Cynical Synapse

Tue, 18 Nov 2008

What’s Good for the Auto Industry is Good for US

Filed under: Business, Economy, Politics — cynicalsynapse @ 9:36 pm

I’m not necessarily a pro-auto industry person, but I live in metro Detroit. It’s no secret the auto industry is a significant component of the local economy. That extends, pretty much, to the entire state, which is partly why Michiganians snicker when they hear Gov. Granholm is one of President-elect Obama’s economic advisors. Don’t forget, also, this is the state that shut down government because the Governor and Legislature couldn’t agree on the budget. But I digress.

Regardless of your viewpoint on it, we are a nation at war. In the 21st century, top-notch militaries need vehicles, communications and computers, and weapons. Does anybody remember the National Guardsman asking then SecDef Rumseld where the up-armored vehicles were? Today, up-armored vehicles are the norm and many are the mine-resistant, ambush protected (MRAP). In fact, MRAPs come in about a half-dozen versions, each from a different manufacturer. The vehicles were developed in only a few years, near light speed by Pentagon standards. Granted, the MRAPs aren’t made by the Big 3 auto makers, but one, Navistar International, was a struggling truck company around 1980.

In any case, the point is US manufacturing capability was able to step up to the challenge. During WW II, Detroit was known as the Arsenal of Democracy. The need is no less critical today because the military operates in vehicles. Beyond the national defense concerns, the auto industry accounts for about 10% of the jobs in the US economy. It’s not just GM, Ford, and Chrysler we’re talking about here. Hundreds of suppliers, from Big 3 spinoffs Delta and Visteon to small and disadvantaged owner businesses, provide lots of components, including seats and trim, moldings, and other components. And it’s not just suppliers. If the Big 3, or a supplier, lay off workers, Joe’s Donut Shop loses customers and, maybe, goes belly-up.

So, the auto execs aren’t playing Chicken Little here. Yes, the auto companies are still dealing with some legacy largese, but that was the “American Dream” back in the day. So, it’s not entirely their fault. And the present squeeze on the auto industry is directly related to the Wall Street meltdown. Hardly a second thought about $700 billion bailout ($800+ billion after the Senate’s earmarks were added), but there’s a hue and cry to not help the auto industry. Excuse me?

As President-elect Obama is fond of saying, let’s be clear about this. First, Treasury Secretary Henry Paulson apparently doesn’t have a plan for the Wall Street bailout. From buying up so-called toxic investments, now he wants to just buy a stake in troubled banks. Once spent, that money’s gone. The Big 3 aren’t looking for a bailout. They’re asking for a bridge loan to get them through the crisis de-regulation and financial corporate greed created. Back in 1979, Chrysler was saved from failure by just such loan guarantees. They made good on them. Wall Street and the banks have no such track record.

People like to say the Big 3 are in the situation they’re in because they focused on selling trucks and SUVs. I’m sure that’s part of it, but up until this year, that’s what consumers wanted. Hello—basic economics. If that’s what the customer wants, that’s what companies make. The problem is, when no one foresaw $4 gasoline, the automakers couldn’t be ready with 35+ mpg little cars. It takes years to design, test, and get safety approvals for a car model. The fact they’re on that road says something on their behalf. But, we need to remember it’s not a snap-of-the fingers thing to change from big vehicles to small vehicles.

Regarding the UAW and restructuring, I can only say the UAW has been a partner in working to reduce costs and manage so-called legacy costs, like healthcare and pensions. By no means am I a pro-union guy, but the UAW has not been silent and they have shared the pain. As for restructuring, which some seem to think is key to the auto industry’s survival, I’m rather dubious. First, parts spinoffs Delphi and Visteon have either been in bankruptcy or been bailed out by their previous parents, or both. As a contractor working for one of the Big 3, I watched two or three restructurings which seemed to me to amount to changing letterhead and signs. Does anybody remember when GM was facing negative publicity for using the same engine across brand names? You can’t expect streamlined operations while also expecting uniquely designed and manufactured components unless we just want one brand name. And GM and Chrysler have both done away with a brand name to reduce reduncancy. So, we don’t want just the Chevy variant or the Lincoln offering. Consumers want to be able to choose.

Hardly without even blinking, in fact with an extra $100+ billion, the Wall Street Bailout sailed through Congress in 5 business days, totaling over $800 billion. You could also add into that the $200 billion Congress approved in July to help homeowners. That’s money that we don’t have—and have to borrow—that’s just gone. Why so much angst over the $25 billion bridge loan for the auto industry? That’s less than 2.5% of the total financial disaster spending spree. According to the Bureau of Labor Statistics for October 2008, auto manufacturers employed 842,600 people, with another 1,820,600 making a living off vehicle and parts sales. With those figures, the auto industry accounts for 2.7 million jobs compared to only 1.8 in the financial sector. $700 billion plus or $25 billion. You do the math. Which is the better deal?

Not sure where you stand? Economist Jeffrey Post is pro while economist Gary Becker is opposed. Remember, though, the ripple effect extends to every corner of the country, wherever there’s a dealership or auto parts store. It’s not just a Detroit thing. And it’s not just the Big 3.

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