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Debating the Wisdom of the Automotive Industry ‘Bailout’

Metal Finishing magazine recently asked various industry members if they thought that the automotive resurgence currently under way would have been possible without the U.S. government’s intervention. What followed was a spirited, evenly divided debate.

BY REGINALD TUCKER, EDITOR

Here’s what some respondents had to say about the matter:

“I do believe all industry, including the automotive [sector], would be much stronger without the government bailouts. With reorganization or even bankruptcy, businesses would do much better than letting the government print/spend/borrow money to the point of oblivion....In my opinion, in order for our industry to thrive, we need the government to get out of the way and let the ingenious folks do their thing. Less government equals more efficiency and opportunity.”
—Bill Campbell, regional sales manager, METALAST

“I do not think that either GM or Chrysler would be here today without the bailout. We should not forget that the credit markets froze solid at that time, and the equities markets were in free fall. Only the government could produce the cash to get them through restructuring. Without them, the supply chain would have mostly died off as well, leaving Ford alive and importing almost all their parts.”
—Robert Hamilton, technology manager, Hartford, Conn.

“[Chrysler and GM] did go through bankruptcy successfully, even though few investors were in line to help. Most of the money has been repaid. 1 Certainly, if those two companies had gone into bankruptcy and failed to emerge, we would have 250,000 more unemployed, plus the workers from suppliers, which is a bit harder to count. All the little shops I visited during my [career] would be closed now. I have seen estimates that the unemployment might be as high as 15% now.”
—David Crotty, adjunct professor at Gateway Community & Technical College, Cincinnati

“Had the auto industry been allowed to file for bankruptcy and then reorganize, then a smaller bailout might or might not have been necessary. The time to consider a bailout was after the company had done all it could do to satisfy its bondholders. Then the situation should have been reevaluated.”
—John Durkee, Ph.d, independent metal finishing cleaning consultant

In a recent New York Times Op-Ed piece, Steven Rattner, a veteran Wall Street executive and lead advisor on the Obama Administration’s 2009 Automotive Task Force, offered this rare inside view of the bailout (or, more accurately, the government’s “investment”): “In late 2008 and early 2009—when GM and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines.” Rattner recalled that the task force spoke diligently to all conceivable providers of funds, and “not one had the slightest interest in financing those companies on any terms,” as he put it. Without government financing initiated by President George W. Bush in December 2008, and extended by the Obama Administration in 2009, he said GM and Chrysler would not have been able to pursue Chapter 11 reorganization. “Instead, they would have been forced to cease production, close their doors and lay off virtually all workers once their coffers ran dry.”

According to Rattner, those shutdowns would have reverberated throughout the entire auto sector, causing innumerable suppliers almost immediately to stop operating, too. That was the primary concern voiced by Alan Mulally, CEO of Ford Motor Co., which, incidentally, did not require or request recovery monies from the federal government. While he and his company could have (theoretically) gained market share by standing by and watching GM and Chrysler crash and burn, Mulally instead testified on behalf of the two beleaguered automakers for the greater good of the industry at large.

“The government’s intervention was absolutely key to helping create a chance for GM and Chrysler going forward,” said Mulally in October of 2010. “The reason we did was that we believed—like two presidents [Bush and Obama]—that if GM and Chrysler would have gone into free fall bankruptcy, they would have take the supply base down and taken the industry down, plus maybe turned the U.S. recession into a depression.”

Hence the need for the Automotive Supplier Support Program, which kept the supply chain functioning—and funded—while GM and Chrysler got their respective houses in order.) Industry analysts estimate that more than a million jobs would have been lost, with the industrial Midwest region bearing the brunt of the impact. After all, we’re talking about much more than the fate of two car makers. It is widely held the automotive supply chain (sheet metal fabricators and producers of glass, rubber, and electronics, etc.) employs three times as many workers as the automotive companies themselves.

There are valid points on both sides of this debate. But what is clear—based solely on the data—is that the U.S. automotive industry is measurably better off today than it was just three years ago. For starters: Chrysler Group’s full year 2011 net income improved to $183 million, compared to a net loss of $652 million the year prior, with net revenue for the year up 31% to $55 billion. Furthermore, Chrysler’s worldwide unit sales in 2011 were up 22%, with its U.S. market share increasing from 9.2% in 2010 to 10.5% last year. Meanwhile, GM reported net income of $7.6 billion in 2011—up more than 60% from 2010—on revenues of more than $150 billion, an 11% increase over the year prior. More importantly, beyond the core organic sales and volume growth, the automakers are also reinvesting billions of dollars back into their operations, restarting facilities, adding shifts and creating or saving thousands of jobs in the process.

That progress is not relegated to the automobile manufacturers. OEMs and Tier 1 suppliers are also reaping the rewards of the resurgent automotive market—as indicated not only by the most recent Original Equipment Supplier Association member survey but also by newly released Bureau of Labor statistics showing employment in the motor vehicle and auto parts production and sales sectors on the rise. It’s not anywhere near 2002 levels, but the numbers are trending upward nonetheless. Likewise, employment in the automotive retail trade—particularly dealerships—is nearly back up to 2008 levels. Just recently it was announced that U.S. auto sales jumped 16% in February to the highest level since the pre-recession period, helped by—analysts say—declining unemployment and improving consumer confidence, even as gasoline prices top $4 a gallon in parts of the country.

WRAP UP
I mostly share Rattner’s view, in that there was simply too much at stake if the government did nothing and opted instead to allow the market to “auto-correct,” which was no guarantee in a recessionary environment. In the midst of one of the worst global economic downturns the world has ever seen, the gamble of a costly intervention—in my mind—outweighed the risk of inaction and potentially further disruptions to the automotive supply chain and the economy at large.

But you don’t need to consult pundits like me for corroboration. Those on the front lines will tell it to you straight. Without the automotive recovery efforts, noted Phil Leonard, plant manager at PunchTech, a sheet metal company in Marysville, Mich., “we wouldn’t be here.”

—Reginald Tucker

For more on the state of the automotive industry and supply chain today, please see the March edition of Metal Finishing magazine.

REFERENCES

  1. The U.S. government provided a total of $80 billion to stabilize the U.S. automotive industry, through investments in General Motors, Chrysler, Chrysler Financial, Ally Financial, as well as programs to support automotive suppliers and guarantee warranties. By the middle of 2011, $40 billion had been returned to taxpayers. Independent analysts estimate that the Administration’s intervention saved the federal government tens of billions of dollars in direct and indirect costs, including transfer payments such as unemployment insurance, foregone tax receipts, and costs to state and local governments. Source: “The Resurgence of the American Automotive Industry,” June 2011, www.whitehouse.gov.

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