Diary

GM, Chrysler Bankruptcies in Perspective

The worldwide auto industry has the capacity to produce 90 million cars a year, but demand is only 58 million. This is probably the best single indicator of where the industry is today.

 

Wasn’t economist Adam Smith’s so-called ‘invisible hand’ of capitalism supposed to even out supply and demand?

 

No. In fact by producing more capacity than demand, it has had the effect of suppressing prices, which is good for consumers. That does not mean that the current situation is not going to require some severe adjustments, however. The industry needs to trim down globally, and inefficient producers will have to lose more weight than anyone else.

 

Now General Motors and Chrysler LLC have gone into bankruptcy, like the Twin Towers of American industry crumbling one after another. And what does it mean?

 

In the long run, it is a good thing. The companies were operating on an unsustainable basis. Certainly many people are going to be hurt, but all three American makers including Ford – which has neither declared bankruptcy nor taken government cash – are going to come out of this much more competitive and with much less body fat for the future.

 

GM said it would close 17 factories and parts producers and terminate 20,000 more jobs by the end of 2011 in Michigan, Indiana, Ohio, Tennessee and other states. The company has not made a profit since 2004 and claims to have $172 billion in debt and $82 billion in assets.

 

Meanwhile a judge has approved the sale of most of Chrysler’s assets to Italy’s Fiat. Under the deal, Chrysler would gain access to Fiat’s expertise in making smaller fuel-saving vehicles. Fiat would initially get 20% of Chrysler, but its share could rise to 35% if things go right. Fiat also will get access to the American market through Chrysler dealerships. But past negative experiences with Fiat will make many Americans unlikely to embrace the company.

 

Thus for the American industry there will be huge challenges ahead. Which cars to make? How to sell them? Interestingly the best-selling vehicles on the American side of the industry are trucks. The Ford F-Series and Chevy Silverado pickups each have sales of more than 450,000 units per year. Why? Because America still is a hard-working nation, and all those construction bosses, masons, carpenters, farmers, welders and others still need wheels with power and load capacity.

 

President Obama said in a statement “What I have no interest in is running GM.” But after more than $50 billion in government bailout cash goes into GM, he has no choice. A private bankruptcy would have given the company a chance to reorganize itself. But by appealing to the government for loans, accepting those loans and then allowing the government to organize the bankruptcy, the government indeed will “run” GM.

 

Obama’s statement is disingenuous because the government ultimately is going to approve the private board of directors that will run GM. Democrat-friendly operatives will operate the company wherever possible, and so indeed Obama himself will not. So his statement is half-true. Which is typical Obama sleight-of-word.

 

That Obama’s Treasury department has arranged for the unions to take big stakes in the new companies (17.5% in GM, 55% in Chrysler) shows how the government is going to manipulate the industry woes to the advantage of liberals. That many of the shut-down Chrysler dealerships are owned by Republicans while one group of dealerships owned by a former Clinton administration official is being allowed to stay open shows how Obama Inc. is going to turn this problem to Democrats’ favor at every turn.

 

Former presidential candidate and Michigan native Mitt Romney has called on the Obama administration to distribute the 70% government share of GM to taxpayers, and the 17.5% of the United Auto Workers stake to UAW members rather than being held by the union healthcare trust fund. This is unlikely.

 

Now the industry will have a choice – to go in the direction consumers wish to pull it through demand, or in the direction that the government wants to push it through supply. These will prove incompatible. While Obama preaches higher fuel economy standards by 2016, most consumers have shown little interest in the economical cars that will produce those higher figures.

 

Since the end of World War II, small fuel-efficient cars have been available – the Volkswagen Beetle, the Chevy Chevette, Dodge Neon, Honda Civic, Toyota Corolla, Hyundai Accent and more. Yet why are not the half of Americans who vote Democrat/environmentalist driving these cars as an example to the rest of us?

 

Answer: Because even they do not want to drive these cars, that is why. And that is an indicator of where the industry will go if it is forced to make small cars.

 

The current woes of the American auto industry are unfortunate but nothing really new. Car companies have come and gone from the start – Marmon, LaSalle, Hudson, American Motors, Tucker, Oldsmobile, Nash. Inefficient, heavily ornamented vehicles like big tail-finned Cadillacs of the late 1950s today look like quaint relics. In the 1960s, boys used to wait for the day that the new chrome-laden models would appear in showrooms, while ‘muscle cars’ of the late 1960s and early 1970s showed us what real power was about.

 

What were we thinking? one might ask.

 

The answer is that for a period the industry made big, inefficient cars and now has moved past that stage. Unfortunately management in the US auto industry has been lax in developing good cars since, and the unions have been exceedingly greedy, leading to the current situation. That Obama plans to give such large chunks of GM and Chrysler to the unions is just another political payoff to the same organized labor that already has sucked hundreds of billions in exorbitant wages, benefits, pensions and health care out of Detroit over the last 50 years.

 

A man by the name of W. Edwards Deming went to Japan after World War II and showed them how Americans made cars. The Japanese, who are not known for being original or creative people but who can take an established idea and improve on it, took the ball and ran with it. Today, the Toyota Camry, now made in the US, is the best-selling car in America and the best passenger vehicle on the American market.

 

The US industry needs to reformulate itself around quality cars. If the government and the enviro movement force it to make only small cars, the industry will continue to shrink. That the United Auto Workers managed to get GM to agree not to import small cars from its overseas plants sounds like a good idea. But the big question is: Will Americans want them anyway, whether made here or abroad?

 

The answer is that that is not likely. Our nation needs today to stop promoting this incessant nonsense about the world running out of oil and to start making good-quality, decent-sized and safe cars that people want, and to produce its way out of its current crisis. Even mid-sized cars like the Camry are fuel-efficient today.

 

Government bailouts are only a temporary fix. Let’s hope the car companies move beyond federal assistance as quickly as possible.

 

Please visit my website at www.nikitas3.com for more. You can print out for free my book, Right Is Right, which explains why only conservatism can maintain our freedom and prosperity.