Obama Auto Plan Comes Up Short

http://www.reuters.com/article/topNews/idUSTRE52T4Z320090330?sp=true

The linked article contains excerpts from Obama’s remarks about his administration’s plans for the auto industry.  The following is an outline of the key elements of that plan:

  • GM’s CEO Rick Wagoner has been ousted, replaced by COO Fritz Henderson.
  • GM gets 60 days to come up with a “better plan,” which involves shedding more brands, striking a deal with bondholders, and creating a “credible model” for “succeeding in this competitive global market.”
  • Chrysler gets 30 days to close a deal with Fiat.  (Fiat promises to build “new fuel-efficient cars and engines here in America.)
  • Fiat promises to repay American taxpayers before taking a majority ownership in Chrysler.
  • Both GM and Chrysler will go through some sort of government-sponsored bankruptcy, but not liquidation.
  • The government will back GM and Chrysler warranties in a bid to alleviate consumer concerns.
  • Acceleration of Recovery Act funds for government fleet purchases, though he didn’t say what percentage of these purchases would be American cars.  (Remember, the “buy American” provision of the Recovery Act had to be watered down to respect existing trade treaties, which includes Japan and Germany, but not Korea.)
  • Boosting funds to finance units like GMAC.
  • Sales tax deductions for the purchase of new cars (not necessarily American cars).
  • A “Director of Recovery for Auto Communities and Workers” to help affected communities.  No specifics about what this means.

The president’s plan misses entirely the real crux of the problem for the domestic auto industry – falling sales, most recently hammered by the deepening recession but in a much longer term slide due to an endless supply of foreign manufacturers getting free access to our market while we get nothing in return.  Even when confronted with blatant “dumping” by Japanese and German manufacturers, and by Mexico raising tariffs on American imports, the president has chosen to look the other way.  And after being crowded out of the small car market by a horde of imports, forcing the domestics to turn to the small truck and SUV market as its last bastion of profitability, the adminstration plans to force them out of that segment of the market as well, leaving it entirely to a swarm of imports.  (See Obama Backs Automakers, Fails to Act on Trade Problem.)  Obama speaks of a “competitive global market.”  There’s no such thing!  There’s only an American market open to global competition.  All other markets are either closed to American manufacturers or are so badly emaciated by over-crowding as to have the same effect. 

Experts have repeatedly warned that consumers will not buy autos from bankrupt auto companies.  Government backing of warranties won’t change this.  Small cars are predominantly purchased by young buyers and, among this demographic, it’s just not cool to drive American cars.  How much less will they buy them once they’ve been further stigmatized as loser-mobiles?

Regarding Chrysler, Obama just destroyed whatever bargaining power Chrysler may have had left in their negotiations with Fiat.  Fiat can now demand all of their assets while taking on none of the debt.  They will also build one or two models in the U.S. while using the deal with Chrysler to open the gates to a flood of imports from Italy.  Bye-bye more market share for domestic manufacturers. 

GM already planned to rid themselves of Hummer, Saturn and much of Pontiac.  But that’s not enough for Obama.  More brands have to go.  GMC is redundant with Chevy trucks, so that seems an obvious choice, except that GM makes a nice premium on GMC with little more effort than sticking a different badge on the truck.  So they can probably kiss that profit stream goodbye.  That leaves Chevy, Buick and Cadillac.  Will one or more of them have to go too?

When it comes to tax incentives to purchase new cars, 75% of the taxpayer money used to fund the program will go to boost foreign car sales.  So the net result will be to do more harm than good for domestic manufacturers. 

In the end, the plan is to reduce GM and Chrysler to bit players in a horribly glutted small car market, one small piece of a strategy to reduce our dependence on foreign oil.  But the crown jewel of that plan was the “cap and trade” item in Obama’s budget, the only thing that might motivate a switch to small cars by raising gas prices, already axed in the name of fiscal responsibility.  So we will be left with low gas prices fueling America’s appetite for SUVs and trucks, but now with only imports to choose from.

Four or eight years from now, when Obama is gone, the last vestige of the now-gutted domestic auto industry will be gleefully abandoned by his Republican replacement and held up as a shining example of how the free market purges itself of “inefficiency.”  Never mind that the market was never free or that millions of jobs have been purged with it.  Who cares?

With unemployment in Detroit at 22.5% and at 12.0% for Michigan as a whole, a state of depression has now been over-layed by a sense of hopelessness.  No one should take any perverse delight in the demise of the auto industry and the state of Michigan, because Michigan is a bellwether – the canary in the coal mine – for the American economy as a whole.

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