Commentary

There’s Nothing Wrong with a “Big Two”

The “Big Three” auto producers - Ford, Daimler-Chrysler and General Motors - want the public to believe their industry faces an existential threat. It doesn’t. They want the public to believe they are innocent victims of circumstances beyond their control. They’re not. They want the treasury secretary to authorize a fresh $25 billion bailout for the industry and the President-elect to pledge support for their parochial cause. Neither should (though Barack Obama apparently did this week, in his meeting with President Bush).

The auto industry doesn’t need a bailout. It needs a shakeout.

Yes, it’s true, some iconic firms - with General Motors at the top of the list - are in serious financial trouble and could fail. But why should those firms be bailed out by the taxpayers? While there is some merit to the suggestion that the industry’s woes are attributable to the credit freeze, that’s just a small part of the story.

Many of the Big Three’s problems are self-made. The contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if Detroit should get a bailout, why not help America’s home builders, coal miners and masseuses, too?

Detroit’s problems predate the financial meltdown. Management and labor consigned the Big Three to a future of troubles when they agreed to preposterous work rules, requiring management to pay workers at 90% of their salaries when they were laid off. Those rules compelled General Motors in particular to keep pumping out vehicles in the face of shrinking demand earlier in the decade, ushering in the period of “0% financing” for five, six and seven years. Because labor costs were locked in, it made more sense to keep producing and selling at below the full cost of production.

Management also gave labor the “Cadillac platter” of health and retirement benefits, all of which substantially increased the cost of producing vehicles at unionized plants in America. Management and labor always assumed that the U.S. government would come to the rescue when the chickens came home to roost over this inefficient, uncompetitive cost structure.

The auto industry doesn’t need a bailout. It needs a shakeout.”

Those were only the beginning of the industry’s economic sins. On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pickup trucks and SUVs would never fall out of favor. When SUVs and trucks are excluded, Big Three offerings barely make the list of the country’s top 10 selling cars of the decade. None has been a top five seller. Shouldn’t producers try to make things that people want to consume before scapegoating their failures and seeking bailouts?

But here’s the equally important thing to realize: If GM fails - or even GM and Ford both fail - we are not facing the loss of the U.S. auto industry. There are plenty of profitable operations, particularly those operating outside of Michigan. In 2008, the Big Three accounts for roughly 55% of light vehicle production and 50% of sales. To speak of the U.S. automobile industry these days, one must include Honda, Toyota, Nissan, Kia, Hyundai, BMW - and other foreign nameplate producers who manufacture vehicles in the U.S.

Those producers are the other half of the U.S. auto industry. They employ American workers, pay U.S. taxes, support other U.S. businesses, contribute to local charities, have genuine stakes in their local communities and face the same contracting demand for automobiles as does the Big Three. The difference is that these companies have a better track record of making products Americans want to consume and are not seeking federal assistance.

If taxpayers are forced to subsidize automobile producers, they should at least be able to subsidize the successful ones.

If one or two of the Big Three went into bankruptcy and liquidated, people would lose their jobs. But the sky would not fall. In fact, that outcome would ultimately improve prospects for the firms and workers that remain in the industry. That is precisely what happened with the U.S. steel industry, which responded to waning fortunes and dozens of bankruptcies earlier in the decade by finally allowing unproductive, inefficient mills to shut down.

In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, three firms accounted for more than 80% of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand.

Following the steel industry’s lead to an auto industry reckoning makes more sense - to the taxpayers, to the country, and ultimately to the auto industry - than another bailout.

Daniel J. Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute.