Will the Big Three Fail?
SMG’s Lataif on saving GM, Ford, and Chrysler
Another day, another government bailout. Or so it has seemed in recent weeks. This time, it’s the auto industry — GM, Ford, and Chrysler — aka the Big Three, whose looming bankruptcies could hit an already weak American economy like a pileup of SUVs. These companies currently employ about 240,000 workers, and their suppliers account for an additional 2.3 million jobs, totaling nearly 2 percent of the nation’s workforce. Last month, industry sales dropped 31.9 percent, to the lowest rate in 25 years. GM predicts it will run out of cash by the end of the year unless the American taxpayers intercede.
President-elect Barack Obama and Democratic leaders want to divert some of the $700 billion financial bailout Congress passed in October to keep the auto industry solvent while it retools to produce more marketable fuel-efficient cars and wait for consumer confidence and credit to bounce back. The Bush administration, on the other hand, is pushing to use money from a recently passed $25 billion loan program to help automakers convert to more fuel-efficient vehicles. At the same time, many Congressional Republicans promise to resist any move that would give taxpayer money to an industry that they say has created its own problems with bad business decisions, uncompetitive labor agreements, and vehicles that Americans just don’t want.
The issue is scheduled for discussion at a Senate hearing today and in the House tomorrow. For some thoughts on what happened to America’s auto industry and what, if anything, should be done to save it, we turned to Louis Lataif (SMG’61, Hon.’90), Allen Questrom Professor and Dean of the School of Management and the former president of European operations for Ford Motor Company.
BU Today: Is the auto industry in as bad shape as it says?
Lataif: The credit crisis–induced recession (and the earlier, unprecedented spike in gasoline prices) could not have been anticipated by the auto companies over the past three or four years as they rationalized their operations and initiated a new product development cycle. The current selling rate for new vehicles is at or below the “scrappage rate” — a level of demand that is virtually unheard of. So, yes, the auto industry is, at the moment, in peril.
How much of the industry’s trouble stems from the current fiscal crisis, with its plummeting consumer confidence and tight credit, and how much is due to more systemic problems with American car companies?
Most of the systemic problems have been addressed in recent years, particularly with the offloading of hourly health-care obligations to the United Auto Workers. There is still a legacy cost problem related to an older workforce and many retiree obligations, but natural demographics are helping to resolve some of those issues. If the companies survive into the next decade, their overall structural costs will be more in line with import car manufacturers.
Why should the average American care if GM or Ford declares bankruptcy?
The average American should be concerned about the survival of the auto industry because a collapse could have terrible reverberations throughout the economy, hurting a lot of innocents. All the suppliers and dealers who would be wiped out would cause a lot of collateral damage in their towns and throughout the economy, more so than any other industry. The auto industry is the largest consumer of steel, rubber, glass, and more and employs hundreds of thousands of people.
Do you agree with the plan sponsored by Congressional Democrats to support the industry by siphoning money from the recently sponsored $700 billion financial bailout package?
The government can make “loans of last resort” to bridge the auto companies for the next two years, until consumer auto demand is restored. (And demand will be restored; there will be great pent-up demand arising out of the current historically low selling rate.) Our elected representatives will need to decide where the loans would come from. I would advocate interest-bearing loans to be repaid over the next several years ahead of all other creditors. The government should reasonably expect to realize a profit for the taxpayers on the risk it takes. I don’t think the government should take an equity stake — that would be more socialization, which would not serve the country well; there is no evidence that the government can manage businesses more efficiently than private ownership.
What about letting the market simply run its course?
If the market were simply to run its course and one or more of the auto companies failed, the effect would be to drag the economy into a longer and deeper recession, hurting everyone in the country. Bankruptcy, in my view, is not a viable alternative. When people buy new vehicles, they enter into a relationship in which they expect parts to be available, service to be provided, and warranties to be honored. It is unlikely that people would choose to buy a new car from a bankrupt car company where there are other, safer choices.
It seems like a lot of industries are in trouble right now — why should we bail out the auto industry in particular?
No industry is as pervasive as the auto industry, involving one of every seven jobs in our economy. In recessions, many companies face difficulties, but few, if any, impact the entire economy like the auto manufacturers.
How can American car manufacturers regain long-term, sustainable profitability?
The auto manufacturers have taken many bold and difficult steps in recent years to restructure their business and restore themselves to a position of sustained profitability. There has been serious downsizing of the manufacturing base, huge cuts in salaried workforce, great strides in achieving fully competitive product quality, more reasonable contracts with the United Auto Workers union, and efforts to develop alternative fuel vehicles (although not nearly at the pace required, given the huge jump in gas prices last summer).
Do you believe a bailout package for the industry will be passed, and if so, how soon?
Because President-elect Barack Obama promised the autoworkers in Michigan and Ohio that he would help, it seems inevitable that the government will intercede in some way. And there will be conditions, such as limits on executive pay until profitability is restored and further concessions from the unions. Beyond that, it would be counterproductive for the government to dictate operating or investment decisions on an industry that is already struggling.
Chris Berdik can be reached at cberdik@bu.edu.
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