Can The USA Afford to Lose Its Domestic Auto Industry ?

The answer is it may already be losing it, or put it another way it may already have lost it to foreign competition - imports and ‘transplants”, foreign manufacturers with automobile assembly plants located within the USA.

Despite the attempts of the USA Administration to bail out the “Big Three “ the downward trends in production and employment have been evident since at least the 1980s. The US auto industry is now characterized by a unionized, high cost “Big Three” General Motors, Ford, and Chrysler concentrated in the Mid West, with shrinking employment and market share and a non unionized foreign owned low production cost sector, located in the South with increasing employment.

The USA government has long had a policy of bailouts for industries thought too important or strategic to fail. There is an excellent short article in Infographics Online, “The History of US Corporate Bailouts” which traces the history of US government intervention in industries which came “cap in hand”. Generally the history has been that the US Government/USA taxpayers have made profits after the restructuring has been competed. And the industries have been saved. The US government has given, by my calculations $1,091 trillion i.e. 1 million million US dollars 1,000,000,000,000) in cash and or guarantees to a range of industries from Airlines to Auto with the bulk of the funding going to financial and or banking institutions. Citigroup in 2008 leads the list with 351 billion (351 thousand million, $351,000,000,000) in cash and more so guarantees.

What is different about the Auto industry? The industry has been unresponsive to its US market base, focusing on the more profitable SUVs and light truck since the 1990s and neglecting the passenger car market. Foreign competition, primarily Japanese and European manufacturers, have been increasing market share and equally the perception of better quality and reliability over US makes, among its US customer base. These foreign brands have steadily eroded the Big Three US market share, which has fallen from 70 % in 1998 to around 53% in 2008.

Foreign manufacturers are able to manufacture cars and trucks at much lower cost it has been reported that Toyota’s Labour productivity advantage is as much as US 350.00 – US $500.00 per vehicle primarily because of absence of union benefits. Overall result; declining employment, income and layoffs within the industry. Employment in the industry has fell from 1,3 million in 2000 to 1.0 million in 2005 and an estimated additional 260,000 jobs were lost since 2005. Though to be fair a portion of the decline in auto sector employment is due to greater productivity along automated assembly lines.

Structurally the Big Three are high cost producers with sales break even points significantly above their foreign competition. The Big Three can make a profit when US sales are 15 million vehicles annually, while the foreign manufacturers require annual US sales of 12 million vehicles to be profitable.

On September 30, 2008, the first automaker loan package, for $25 billion, was signed into law. The bill sets aside $7.5 billion in taxpayer funds needed to guarantee $25 billion in low-interest loans to help US automakers produce more fuel-efficient cars and trucks. So despite injections of cash oequired to guarantee $25 billion in loans and a further 17.4 billion to Chrysler and GM with a three month deadline, which is about to expire, to come up with viable plans to reduce costs and increase profits, this radical change is just not going to happen within such a short space of time.

Americans stopped buying the big vehicles, as gas prices rose in 2008 and the credit crisis made it more difficult for people with average credit to buy a vehicle. The Big Three’s sales and profitability plummeted. But had the Big Three planned their sales strategy to meet the needs of a broader market and fuel efficient base beyond gas guzzling SUV’S ?

The Big Three face a future fraught with uncertainty. Is the US government intervention going to be “too little too late”. Is the forced ouster of Rick Wagoner from GM, with his $22.1 million pension, just a token to appease a US public livid over high executive bonuses ?

Bankruptcy protects the firm from its creditors. The creditors of these Big Three firms are thousands of suppliers who are heavily concentrated in the Mid West states. In most cases, the Big Three manufacturers are their major customers. These suppliers have already been squeezed by falling demand and lower product prices. If they cannot collect the money owed them by the Big Three, there will be a whole chain of secondary bankruptcies.

The impact in these states is potentially huge. According to the Center for Automotive Research, auto related employment accounts for almost 7 percent of total employment in Michigan, 6 percent in Indiana, and 5 percent in Ohio. Losing 7 percent of total employment in Michigan would be equivalent to losing more than 9 million jobs nationwide.

The potential impact of a Big Three failure is not confined to the Mid West. States outside the Mid West, for example New York would also be impacted. Thomas P. DiNapoli, Comptroller of New York State has said “ New York’s economy is interdependent with the major US automobile makers through New York State based auto related jobs and billions of dollars of debt held by New York based financial institutions.” A collapse of one or more of the major auto makers says Mr. DiNapoli, “would further exacerbate New York’s already gloomy economic situation” (United States Auto Industry and the New York State Economy Online December 2008). Downsizing and bankruptcy have ramifications far beyond Detroit.

Undoubtedly bankruptcy of say a GM would affect parts manufacturers, auto dealers, banks and other New York Companies which have significant employment and financial investments tied to the future of the Big Three e.g. the GM engine plant in Buffalo New York employs 1,380 personnel. The 1,100 auto dealers in New York State employ 49,000 New Yorkers, with average annual salaries of US$ 50,000.00.

Most analysts agree that the US auto crisis has occurred mainly as a result of the bad policies of the Big Three U.S. automakers, since Asian companies that manufacture automobiles in the U.S. are not experiencing similar problems. A December 22, 2008 New York Times article stated, "For the most part, the so-called auto transplants — foreign-owned car companies with major operations in the United States — have deep pockets and ample credit, and they are not facing potential bankruptcy like General Motors and Chrysler." In 2006, Consumer Reports reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies. While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period.

The Obama Administration faces a quandary. Chrysler cannot survive on its own. But will it be able to strike a joint venture deal with Fiat within the 30 day Obama issued deadline ? GM is a loss maker. It had run up over $51 billion in loses in the three years preceding 2008. In a report sent to the U.S. Treasury Department yesterday (March 31, 2009), General Motors adjusted its planned losses before interest and taxes to deteriorate by an additional $1.1 billion this year, compared with a forecast released Feb. 17. But GM forecasts that cash burn will improve by $700 million this year.

That leaves us with the Ford Motor Corporation:

“Among the 6 top auto manufacturers, Ford was the only American car manufacturer that gained market share in Q4 of 2008. While the quarter was less than stellar with losses rising across the board, a gain in market share shows Ford getting one over its Detroit rivals.

So, if you were to make a speculative bet on one of the three automakers, I would bet on Ford over GM. It has some momentum behind it, and their post 2010 line-up of cars look strong.”

See quote from the article “Ford a likely Survivor of the Auto Industry Crisis” (Faisal Laljee -Seeking Alpha - Online February 17, 2009)

On the other hand –“ Ford Motor Co. and General Motors posted the sharpest declines among the major automakers as U.S. sales fell 36.8 percent in March. Ford's sales dropped 42.1 percent and GM's 44.7 percent. Chrysler LLC sales tumbled 39.3 percent. The biggest Japanese automakers all fell between 36 percent and 39 percent” Automotive News –Online April 01, 2009). These figures it seems to me, represent overall industry decline. It doesn’t much change Ford’s market position..

In conclusion, despite the projected future flow of auto industry “red ink”, is there enough time for the industry (GM and Chrysler, as Ford did not accept bailout money) to meet the Obama set deadlines ? The industry clearly needs restructuring, along lines to meet the competition head on in the areas of cost, quality, engineering /sales balance, R&D into more fuel efficient and newly transformational power sources. Does the US Government allow the US auto domestic industry to crumble, with all its attendant negative national economic and financial consequences ? Or does it take the radical step of appointing an Automobile Czar with a clear mandate and timetable for reform and industry restructuring ? Would this be considered the American way ?

These questions will be answered over the next few months. The outcome is going to be a be a key signpost in the direction the industry will take over the coming decades. And where will Ford stand when this is all over ?