The Big Three Stick-Up

November 19, 2008 at 5:16 pm
Contributed by: Chris

In this week’s column for Energy and Capital, I argue that instead of stepping backward to bail out the automakers, we should step forward to the next generation of auto makers.

The Big Three Stick-Up

Bailing Out the Automakers Is Stepping Backwards

By Chris Nelder
Wednesday, November 19th, 2008

It was quite a spectacle watching the heads of the Big Three automakers beg the Senate Banking Committee for another $25 billion in bailout money yesterday.

Or should I say, watching them attempt to stick-up America.

“This is about much more than just Detroit,” said GM chief Rick Wagoner, “It’s about saving the U.S. economy from a catastrophic collapse.”

Only a “bridge loan,” he argued, could keep their long supply chain alive, and preserve public confidence in the companies so they might survive.

He ticked off the measures GM has already taken: Whacking $9 billion from its fixed cost base, on the way to $15 billion by 2011. Cutting hourly labor costs by $12 billion by 2010. Slashing pension and health care costs. Scaling back manufacturing capacity and discontinuing unprofitable truck models. Bonuses, raises, 401(k) contributions, and post-retirement health care are gone. By next year, the company will offer 20 new models that get at least 30 mpg, he said, as well as nine hybrids. Their hydrogen car test fleet is the largest in the world, he boasted, and they are going “all out” to bring the Chevy Volt PHEV to market “as soon as possible.”

So don’t tell him that GM isn’t doing enough to adapt. Their crisis wasn’t due to a flawed business model or an undesirable line of products, he asserted, but rather the same credit crisis that has sunk the financial sector.

There’s nothing new about the latest crisis in Detroit; this is the same old song and dance we’ve heard again and again. Oh what the heck, let’s play it again:

Since the first amphibians crawled out of the slime
We’ve been struggling in an unrelenting climb
We were hardly up and walking
Before money started talking
And it’s sad that failure is an awful crime.

Well it’s been that way for a millennium or two
But now it seems there’s a different point of view
If you’re a corporate titantic
And your failure is gigantic
Then in Congress there’s a safety net for you.

I am changing my name to Chrysler
I am going down to Washington D.C.
I will tell some power broker
What they did for Iacocca
Will be perfectly acceptable to me
I am changing my name to Chrysler
I am headed for that great receiving line
So when they hand a million grand out
I’ll be standing with my hand out
Yessir, I’ll get mine.

—Tom Paxton, “I’m Changing My Name to Chrysler” (1979)

And after that bailout, immortalized in song, what did Chrysler give us? The infamous “K cars.” I had one of those for a few years, a hand-me-down, and it was a total piece of junk. By the time I got rid of it, it was a veritable death trap, with a two-by-four propping up the driver’s seat and an engine that ran at 4,000 RPM at all times and couldn’t be fixed.

But I digress.

For the good of America, the auto titans argued to Congress, their businesses must be saved…while holding the gun of jobs at our backs.

GM even put out a YouTube video about the potential job losses (which stock analyst Henry Blodget rightly called “propaganda terrorism”) saying that between the Big Three, there are:

  • 239,000 employees
  • 775,000 retirees and surviving spouses dependent on pensions and benefits
  • 610,000 workers employed by suppliers
  • 740,000 employees at 14,000 dealerships

One of every 10 jobs-13 million people-are reliant on the US auto industry, the video claimed, and if all of the Big Three’s US operations ceased in 2009, nearly 3 million US jobs would be lost, with a huge blow to the economy.

“We can loan $25 billion now…or lose $156 billion later. What will WE do?” it concluded.

It’s Not About the Jobs

That’s right America: It’s your problem. Just like the banks and insurance companies and everybody else we’ve been bailing out because they’re “too big to let fail.”

After the roughly $2 trillion already committed to stemming the credit crisis, an additional $25 billion in public money for the automakers (on top of the $25 billion loan program created by Congress in September to help them develop more fuel-efficient vehicles) seems almost trivial.

But it isn’t.

Not only is it a moral hazard to reward unprofitable business practices, it’s fundamentally wrong and anti-capitalistic.

It wasn’t about the jobs when the automakers sent so much of their manufacturing overseas; that was about the bottom line.

It wasn’t about the jobs when they built, and then destroyed, the EV-1 electric car program.

It wasn’t about the jobs when they made decades of shoddy vehicles consumers shunned in favor of better products from foreign manufacturers.

It’s only about the jobs when it costs them. For over 50 years, the Big Three have fought anything that was good for the public but which might cost them some profits, like installing $25 catalytic converters to reduce emissions, adding mandatory seatbelts, or making a serious investment in cleaner, next-generation vehicles. Then they’re willing to spend millions to fight it.

They have staunchly opposed fuel efficiency standards for decades, and ignored the impending threat of peak oil even as oil prices drove them out of business. General Motors began dismantling urban mass transit in the US in 1922, and has disrupted countless attempts at public transit ever since.

GM Vice Chairman Bob Lutz even had the gall to call global warming a “a total crock of sh*t.”

(For a painfully detailed history on the Big Three’s shenanigans, check out Taken for a Ride by Jack Doyle, and the 1996 documentary film of the same name by Jim Klein.)

Even as the automakers created those all-important jobs while building their businesses, they also committed the entire country to an unsustainable infrastructure of far-flung suburbs and endless roads. We’re about to pay an enormous price for that.

As it turns out, what has been good for GM is not good for the country in the long term.

Don’t get me wrong. I have a great deal of sympathy for the good people who work in the Big Three’s plants. The first part of my childhood was spent in Detroit, and I know full well how critical the auto industry is to that economy. It has broken my heart to see that once-great city fall into the disrepair and crime that plagues it today. But to my mind, that’s all part of the proof that the Big Three have had their day.

I even have a little sympathy for the Big Three CEOs who are struggling to save their companies now. But the cutbacks they have made amount to pruning a dead tree.

Lead, Follow, or Get Out of the Way

At some point, our concern has to be the long-term sustainability of our economy, not just today’s jobs. A truly sustainable economy has plenty of jobs; they just might be different from the jobs we have today.

And the sooner we commit to building that sustainable economy, the sooner we’ll have the jobs we really need, making the things we really need, like truly high-efficiency vehicles. It’s a bad joke that American manufactured vehicles in Europe already get 60+ MPG while the same models here get under 35.

Now, if GM fails, then so does the promise of the first serious American-made PHEV, the Chevy Volt. And that would be a shame. But I have no doubt that the world’s more progressive automakers will be quick to fill that void. The Japanese manufacturers are already light-years ahead of the Big Three in PHEV technology, and are already tooled up to crank those vehicles out in mass production.

Meanwhile, scrappy young startups in Silicon Valley and elsewhere are preparing to leapfrog the industry in technology, with high-performance PHEVs and all-electric vehicles that blow the doors off of anything the Big Three have planned, like the Tesla and the Aptera. These companies are shooting for 100 mpg, not 30, and they plan to deliver it in about the same time frame.

We can do better, folks. With peak oil essentially already upon us, we must do better. The rest of the world is already doing better. Why cling to this lumbering beast that has done so much permanent damage to the long-term health of our country?

In the short term, I suppose we have no choice but to try to preserve some of the Big Three’s jobs, because such a massive loss will really cut when the economy is as down and out as it is. But any sort of public bailout must come with a lot of strings attached, to force the companies to downsize, shed their obligations and start building vehicles for the 21st Century.

Eventually, however, I think they must go. For over 50 years, they have worked to ruin the future of transportation, stifle innovation, bury patents, and stop any progress on controlling emissions. They have spent hundreds of millions, and cost the public billions, in obstructing progress. This cannot be allowed to continue.

In the same way that that a redwood tree inhibits the growth of the understory by blocking the light before it can reach the forest floor, the Big Three have become an effective monopoly of bad design. Their company cultures are rotten to the core, and they are about to topple, making room and letting in sunshine where new, nimbler companies may sprout and thrive.

The only real transportation solutions for the future will run on electric power produced from renewable energy, because liquid fuels are going into terminal decline. Transportation of both people and goods will have to be switched rapidly over to electric rail and high-performance PHEVs. With the firm support of the Obama administration for a massive increase in renewable energy generation, a high-voltage long-distance grid, and research and development of battery technology, we can and will build those solutions right here at home. New companies will take over the Rust Belt, reopen Detroit’s shuttered plants, and put everybody back to work.

But we don’t need the Big Three to do it, and we don’t need to do it at gunpoint.

Until next time,

chris nelder signature

Chris

 

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3 Comments

  1. “I even have a little sympathy for the Big Three CEOs . . .”

    Not me – not when all three flew to DC in their multi-million dollar private luxury jets to beg for money.

    And the UAW helped destroy the Big 3 as well. Bailing out the Big 3 is essentially turning the UAW members into government employees. And quite a slippery slope – what company would be next to be bailed out? And next? And next? Where does it end? The US can only print so much money.

    Questions: You provided several arguments for not bailing out the Big 3 – what would you anticipate happenning if they do get bailed out? Do you think they would truly change or only come up with excuses why they can’t make more efficient and cleaner burning cars (they do have a very powerful lobby)? And if they go bankrupt do you see multiple smaller car companies taking their place or do you think the Japanese/Koreans would end up with a monopoly?

    Comment by markytom — November 19, 2008 @ 8:45 pm

  2. Unless the entire company leadership in each company is replaced, such that the culture of the companies can be fundamentally changed, I would expect more of the same. I they go bankrupt, they’ll probably maintain operations at a lower level, and be gradually sold off to younger, nimbler competitors, though not necessarily foreign competitors! There is a whole crop of domestic automaker startups that could potentially take over their factories and re-employ the labor force, but it will take years, and a lot of private capital. Pure speculation though at this point…

    Comment by Chris — November 19, 2008 @ 9:18 pm

  3. The UK fed its own auto manufacturing dinosaur massive amounts of cash, courtesy of taxpayers, for decades during repeated attempts to turn it into something modern and competitive. All these attempts failed because the management and unions knew it was easier to go back to the public trough every few years than to make the tough choices needed to become profitable.

    Finally, the Government called the car makers’ bluff (and by this time it had such a big stake in British Leyland that it was effectively calling its own bluff). Jobs were lost, factories closed and communities suffered. In the meantime, Nissan, Toyota and Honda set up factories in other parts of the country. The UK now makes more cars and employs almost as many people in car making as it did before the Gov’t kicked away the old industry’s crutches.

    Ford and GM in the UK had to smarten up their act when the Japanese arrived, because they had to become fully competitive; not merely be a bit more competitive than the inefficient British Leyland.

    BL, renamed Rover Group, still took 20 years to finally die after being taken off life support. That fact should put into perspective the US carmakers’ threats of instant Armageddon if they don’t get a bailout. Rover looked like it might make it once or twice but in reality the world of auto making moved on too far during BL’s zombie phase for Rover to ever catch up. Another reason why zombiefying GM and Ford is doomed to fail.

    As zombie corporations, they will suck the life blood out of US manufacturing just when your country needs to stop making cars and start building a post-Peak society. People talk about a Manhattan Project but my preferred analogy is the Battle of Britain in 1940, which was largely fought, on the British side, with aircraft built in former car plants. Give Detroit a licence to build one ICE car for every two PHEVs or renewable grid components. That might spark something in a dinosaur brain somewhere.

    Comment by Finite Resource — November 20, 2008 @ 6:59 am

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