On Trust, Fairness, and the Auto Industry Bailout
posted on December 11th, 2008
The proposed bailout for the big three domestic auto makers upsets me. Nobody is rushing to the aid of workers in the not-for-profit sector, despite the fact that a) there are many of us, and b) the economic slowdown isn’t our fault, either. Other auto makers who manufacture and sell cars in the United States aren’t asking for handouts. So why does an industry that has been run terribly inefficiently deserve a bailout?
On the other hand, if certain elements of the banking industry are “too big to fail”, why isn’t the auto industry? After all, plenty of American citizens depend on their cars, plenty of those cars are made by U.S. auto makers, and plenty of those are still under warranty. But is saying “the auto industry can’t be allowed to fail” the same thing as saying “the auto industry must be bailed out”? And is the first premise even correct? In short, why is this issue so much more complicated than it should be?
- AIG, which employs 166,000 people, has already been granted a bailout in the form of secured loans in the amount of $123 billion. The Detroit Three, which directly employ 411,000 people, not to mention the people employed by suppliers and subcontractors, is asking for approximately 20% as much as AIG has already received. And as John Stewart pointed out, at least the auto industry actually makes something.
- As much as I’d like to blame the big three for needing help because they make big, inefficient, expensive cars that I don’t want to buy, the truth is that they sold a lot of cars for a long time, so there was actually a market for these products. Several years of staggering volatility in the oil market followed by a credit freeze was a perfect storm; fewer people could afford to drive the cars they made, and of those, even fewer would be able to get a loan to purchase one. 5 of America’s top 10 selling vehicles of 2006, as well as 4 of the top 10 in 2007, were from the Detroit Three. Each year the list was topped by the most popular vehicle in America for 23 consecutive years, the Ford F-series pickup truck, followed by another pickup, the Chevy Silverado. I wasn’t buying these things, but clearly somebody was.
- At the same time, other auto makers who manufacture cars don’t seem to need a bailout, because they don’t pay their employees as much and they market cars to more parts of the world than just North America. The Toyota Corolla, for example, enjoys brisk sales in the U.S. and far out-strips the mighty F150 in sales worldwide. Failing to create products that appeal to the world-wide car-buying public is certainly their fault.
But even if we grant that the Detroit Three both need and deserve assistance, is a bailout the answer? The CEOs claim that they couldn’t survive bankruptcy because the American People would lose too much faith in them, driving down sales. And it’s true, even I would think twice before buying a car, even the magical $10,000 electric car I’ve been waiting decades for, if I thought the maker couldn’t be forced to honor its warranty. At the same time, I can hardly imagine that the words “Chapter 11″ could possibly decrease the public’s faith in the domestic auto industry. So I confess, I can understand why labor would be against bankruptcy - even though pensions would be protected, the contracts could be thrown out and other benefits could be endangered - but the only reason I can think of why management would be afraid of bankruptcy is that a bankruptcy judge could potentially throw them from their jobs. I would think that management would love the ability to throw out the extremely costly UAW contract; the fact that they’re so resistant confuses me.
My suggestion is to structure the bailout as a sort of “reduced bankruptcy”:
- Any company that chooses to receive a government bridge loan must use the money for one of the following purposes only:
- Guarantee warranty service on all cars under warranty from the manufacturer, including new cars sold.
- Continue to provide health care benefits for employees and dependents that currently receive them.
- Research and Development of electric and alternative fuel vehicle power trains.
- The “Car Czar” is granted several important powers that a bankruptcy judge would have, namely to throw out existing contracts and to replace corporate leadership.
- Any participating company’s CAFE standards will increase by 20%, above and beyond other scheduled increases, starting in 2010.
I don’t know if the Detroit Three would go for it, and if they do, I don’t know that it would solve their myriad problems. However, I do know that if they didn’t take this deal, their stated reason for resisting bankruptcy, that nobody would “trust” a bankrupt carmaker to sell and service a good product, is complete bullshit.
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