Overview of the CQ Researcher issue on the Auto Industry's Future

By Thomas J. Billitteri February 6, 2009

U.S. automakers, by their own admission, have made a lot of mistakes over the years. Too much emphasis on trucks and SUVs; poor quality; and failure to respond to the growing consumer demand for fuel efficiency.

But their biggest blunder of all — at least in the public relations realm — may have been the three private jets. Amid the most serious economic crisis to face the nation since the Great Depression, the chief executives of Ford, General Motors and Chrysler each took his own corporate jet to Washington to ask Congress for billions in aid.

Predictably, lawmakers (and late-night comedians) had a field day. “There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands,” said Rep. Gary L. Ackerman (D-N.Y.). Afterwards, with billions in loans in hand, GM Chairman Richard Wagoner predicted brighter days ahead.

“When we get done and get through this, we will have an industry . . . positioned for real long-term success,” the embattled executive told a Detroit radio audience. “There is going to be some point when it's morning, and the sun is going to come up.”

But Wagoner's forecast may have been overly optimistic. The global economic crisis has darkened the sky over the entire auto industry, and the outlook for Detroit's Big Three — GM, Ford and Chrysler — appears especially gloomy.

Car and light-truck sales at GM and Chrysler — both of which received low-interest bridge loans — were down 23 and 30 percent, respectively, last year. Both companies, under pressure to show they are cutting costs as part of the bailout agreement, reportedly were offering new buyouts this month to hourly workers that included cash payments and vouchers for vehicle purchases.

Sales were down 21 percent at Ford, which declined a federal loan. The company, which reported a record $14.6 billion loss for 2008, believes it can survive without federal aid.

Sales results for the Big Three in January, including declines of 49 percent at Ford and 55 percent at Chrysler, showed that the storm over Detroit is growing even more ominous. In fact, in January, Toyota usurped GM's 78-year reign as the world's biggest carmaker.

The bad economy and plunging sales figures are only part of the gloom hanging over Detroit. Experts say the domestic auto industry is mired axle deep in challenges that include massive benefits for retirees, labyrinthine dealer franchise laws that hinder automakers' ability to downsize and reorganize and growing foreign competition on U.S. soil.

Under the $17.4 billion loan agreement, GM and Chrysler have until March 31 to show they are on the road to financial viability. But key terms — or “targets” — remain negotiable, meaning the Obama administration and Congress will bear the burden of oversight in coming months.

To thrive — or at least survive — Detroit must move at a race-car pace to remake itself into a more cost-efficient, nimble and innovative business, experts say. That will require new concessions on wages and work rules from the United Auto Workers (UAW) union, compromises from suppliers, creditors and dealers and an uncharacteristic degree of flexibility by management, they say.

The UAW has pledged cooperation but also said it will resist targets in the loan agreement that, it argues, single out workers. The targets aim, in part, to make work rules and wages competitive with those at foreign-owned U.S. plants by the end of 2009. “We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” said UAW President Ron Gettelfinger.

The recession, which has choked off credit and slowed car sales to a crawl, is making Detroit's job all the harder. In recent weeks, many experts said they expected the economic slowdown to force Chrysler — generally viewed as the weakest of the Big Three — to file for bankruptcy or merge with another company.

In January, the Italian car company Fiat agreed to acquire a 35 percent stake in Chrysler, which Chrysler Chairman Robert L. Nardelli said would enable the automaker to offer a broader lineup of vehicles while adhering to conditions of the federal bailout. But the deal reportedly depends on Chrysler getting $3 billion in additional government loans.

“It would be difficult for Chrysler to be sustainable by itself,” David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said before the Fiat deal became public. As for GM and Ford, “We just don't know,” he said. “Once the economy begins to have a little life, it could make a huge difference.” But, he added, “It's a race against time.”

In mid-January, Wagoner said that while GM wanted to avoid a Chapter 11 bankruptcy reorganization, its viability was “not 100 percent” certain.

The auto industry's woes are likely to add pressure on President Barack Obama and the Democrat-controlled Congress to reshape the nation's health-care and energy policies, which are closely tied to Detroit's fortunes. Experts say a national health-care plan could reduce the costly benefits the Big Three shoulder for workers and retirees. And a policy that deemphasizes oil could induce more consumers to embrace hybrid vehicles and make automakers' product planning less unpredictable and more environmentally friendly.

But for now, far-reaching policy changes may be difficult to pull off because of the worldwide recession, and no car manufacturer — domestic or foreign — has escaped the wreckage. Last year Toyota's U.S. car and light-truck sales fell 15 percent and Honda's 8 percent, and their December sales results were worse than those of either GM or Ford, according to Autodata.

“The tough times are hitting us far faster, wider and deeper than expected,” said Katsuaki Watanabe, the outgoing president of Toyota Motor Corp., which projected its first operating loss in 70 years.

Still, experts say Detroit's problems are far deeper than those facing foreign-based makers, in part because of past decisions the domestic manufacturers have made. The car companies themselves acknowledged missteps in December as they sought to wrest some $34 billion in federal aid from Congress — a gambit blocked by conservative Republicans.

“We made mistakes,” GM's Wagoner told the Senate Banking Committee, citing a failure to make the company's operations more flexible and move faster into the U.S. market for smaller, more fuel-efficient vehicles. In a trade journal ad, GM apologized for violating Americans' trust by, among other things, letting quality lag behind industry standards and designs to become “lackluster,” skewing its product mix toward trucks and SUVs and agreeing to “unsustainable” employee-compensation plans.

The stakes in achieving long-term viability of the auto industry could not be higher, economists and policy makers say.

From plastics and electronics to glass and steel, the auto industry is among the nation's biggest consumers of U.S.-manufactured goods. Economists say a failure of even one auto company — especially GM or Ford — could set off a cascade of devastating job losses, send parts suppliers into bankruptcy and further destabilize auto production. The fallout would also hit businesses that rely indirectly on the auto industry, such as retailers in manufacturing towns.

The Economic Policy Institute, a liberal think tank in Washington, says the collapse of the domestic auto industry could eliminate up to 3.3 million American jobs, with much of the damage in Rust Belt states like Michigan and Indiana, which already are reeling from this year's economic travails.

Similarly, the Center for Automotive Research estimated that a shutdown of the Big Three would eliminate nearly 3 million jobs in the first year, with a slow recovery in employment afterwards. A shutdown would cost government $60 billion the first year alone, the group said.

It was fear of a domino-like economic tumble that led former President George W. Bush in December to throw automakers a lifeline. “In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action,” he said in announcing that the Treasury Department would use money from the Troubled Asset Relief Program (TARP) — the $700 billion financial-industry rescue plan passed in early October — to prop up Detroit.

But support for a rescue has been far from overwhelming, both in Congress and on Main Street. “I believe it is wrong to make the American taxpayers an unsecured creditor to the automakers,” Sen. Johnny Isakson, R-Ga., said after Bush announced his rescue plan.

Obama backed the bailout, saying a collapse of the auto industry would have had “devastating” economic consequences. But he tempered his support with a tough message. “The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it,” he said.

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