10 Reasons to Support U.S. Auto Industry Loan

Emil Bandriwsky
November 20, 2008

General Motors, Ford, and Chrysler have made plenty of mistakes, but there are at least 10 good reasons why the American taxpayers should extend an emergency loan to our Big 3 Automakers. This is not about saving a few companies, and a few jobs; it is about saving an entire American industry, making an investment in America’s common future, and preventing a slide into a full economic depression.

1. The American auto industry has been practicing self help on the way toward regaining long term sustainability. General Motors was in the midst of historic cost cutting when events of this year overwhelmed our entire economy. Since 2005, GM has reduced structural costs in North America by over $9 billion. The latest UAW contract, signed in the fall of 2007, should show savings of about $6 billion a year starting in 2010, by reducing legacy costs associated with pensions and retiree health care. Between 2000 and mid-2008 the salaried workforce was reduced from 44,000 to 32,000, and the hourly workforce from 132,000 to 64,000. Other savings methods were implemented including reducing salaried employment costs by 30%, eliminating raises and discretionary bonuses for executives and suspending 401k match for salaried employees. All of this was done while GM and Ford have virtually eliminated the perceived quality gap with Japanese carmakers.

2. The current crisis is not primarily the fault of America’s Big 3. When gasoline prices doubled earlier this year the sales of trucks and SUVs plummeted. American automakers currently rely on this segment because spiraling legacy costs have virtually squeezed any profit out of the small car segment. America’s carmakers will be cost competitive in the small car segment by 2010, when major benefits from the last GM-UAW contract are realized. About 60% of new cars purchased in the US require financing, and GM’s sales in October 2008 were down over 45% compared to a year earlier. In this instance, the American automakers are victims of the financial meltdown of 2008 and the overnight disappearance of banks willing and able to lend money to car buyers.

3. The American auto industry is a national asset, and we all share some ownership. By now we know that America’s Big 3 are not “too big to fail.” They are also too important for us to allow them to fail. Almost 4% of US Gross Domestic product is auto-related and represents 10% of US industrial production by value. One out of every 10 US jobs is auto-related, with auto workers receiving $335 billion annually in compensation. The auto industry purchased $156 billion in US parts, materials and supplies, supporting jobs in all 50 states. The companies provide benefits for 775,000 retirees and surviving spouses, and provide health care benefits for 2 million Americans.

4. It is a good business decision, because it will definitely be cheaper to loan $50 billion to the American car makers, than to suffer with the monumental cost of bankruptcy, including the loss of up to 3 million jobs, and the Federal Government assuming hundreds of billions of dollars in pension and health care liabilities. Bankruptcy by any of the American auto companies would pull the entire industry down, because liquidating the assets of a bankrupt automaker would drive the survivor’s prices, along with suppliers, below the point of maintaining solvency. A bankruptcy by GM or Ford will almost certainly push the US economy into a full depression that will take years to recover from.

5. GM, Ford and Chrysler are the only American car manufacturers. A Honda or Toyota plant in Alabama or Georgia is not an American company. The Japanese and Korean transplants that enjoy millions of dollars in tax breaks, even while importing most of their assembly components, do not “create” any jobs. They merely shift employment from old industrial northern states to non-unionized Southern states. Taking into account the loss of jobs at suppliers, and support businesses, the “creation” of one job at a Hyundai plant in Mississippi, probably eliminates three jobs in Michigan or Ohio. And of course the profits are siphoned out of America.

6. Automobile manufacturing is a vital component of our national defense. Only a few generations ago America was shocked into World War 2 by the Japanese bombing of Pearl Harbor. American automakers responded by turning their industrial might toward the defense of our nation. During World War 2 General Motors was a major supplier of US military hardware, supplies and equipment. Putting these resources in the hands of Japanese, Koreans, or Germans makes the United States extremely vulnerable; both during wartime and during peacetime.

7. The car business is not “just another business”. Cars are deeply embedded in America’s culture and psyche. Our historic “love affair with the automobile” throughout the 20th century is an intertwined evolution of society and technology. The automobile enabled both the growth of America’s suburbs and her middle class. These car companies are called “iconic” for a reason; their products are inspirational. How many American songs, books, and movies have been written about Chevys, Corvettes, Ford Mustangs, T-Birds, Chrysler Hemis and so on? On the other hand, I can’t think of a single song written about a Japanese vehicle. This is not the time to turn our backs on an old friend.

8. Automobile manufacturing is a strategic growth industry internationally, and both Ford and GM are well positioned to exploit that growth. While car demand has leveled off in the mature markets of Western Europe and North America, there is immediate growth potential in the Brazil, India, Russia, and China; all of which have significant American factories. About 60% of the 10 million vehicles that GM sold in 2007 were sold outside of the United States. China is GM’s second largest market, and GM has exported about 10 billion dollars in autos and parts, proudly made in the USA, to China in the past decade. There is no similar benefit to the American economy from Honda or Toyota selling into foreign markets. Frankly speaking, the prosperity of America’s auto companies is good for the country.

9. The automobile manufacturing industry is not the same as the buggy whip industry. It is NOT inevitable that all American car companies will disappear, like the steel, clothing, consumer electronics, or so many other, formerly great, industries. A country that does not produce anything, but only consumes and complains, must eventually decline. We will not remain a great nation by swilling $5 lattes, while shopping at discount stores for cheap Chinese products, and flipping burgers for a living. The whole process of designing, building and selling cars is a very complex undertaking. There are plenty of opportunities for American ingenuity, good engineering, technology, marketing, and efficient management to compete with global carmakers whose chief advantage is primarily cheap labor.

10. The American auto industry is crucial to reducing our dependence on foreign petroleum. We can not allow ourselves to lose the race for alternative propulsion technology, including electric, flex-fuel or fuel cell vehicles. GM currently offers 18 models achieving 30 MPG highway or better, twice their nearest competitor. GM is the top ranked US Company in global R&D spending in 2008 at $8.1 billion. The Chevy Volt, an extended range electric vehicle with zero emissions, would allow most commuters after 2010 to never use a drop of gasoline. America needs to lead this technological revolution.