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Bailing Out the Auto Industry

My friend, Ira Goldman, once an aide to Governor-then-Senator Pete Wilson of California and the inventor of the Knee Defender (I wrote about the Knee Defender here), is an occasional correspondent on political and social issues.  During a visit at Thanksgiving of 2008, when the government bailout of the American auto industry was looming, he asked me whether I supported it.  We had a brief discussion of it at the time but I always prefer to have time to think things through over having to opine off-the-cuff.  I sent these to him later…

8 December 2008

You asked me, when you were here, whether I thought the government should bail out the auto industry and I ventured, on philosophical grounds, that they should not.

Since it now appears they are going to, despite my objections (I am shocked!), it would seem we must make the best of it and at least do it well.

To that end I have a rhetorical question.

We all recognize that, aside from the underlying structural problems (health care, retirement, wage, and working conditions packages negotiated decades ago and simply no longer viable) that undeniably hamstring them, the current management of these companies has not managed them well; and that the American part of the industry, as a whole, has done an abysmal job at building cars that people actually want to buy. In other words, it’s clear that the industry needs a new direction and an injection of wisdom from some visionary leaders. Capitalism says that could happen if you let the companies fail, so that the capital tied up in them could go back into the market where it could be re-directed to (purchased by) people of vision. But that’s not going to happen (or at least not soon).

Now that some kind of government bailout seems all but certain, we have seen a chorus from various Congressmen about what constraints and directives should accompany the money.  Similarly, the leftward press — including Thomas Friedman and the editorial board of the NYT, but certainly including a host of others — has been quite vocal about what Congress should direct the auto companies to do with the money, laying out grand strategies for building energy-efficient cars and for treating the employees well and so on. It seems that, suddenly, everyone is an expert on the auto industry and on how it should be structured and operated.

Am I the only one in America who has grave doubts about whether the combination of marketing vision, business acumen, strategic sense, operating experience, and hard-nosed decision making required to rejuvenate the American auto industry is really to be found in the Congress of the United States and the editorial board of The New York Times?

8 December 2008

Another thing that occurred to me.

It is true that foreign car manufacturers — and particularly the Asian ones — have offered a lot of fuel-efficient models to the American market. But it is also true that a lot of their models are not excessively fuel-efficient. I know that Volvo’s aren’t.  I’d bet Mercedes’ and BMW’s aren’t. And Lexus’ and Acura’s.  And even some of the larger Toyota models probably aren’t in the “fuel-miser” category.

In fact, I’d bet that, in a side-by-side comparison of equivalently-sized vehicles, the American cars aren’t all that far off their foreign competitors in terms of fuel-efficiency.

It’s just that a large part of the American car companies’ fleets are not equivalently-sized. In large measure, they have the larger-car market and the foreign companies have the smaller car market.

Now Congress, as part of the bailout plan and egged on by the liberal columnists and editorial writers, is likely to direct Detroit to focus on fuel-efficiency above all other things. Their presumption is that Detroit’s problem is that they haven’t been focusing enough on that.

But the fact that Detroit was selling a lot of large and less-than-fuel-efficient vehicles despite the fact that many small and fuel-efficient ones were readily available, both from foreign manufacturers and from Detroit itself, would seem to indicate that there was a significant market for large and less-than-fuel-efficient vehicles. No one at GM was pointing a gun at anyone’s head and saying “Buy the Suburban or else!”.

We are assuming that oil prices will be very high from now on and that, therefore, the current dearth in the market for such vehicles will continue. But then again, none of us believed last summer that gasoline would be back down below $2/gallon in December. Unless part of Obama’s plan is to put on a carbon tax to keep the price of gasoline above some minimum level (and that doesn’t seem likely at the moment), there is good reason to believe that Americans, with their short memories, will again start looking for slightly larger vehicles that can be used to carry loads. I know, from my own experience, that there are good reasons for wanting a pickup truck or an SUV if you don’t happen to live within 5 miles of the urban center in some large metropolis.  People weren’t buying those things mindlessly — they offer advantages that are worth some amount of extra cost in gasoline.

Add to that the fact there is no evidence that the foreign manufacturers intend to give up on fuel-efficient cars; rather they are likely to hit that market harder than ever and, perhaps, even abandon somewhat their own larger models.

So the question is: Are we about to force Detroit, through the strictures Congress puts on the bailout funds, out of a market (larger vehicles) in which they had clear dominance and into a market (for smaller fuel-efficient vehicle) in which they have historically had a hard time competing and for which competition is likely to be even fiercer in the future?

And, if so, how is that a good plan for revitalizing the American car industry?

© Copyright 2008, Augustus P. Lowell

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