Changing the Auto Industry from the Wheels Up

The problems of the U.S. auto industry call for radical solutions.

By Alejandro Reuss

Intro | Pt. I | Pt. II | Pt. III | Pt. IV | Pt. V | Pt. VI | Full article

Introduction

The “Big Three” U.S. auto companies are not facing a crisis—they are facing multiple interrelated crises at once. Chrysler, General Motors, and Ford have posted tens of billions in losses over the last few years. They suffer from chronic overcapacity, producing more cars than they can sell, and have ended up selling cars at a loss. [Note 1] Their cars are widely viewed as lagging behind those of international competitors in quality, styling, and reliability. They have focused on fighting fuel-efficiency standards rather than developing new, fuel-efficient vehicles. [Note 2] They have bet heavily on large, gas-guzzling models and are playing catch-up Toyota and Honda in the development of hybrid cars. [Note 3] They face significant cost disadvantages compared to their main competitors, mainly due to retiree health and pension “legacy costs.” [Note 4] And, on top of all this, a deep recession has hammered car sales. [Note 5]

Already operating in the red before last year, the Big Three have been burning through billions in cash reserves during the current recession. General Motors, having posted losses every year since 2005, lost over $30 billion in 2008. [Note 6] It has reported that, in the first quarter of 2009, it lost another $6 billion (and depleted its cash reserves by over $10 billion). [Note 7] Ford has posted losses since 2006, including about $15 billion in 2008. [Note 8] Chrysler lost $8 billion last year. [Note 9] With their companies teetering on the edge of bankruptcy, GM and Chrysler executives appeared before Congress last November asking for a government bailout. In December, the Bush administration announced $13.4 billion in loans for GM and $4 billion for Chrysler. [Note 10](Since then, both companies have asked for billions more.) In April, the Obama administration offered additional loans of one-half billion to Chrysler and up to $5 billion to GM. [Note 11]Lacking private sources of financing, the two companies have managed to stay in business this long thanks only to the government loans.

The government has required both companies to submit restructuring plans, including concessions from workers and creditors, as a condition of the bailouts. [Note 12]At the end of March, the Obama administration rejected the submitted plans as inadequate. It gave Chrysler 30 days more to conclude a takeover deal with Italian auto giant Fiat, while GM got 60 days to submit a new restructuring plan. [Note 13]In late April, Chrysler appeared to have a deal with Fiat, with the Italian automaker set to take over operations and receive 20% of the company’s stock (with a possible future increase to 35%). A United Auto Workers (UAW) retiree health-care trust would own 55% of the stock. [Note 14]The UAW accepted new concessions on wages and benefits, while the company’s major creditors agreed to cancel billions in debt for about a third of its face value (plus less than 10% of the company’s stock). [Note 15]When some creditors balked at the plan, however, the company filed for bankruptcy. [Note 16]Meanwhile, GM proposed a restructuring plan in which the federal government would own 50% of the stock (in exchange for the cancellation of about $10 billion in company debt), and the UAW retiree health-care trust nearly 40%, leaving the company’s unsecured bondholders with just 10%. [Note 17]The plan included the shutdown of the company’s Pontiac division and over 20,000 layoffs. Bondholders could still balk, however, in which case GM would go into bankruptcy as well. [Note 18]

No matter what the outcome of the current crisis, the “Big Three” are not likely to return to the heights of their post-World War II heyday. In the 1950s and 1960s, the Big Three dominated the U.S. auto market. As recently as the late 1990s, they accounted for over 70% of total U.S. sales of new cars and light trucks. Now, they account for less than 50%. [Note 19] In the mid 1950s, General Motors alone accounted for over 50% of U.S. new-car sales. [Note 20] Today, the company’s market share is about 20%. [Note 21]Under the company’s proposed restructuring plan, it would employ less than 40,000 union auto workers, less than one tenth the number the company employed at its peak in 1970. [Note 22] There is no way to put Humpty-Dumpty together again, and it does not seem that any of the major players in this drama—the companies’ managements, the leadership of the UAW, or the government—really believe that there is. The real question is whether something new and better will be built from the wreckage of this industry.

Intro | Pt. I | Pt. II | Pt. III | Pt. IV | Pt. V| Pt. VI | Full article

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