In spite of Hope ‘n Change’s Hollywood happy talk, the depression in many sectors of the economy is intensifying – including the auto industry. And government meddling in the auto sector may just end up making a bad situation worse.
Although it’s fashionable to blame the Big Three’s cost structure and product lines for their troubles, the real problem, according to David Cole and Sean McAlinden of the Center for Automotive Research, is hyper low sales. As they point out, in a ‘normal’ recession, we would expect to see sales of 12-14 million vehicles instead of the 9-10 million that we’re now seeing. That’s why Toyota is losing more money than GM and way more than Ford.
As they observe, hyper low sales are a by-product of the deep fear felt by Americans when they confront a financial collapse in which their own government is complicit.
Writing in the Detroit News, Cole and McAlinden point out that the auto industry’s problems are largely caused by two failures of government policy: ‘the lack of any real energy policy, which set the stage for the crisis with the wild ride of energy prices in recent years’ and the idea ’that every American should have a home, even if he or she cannot afford one. This policy was the seed, fertilized by financial corruption, that brought world financial markets to their knees.’
But government intervention in GM and Chrysler creates a new set of problems and issues that could have disastrous implications for the economy as a whole:
• What does the government want from its control? Do government officials expect to be repaid or to maximize union jobs? Do they want to build politically correct vehicles, even if not desired by consumers? This can be a recipe for failure.
• The emerging union control of GM and Chrysler is as great a contradiction as the government’s control and must be managed so it does not compromise the primary goals of the company. A successful company can have only one master — the market. It will determine success or failure. Will the government allow Chrysler and GM to profitably respond to the market?
• While government officials claim they do not want to run the industry, they will probably appoint the majority of the industry directors. The task force seems to be managing on a day-to-day basis even though its members have little experience with the industry’s complexity. Who will be in charge?
• The financial markets now view GM and Chrysler as pariahs. No one will invest in or loan anything to a government-run company that so willfully violates contracts and 125 years of bankruptcy law. How will the government restore the trust between lenders, investors and the companies?
• The only solution is completely independent boards at GM and Chrysler with no strings from the government except a mandate to repay the federal loans. The boards should be able to hire and compensate the best management talent available, from the CEO down throughout the organization, to ensure that the companies can perform at a high level of excellence. The government does not possess this talent and may not even be aware of the need for it.
• One critically important question is the impact of the government’s involvement on companies without government support. Will their futures be jeopardized by companies with a special relationship with the government?
What the industry needs is independence and a ruthless commitment to excellence in the market. Unfortunately, Hope ‘n Change’s men seem more interested in rewarding constituencies and punishing enemies. When it comes to the ‘automotive task force’, I see a group of people who don’t know what they don’t know – and they’re too arrogant to learn.
But in the end, who will want to lend GM and Chrysler money? As Cole and McAlinden observe, the two companies are now pariahs in the financial markets due to the government’s heavy hand with creditors. What Hope ‘n Change’s men don’t seem to understand – or don’t want to know – is that markets are about voluntary behavior based on self-interest. Without predictability in law and contract, voluntary actors will voluntarily walk away from the table.
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