US Auto Industry - A Brief Summary

Four Points to consider from today’s House Hearings:


On C-Span today, Thad McCotter stressed that this is NOT a new appropriations of money, but a reallocation of money already appropriated.  He suggested that half come from the DOE $25b fund for fuel-efficiency improvements, and half come from TARP given the role of the financing arms of the automotive corporations.

So this isn’t any new money.  It’s money that is already allocated; that battle is already lost.  The only question is how to distribute the money.  But remember, the money is already as good as gone.


Secondly, a question concerning pension plans was brought up during the house session.  I don’t know all the details of who owes what, but Wagoner did mention that GM’s pension obligations are currently fully met (meaning there is no advantage to be gained there with bankruptcy).  I take this to mean that if liquidation occurred, those pension funds would be at risk.  Perhaps someone with knowledge of this aspect could enlighten me here: Wouldn’t some of the pension obligations then fall to the government if GM ceased to exist?


Third:  Concerning health care obligations; an agreement is already in place to transfer those from GM’s books, and that agreement has been modified to allow GM to extend those payments to the trust.  Eventually, the UAW will be responsible for managing that trust.  If GM ceased to exist, wouldn’t those costs all be transferred to the government in the form of Medicare for retirees?


Fourth: We are experiencing unprecedented decreases in sales.  This is important to consider.  All of the automakers are scrambling to reassess their business plans in light of the new economic environment.  No one foresaw a drop of 40-50% in year over year sales, just like no one could have predicted an increase in gas prices of over 100% over the course of two years, then a reduction back to 2006 levels in a few months.  No business plan can accommodate this.


How We Got Here (Recent Pressures that Exposed the Weaknesses of the Domestic Manufacturers)


Government meddling in the housing and mortgage industry contributed to the collapse of the credit market and housing prices.  This eliminated most sources for funding for vehicles (either auto loans or equity).  Then the price of energy skyrocketed over a short term, increasing foreclosures further and putting pressure on the economy as a whole.  As a result, people quit buying cars, exposing the underlying weaknesses in the domestic auto industry.  Bankruptcy became imminent, so more people quit buying cars.  No one knows how this is going to pan out.  However, none of this has been the result of a failed business model or the free market.


GM, Chrysler, and to a lesser extent Ford are not on the verge of failure because of failed business models; they are on the verge of failure because they are broken socialist experiments.  If it takes a reallocation of existing funds to bridge the automakers through to March, that is the best solution.  By March, the extent of the failed socialism will be plain to see, and in March we will be discussing either more money continuing things as “More of the Same”, or we will be discussing additional funding to bring about much needed change.


Impact on the Foreign Automakers Located in the U.S.

(Successful Foreign Companies will Pick up the Slack)


Here is an example of how close the auto companies are linked:  I recently rented a Dodge Caliber.  I hated the steering column, as I banged my knee repeatedly on the molding.  Two weeks later, I rented a Toyota Corolla; and I hated the steering column, as I banged my knee repeatedly on the molding.  It was then I noticed:  The instrument panel, steering column, and nearly the entire dashboard were identical between the two vehicles.  If Chrysler closes its doors, whoever makes this instrument panel is going to have a dramatic decrease in sales, and will most likely shut down as well.  Toyota will not have the instrument panels needed to make their Corollas, and they will have to shut down production until new panels can be found.


The questions here are complex, with no easy answers.  “Let ‘em fail, Shut ‘em down” sounds good, all principled and hard-core.  But it’s not feasible.  That approach will bring down the international manufacturers here in the states too.  Barring a deep, long, and severe recession, there will ultimately be a shortage of cars, or we will be importing more cars than ever.  The international companies do not have the capacity in the states to meet demand domestically, and won’t for a number of years.  There is no way the international companies would buy up the current assembly plants, slap a Toyota or Honda nameplate on them, and continue to build the same perceived lower quality vehicles without massive (and expensive) retooling of those plants.  Parts suppliers will fall left and right, cutting off the domestic supply of components to the foreign manufacturers.


Turning the Bridge Loan to a Benefit:


Reallocation of existing money to bridge the domestic automakers to March 2009 will provide time to formulate solid, free-market changes needed to strengthen the entire US auto industry.  It will provide time set plans in motion for organized quasi-bankruptcy, where contracts can be renegotiated and solutions found.  Remember, we are dealing with economic circumstances that are unprecedented.  There is no business plan that can accommodate wildly fluctuating fuel prices, dramatic drops in home equity, and a near-freezing of the credit market.  This plan has to be developed.


In the meantime, stress to your representatives that while re-allocating money already appropriated to keep the automakers afloat can be swallowed, you will in no way accept any additional expenditures of NEW money without dramatic changes to the way the domestic manufacturers are organized.