It was 1991 and landing in the USA for the first time was very exciting. I almost kissed the ground because it was only my second time in a plane and the 737 we were flying in had maneuvered its way around Hurricane Bob. It felt like we had gone through it. Upon arrival at JFK International Airport, making our way through customs, I was on sensory overload. We exited the building to the taxi area. It felt like being on a movie set. We made our way to Silver Spring, Maryland, and stayed in a Days Inn. Along the way, we couldn’t help but notice how much bigger many of the cars were.
Fast forward to 2009, which has just been ushered in. In mid-December of 2008, the US Senate rejected a proposed $14 billion bailout package, separate from the already-approved $700 billion Wall Street bailout (Emergency Economic Stabilization Act of 2008). Wall Street took another dive as a result. A couple of days later, President Bush, against the grain of most Senate Republicans, approved a $17.4 billion bailout for the auto industry, emergency loans to keep GM and Chrysler from running out of cash. The funds will be drawn from the $700 billion plan. On February 17th, the Obama administration will need to decide if the automakers will have come up with a viability plan. The car companies can delay providing this plan until March 31, 2009, at which time the US government can demand full repayment of bailout funds, if necessary.
How and why did the automakers get to this point? Without going into the vast underlying reasons for the downturn of this and other industries and economic sectors, one has to look at the product for sale.
In 1991, I was a fresh-faced 17-year-old. My brothers and I walked between our motel and the Metro several times that summer. We kept looking at all the cars going by and and in many cases couldn’t believe what people were driving. Suburbans, Caprices, raised F350s, and there were minivans galore. This was also around the dawn of the SUV’s popularity. How could people afford these guzzlers? Gas prices were low at the time, a mere $1.15 per gallon.
During our conversations, my brothers and I kept talking about the day that oil prices would shoot up and what the consequences would be. We talked about the inevitability of rising gas prices and how it would be like what killed the dinosaurs off. The consequences would be disastrous. We found it incredible that companies were almost purely focusing on building large cars. A small car in the US was considered a comfortable mid-sized vehicle in other parts of the world. That was just the way the market was over in US and there were not as many small American cars on the road.
We kept talking about how American car companies would essentially go extinct with the “end of oil”. We didn’t of course know too much about peak oil, but we grasped the basic picture. At the time, we also did not fully understand other factors such as the implications of the rise of emerging economies, their hunger for oil and its effects on global demand, as well as the influence of speculators, futures markets and OPEC’s strategies. Throw in the growing interest within the US towards greater energy independence, popularization of the green movement, the economic downturn of the late ’00s (pron: ohs), the competitiveness of the American automobile, and the US car industry has definitely come to a major crossroads another 17 years later.
Back to the product itself. One thing my brothers and I were dumbfounded over was car design. Who was designing some of these monsters and why were people buying them! Why weren’t cars more streamlined? Did people realize how much extra money they’re burning away? Was there peer pressure to have a big car? Was patriotism overriding common sense in some cases? Was there a conspiracy by manufacturers to deliberately not make a more aerodynamic and fuel efficient design available sooner? Do Americans just need that much more space? Where was the concurrent investment in public transport? Was there a limit to engine size!
At this juncture in time, American cars have made a big improvement in terms of reliability and safety. Bearing in mind all the other problems facing US car manufacturers, could they be putting out a better product?
What role is the government going take with respect to the US automobile industry? If US taxpayers are bailing them out, why not set up a formal department to oversee these two car giants? Call it the NIH of the car industry. Since public funds are at stake, why not develop a superior, competitive product using some of the most brilliant minds available? The Manhattan Project cost roughly $24 billion in today’s dollars. This is about the same amount of money slated as bailout loans to GM ($13.4 billion), Chrysler ($4 billion), and their lending arms (GMAC, $6 billion; Chrysler Financial, $1.5 billion). $15.5 billion of the $24.5 billion has already been disbursed, with the rest being made available by the end of March, 2009.
We’re obviously not under the same kind of threat that was the driving force behind the Manhattan Project. Would there be the same kind of motivation to succeed? I say there’s a huge amount of motivation and hunger to do well. The financial repercussions of GM and Chrysler’s collapse would be huge. However, the US government is taking a huge gamble that might only entail delaying the inevitable. Why not put the money to better long term use sooner?
Actually, I would be very against such government interference. It could save the car industry in the US but it is not up to the government to save an entire industry in such a manor. That’s the private sector’s role. It just makes you wonder if the people in government are thinking that this is public money that could be very useful in the future, or just numbers on pieces of paper that politicians feel entitled to spend without a solid plan in place. If GM and Chrysler are not viable, bankruptcy or insolvency would be the “American” thing to do.
The new business paradigm for GM and Chrysler will be to run efficient, profitable businesses, selling products that are competitive on an international scale. Part of the problem lies in a credit climate that until now led to a pseudo standard of living of sorts, propped up by debt, much of it foreign. This climate also translated itself into the car industry. The long-term solution is not to infuse it with more debt and credit. Adding another block to an already crumbling pyramid will prolong the structure for a while. Are bailout funds to GM and Chrysler just another block of a giant pyramid scheme or is it more feasible to stop building, work on the cracks, and build as solid a structure, smaller if necessary?
The hope of the bailout funds is to buy time, to plan for an era of more efficient, competitively built, and reliable vehicles. Who knows, maybe this is the start of a stronger Detroit? Perhaps it is already too late, partly due to market conditions themselves. Whatever the outcome, once restructured, the car industry will likely never again receive so much relative government assistance. If it survives, it will only do so by becoming more competitive, diverse, and better run. On the eve of the new administration, questions arise – is there a comet coming and is it headed for Detroit?
