No Easy Answers to the Auto-Industry Crisis

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Understanding the automaker bailout

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No easy answers to the auto-industry crisis The Gazette Published: 22 hours ago Is Congress fiddling while Detroit burns? Or are U.S. lawmakers just being prudent with $15 billion of taxpayers' money?

Late Thursday the planned bailout of General Motors, Chrysler and Ford was derailed by Senate Republicans - or by truculent union leaders, take your choice - and now President George W. Bush is reported considering using for the purpose $15 billion from the $700 billion Congress authorized previously for a whole range of bailout projects, without many strings attached.

In Canada, the federal and Ontario governments are standing, chequebooks open, waiting to see how the U.S. drama plays out. The specific danger for Canada is that once Uncle Sam gets his thumb on the scales in this fully integrated continental industry, U.S. jobs will be given primacy over Canadian ones. Congressional good will toward Canada isn't worth a rusty Edsel in times like these.

More broadly, the whole auto bailout issue remains controversial. True, $15 billion is under-the-sofa-cushions small change by the standard that has become normal in this abnormal season of "bailouts" and "stimuli" around the world. But what if governments prop up the Big Three - as they were once known - and in three or four months they come back, with their hands out again?

The underlying problem is not arrogant executives or bad decisions, but excess capacity. It's hard to imagine auto sales rebounding strongly in calendar 2009 and GM and Chrysler, and to a lesser extent Ford, will continue to struggle with fixed costs and sluggish sales. Short-term bailouts can at best give a little time for some kind of drastic action.

Nor is the prospect of a "car czar" very appealing: The last time a state controlled what cars got made, the result was the Lada. With oil prices down, consumers could well be clamouring, say two years from now, for big boxy SUVs once again. What if nobody wants to buy the politically correct little "green" sedans Congress and bureaucrats could mandate as part of a bailout?

Nor are the problems limited to two or three companies. Parts makers, tool-and-die shops, and other employers are part of the industry, too. If even one of the Big Three goes down, ripple-effect bankruptcies, or at least layoffs, will swamp the sector. Remember, though, that most of that capacity would be needed again before long, as the industry reorganizes. North Americans still buy a lot of vehicles, even in a bad year.

Plainly something will have to give in the auto industry. The companies that emerge from this inferno, once the economy begins to revive, will be more efficient than the Detroit Three today. But will they be the same companies? And should that decision really be up to Congress? Those are the questions we will see answered before long.

                                                                            source © The Gazette (Montreal) 2008