monday or Friday, fearing that either the workers were
too exhausted and hungover after the weekends to do a good job or too
anxious to leave on Friday to care.
By the late 1960s, the Big Three had become an easy target for Japanese
and European competitors. In 1980, Chrysler faced bankruptcy, and General
Motors’ management seriously considered exiting the auto business
altogether. As part of that strategy, GM bought Hughes Electronics and
Ross Perot’s EDS.
Perot and the GM management quickly soured on each other. He wanted to
manufacture the best cars in the world, and they wanted to enter into
businesses in which they were inexperienced. One of the more interesting
business lectures captured by the Harvard Business School in its case
studies is Perot’s speech to the GM board on the day he concluded his
sale of stock back to the company. He ticked off what he thought was wrong
with GM and what it needed to do assure its prosperity in the auto
industry. The essence of his message was to treat workers well, be
innovative, settle for nothing less than making the best cars in the
world, and sell them at the lowest possible price. His advice was ignored,
of course, and GM continued to lose position in its domestic market.
Eventually, GM, Ford, and Chrysler’s plodding efforts to build better
vehicles began to pay off in the early and mid- 1990s. Quality improved,
styling began to matter once again, and the Big Three produced the kinds
of vehicles Americans wanted—big, comfortable, powerful, and safe. Easy
credit and cheap gas made owning the behemoths inexpensive, and Detroit
seized control of the market for full-size pickups, vans, and SUVs.
A key moment for the Big Three and UAW came after their signing of the
1996 labor contract. GM thought it had bought three years of labor peace.
But the union unexpectedly staged a series of local strikes in facilities
that produced strategic parts, the shortage of which could stop all GM
production. These snap strikes closed GM for part of 1997 and cost the
company billions of dollars. For whatever advantage the union may have
gotten, its actions enraged GM management, which accelerated its
investment in duplicative plants in other parts of the world, staffed with
nonunion workers.
In 1999, GM spun Delphi, its parts division, into a new corporation that
entered Chapter 11 reorganization in 2005. The UAW contract was broken,
and the workers were left with $14 per hour jobs, no healthcare, and no
defined-benefit pensions. President Lyndon Johnson was once asked if half
a loaf of bread was better than none. He replied, “A slice is better
than none.” The Delphi workers got a slice.
Over the past two decades, each of the Big Three has been through
extensive management changes, downsizing, and layoffs. Chrysler even
became part of the German company Daimler, which could not make the
acquisition profitable and eventually sold 80 percent of its interest to
Cerberus, a private investment fund.
It is difficult to teach an elephant to waltz, but it can be done. While
the Big Three have been slow to change, they have adapted well enough that
they still hold half the U.S. market share. It is an amazing turnaround.
Consider quality. In 2007, Ford won 102 quality awards, including
AutoPacific’s Best in Class for three models and Germany’s largest
auto magazine’s Auto 1 of Europe Award for its S-MAX. Forbes awarded the
2008 Chrysler 300 “the highest-quality car in the near-luxury category”
over the Audi A4, BMW 3 Series, Lexus IS, and Mercedes-Benz C Class. Of the
15 global finalists for the 2008 Motor Trend Car of the Year Award, the Big
Three manufactured nine, the Japanese four, and the Europeans two. The 2008
winner was GM’s Cadillac CTS, which Motor Trend described as “proof
that Detroit can still build a world-class sedan.”
As for innovation, General Motors, Ford, and Chrysler invest almost $12
billion annually on R&D, making them a major source of technology
development. In 2007, the U.S. Patent and Trademark Office granted these
three corporations 1,030 patents.
James E. Malackowski, CEO of Ocean Tomo LLC, a merchant bank that
specializes in intellectual property products and services, recently
compared four of the green, clean, and energy efficient patent portfolios
held by the Top 15 global automakers—emission control, catalytic
converters, and related chemistry; fuel cells; hybrid/electric vehicles,
mostly motor and battery innovation; and emerging related technologies,
including solar, wind, and other green inventions.
GM has higher average quality and newer green technology and patents than
the other 14 auto manufacturers combined. Together with Ford it holds
approximately one-third of all green-technology patents and the related
value. Moreover, GM has 70 percent of the patents in the
emerging-technology category. This domestic share increases to 85 percent
if Ford is added. Finally, Ford owns 30 percent of all patents with a
similar related-value measure in emission-control innovation. These Big
Three technologies have great potential for stimulating overall U.S.
economic and job growth and creating a greener and more fuel-efficient
world.
There is much of value to be saved in this vital industry, but relief has
been slow in coming. When Wall Street recklessly gambled with borrowed
monies and lost, federal aid was characterized as a “bailout.” The
present auto crisis was created by powerful economic forces, many beyond
Detroit’s control. Federal efforts to save the U.S. auto industry would
constitute a “rescue.”
The primary causes of the current U.S. auto-industry crisis are threefold:
a financial freeze in which even well-qualified borrowers are denied credit
to buy vehicles; fluctuating oil prices that have driven the price of
gasoline from less than $2 per gallon to more than $4 and then back to $2,
all in less than 10 months; and a consumer panic that has cut retail sales
to 15-year lows.
The failure of the U.S. Treasury Department and Securities and Exchange
Commission to monitor, let alone regulate, Wall Street has created
today’s financial wreckage and the resulting consumer panic. And despite
the obvious need for a far-sighted energy policy, the last four presidents
and Congress have done little but encourage more drilling.
The longer-term inability of America’s auto industry to export
competitive products has its origins in U.S. trade policies that accept
closed foreign auto markets and the payments of massive export rebates by
other governments to their automakers. How can U.S. automakers be expected
to compete in a world where German producers get a 19 percent export
subsidy on every vehicle sold in the United States, China undervalues its
currency by up to 50 percent, Japan keeps its auto market tightly closed,
and the U.S. government allows South Korean automakers to sell more than
700,000 subsidized vehicles in this market annually, but tolerates
Korea’s restriction of U.S. imports so tightly that fewer than 7,000
American-made vehicles are sold there each year? The Big Three and the UAW
are not at fault for these distortions of competition.
The three overarching questions that President-elect Obama and the 111th
Congress face are: what will happen if the Big Three are not saved, how
much will it cost, and what is the best way to execute the rescue?
As to the first question, federal inaction would be costly and destructive
in ways America has not experienced since the Great Depression. The Center
for Automotive Research—appropriately, CAR—projects that a 100 percent
closedown of the Big Three auto producers would result in the loss of
almost 3 million U.S. jobs in the first year. The majority of those losses
would be Main Street jobs distributed across the country that depend on
spending by the Big Three—steel, glass, and rubber producers and the
20,000 dealers, who are major purchasers of advertising in local
newspapers, radio, television, and other small business services provided
by lawyers, accountants, real estate contractors, and landscapers.
A 50 percent reduction in the Big Three’s operations would be almost as
costly. CAR estimates that 2.47 million jobs would be lost in the first
year, 1.5 would still be unfilled in year two, and slightly more than 1
million in year three. The lost revenues from either scenario would
devastate federal, state, and local budgets, creating further economic
upheavals. CAR estimates that a 100 percent shutdown would cost $156
billion in lost tax receipts and increased transfer payments. A 50 percent
shutdown would cost $108 billion.
Job loss is only part of the risk. The U.S. defense industrial base would
be greatly weakened if the Big Three failed. The collection of machine
tools, robots, production lines, and skilled workers of the auto industry
gives the United States the capacity to shift quickly from domestic
production to the manufacture of tanks, airplanes, and other war materiel
as happened in World Wars I and II. The foreign auto transplants are not a
substitute, for they are mostly facilities for putting together kits
manufactured abroad.
As for the cost of the auto rescue, it is impossible to estimate the final
number. Certainly, $38 billion for an operational bridge loan is too little
and will require supplements. GM alone has a cash-burn rate of $2 billion
per month, and will use its portion of the first loans within months. Yet
the earliest that GM says that it can produce its new line of vehicles is
2010. Inevitably, the automakers will be back for more, much like the
banks and insurance companies.
As CAR has documented, however, the costs of inaction will also be great.
Its estimates of a collapse, moreover, do not include the costs of
shifting more than $100 billion of Big Three pension liabilities to the
Pension Benefit Guaranty Corporation, which is currently operating with a
$10 billion deficit. Only about a quarter to a third of the Obama
administration’s proposed stimulus of massive investment infrastructure
expenditures will be felt in 2009, half in 2010, and the remainder
thereafter. As presently defined, it will have little effect on the Big
Three.
They need more sales now. The fastest and surest way to stimulate such
activity is for the federal government to give a massive one-to-three-year
tax deduction for sales of U.S. vehicles with a high U.S. or North American
content, such as 70 percent. This would help clear the dealer backlog and
immediately put people to work. It also would allow taxpayers to get great
bargains on new vehicles.
Some have suggested that Chapter 11 is the only viable option for the Big
Three. But it would create an economic avalanche in which dozens, if not
hundreds, of suppliers and dealers would be forced into bankruptcy. No
institution other than the federal government is now able to provide the
billions of dollars necessary for the industry to operate during
reorganization. And at the very moment that these auto giants need to act
quickly and be flexible, they would be constrained by a federal judge and
trustees to get approval for even the most basic decisions. Those who
advocate bankruptcy need only look at the cumbersome and costly Delphi
experience, which is now in its fourth year.
But rescuing the American auto industry will require more than vast sums
of public monies. Basic policy changes in trade and tax laws are
essential. One of the most difficult, but unavoidable, challenges will be
to end the Value Added Tax discrimination faced by the Big Three in both
their domestic and foreign markets. Soon after World War II ended, U.S.
trade negotiators agreed to allow the rebate of Value Added Taxes on their
exports and the imposition of VAT equivalents on their imports of U.S.
goods and services. Europe was rebuilt decades ago, but 153 nations now
have a VAT, and its average rate is 15.5 percent. Japan has a 5 percent
VAT, China’s is 17 percent, Germany’s is 19 percent, and France
imposes 19.6 percent. The economic consequences to the Big Three and other
U.S.-based manufacturers have been devastating.
When a German automaker exports a vehicle into the U.S. that costs
$50,000, for instance, it receives from the German government a 19 percent
VAT export rebate, worth about $9,500. But when one of the Big Three
exports a $50,000 vehicle to Germany, it must pay the German government a
19 percent, $9,500 VAT-equivalent tax at the dock. Thus the Big Three
products are price disadvantaged in both markets. Moreover, these
discriminatory VAT rules provide a powerful incentive to outsource
production from the United States. In the Tokyo, Uruguay, and Doha trade
negotiations, the U.S. Congress instructed American trade negotiators to
eliminate this tax disadvantage, but other governments refused to discuss
the issue.
In addition to pressing for the adoption of new global trade rules to end
VAT discrimination against U.S. manufacturers, the incoming administration
should focus on eliminating the many protectionist national tariff and
non-tariff trade barriers crippling the Big Three. India, for example,
imposes a 100 percent tariff on imported U.S. vehicles. China’s tariff
rate is 25 percent. Korea has long-run national anti-import campaigns that
include targeting for tax audits anyone who buys a foreign car. Unless
foreign economic protectionism is confronted immediately and at the
highest levels of the U.S. government, the American auto industry cannot
survive.
Three other principles are essential to the rescue. First, taxpayers
should receive substantial equity in these ventures, plus long-term
warrants, whose purchase price is set at today’s stock values. After
all, we are taking the risk. When any public loans are repaid, the terms
and conditions should require a sale of those stocks, hopefully at a
substantial public profit. Taxpayers made almost a 30 percent profit on
the Chrysler loans three decades ago.
Second, demands for a reduction in worker pay should be eschewed. The UAW
and its members have already made massive wage and benefit concessions in
recent negotiations. Delphi is only one example. Almost a century ago,
Henry Ford paid his workers a then unheard of $5 per day so they could buy
the products they were making, and the auto industry led the way in
creating an American middle class. This rescue should not undermine
broader efforts to provide secure jobs and benefits, nor should it allow
the pitting of well-paid American workers against the penny-wage labor of
other countries.
Without question, the UAW has often been smug, arrogant, and inflexible.
But rather than punishing it by requiring reduction in its members’ pay,
we should expect the union to contribute to the rescue. It should enter
into a no-strike agreement until the federal loans are paid and invest its
$1 billion “rainy day” reserve, commonly called its “strike fund,”
in the preferred stock of the Big Three until the loans are satisfied. The
rainy day has come, and if taxpayers are putting up money to save UAW jobs,
so should the union.
While U.S. antitrust laws allowed the UAW to target one company at a time,
those same laws prevented the Big Three from negotiating together on an
industry-wide contract. Any rescue should permit the Big Three and UAW to
negotiate an industry wage and benefit package.
Third, executive pay at the Big Three should be capped at some simple
multiple of the average annual pay of Big Three workers, such as 10 or 15
to 1, with any bonuses being provided in corporate stock, at least until
any federal loans are paid off. Also, the Big Three executive pension
funds should be required to have at least a majority of its capital
invested in Big Three stock. The goal, of course, is to create a common
incentive for labor and management to work together.
As of mid-November 2008, the U.S. Treasury and the Federal Reserve had
advanced $2 trillion to salvage the financial wreck created by Wall
Street. In late November, the FDIC announced that it was ready to loan
another $1.4 trillion to stabilize the banks. The Bush administration and
Congress seem to have no limits to their concern about Wall Street.
The Big Three automakers, their suppliers, and dealers are on Main Street.
They employ millions of workers and provide essential goods for American
consumers. If the Big Three fail, an economic tsunami will quickly roll
across the United States, destroying jobs, incomes, and national
confidence at historic levels. The challenges faced by the new
administration at that point would be similar not to those faced by
Franklin Roosevelt, but to those that confronted Herbert Hoover in the
first years of the Great Depression.
In this instance, what is good for General Motors is good for America."<<
__________________________________________
Pat Choate is director of the Manufacturing Policy Project. His most
recent book is Dangerous Business: The Risks of Globalization for
America.
http://www.amconmag.com/article/2008/dec/15/00010/
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