Tag: economic bailout

How Did U.S. Automakers Get Themselves into This Mess?

President-elect Obama yesterday asked President Bush to throw a lifeline to the battered U.S. auto industry. House Speaker Nancy Pelosi also called for “emergency and limited financial assistance” for auto makers and suppliers, introducing legislation to make the big three automakers eligible for help under the $700 billion Congressional bailout passed last month. The move followed disastrous third-quarter losses reported by Detroit’s Big Three: General Motors, Ford and Chrysler.

Prior to its election break, Congress passed legislation providing $25 billion in government-backed loans to automakers to help them retool for the production of more fuel-efficient vehicles. Since then, the Big Three and United Autoworkers officials have asked for an additional $25 billion to keep the automakers afloat and a further $25 billion to fund future healthcare payments to 780,000 retirees and their dependents. Legislation currently being written in the House and Senate is expected to severely limit executive compensation and demand vigorous federal review in exchange for bailout funds.

Critics say Detroit is suffering from decades of short-sightedness and poor decision-making. In iterating the missteps that have led automakers to the edge of bankruptcy, critics cite the auto industry’s failure to invest in new products, failure to aggressively pursue fuel-efficient cars, failure to meet the competitive challenge of Asian imports and failure to take on growing union demands.

“There’s been 30 years of denial,” said Noel Tichy, a University of Michigan business professor, author and auto industry consultant. “They did not make themselves competitive. They didn’t deal with the union issues, the cost structures long ago, everything that makes a successful company.”

Tichy says the auto industry’s problems started in 1980s when Toyota and Honda mastered the production of reliable, fuel-efficient cars. Detroit, unfortunately, failed to see this as an omen of future trends. Cheap gas and a strong U.S. economy made Detroit blasé about the public’s fledgling interest in ecology and “green” lifestyles. Driven by high profits and consumer demand, the Big Three automakers continued to invest in the traditional “bigger is better” model, flooding the American market with luxury vans, trucks, SUVs and the ultimate example of overindulgence, the Hummer.

By the 1990s, Detroit had effectively ceded the small and midsize car markets to Toyota and Honda. When fears of global warming, pollution and high oil prices began to gain affect public opinion and buying habits after the millennium, U.S. automakers were caught unprepared. Skyrocketing fuel prices over the past year sent sales plummeting and sealed their fate. Coupled with a recessive economy and tight credit, failure to address future trends has driven the U.S. auto industry to the brink of extinction.

Next time: Hope for the future: Changes that will redefine the U.S. auto industry

Hope for the Future: Redefining the Auto Industry

Despite harsh criticism, the President and Congress seem poised to throw a lifeline to America’s struggling auto industry. Critics say Detroit’s problems stem from 30 years of short-sightedness and poor decision-making. Failure to recognize future trends toward smaller, more fuel-efficient vehicles compounded by failure to aggressively address budget-busting labor demands head critics’ lists of the poor management practices that have led to the U.S. auto industry’s financial woes (see our Nov. 12 post). Today, the auto industry defends itself.

U.S. auto industry representatives dispute their critics, saying critics oversimplify the issues and don’t credit automakers for the significant progress made in recent years. “In the last five years, there’s been more restructuring done in the automotive business than any other business in the history of the United States,” said Tony Cervone, General Motors VP of communications.

Auto industry spokesmen cite a decade’s worth of tough cost cutting measures, improved productivity and their switch to the production of more competitive, fuel-efficient cars as indications that Detroit has been working hard to reverse course and increase its competitiveness with popular foreign imports. They point out that their ability to compete is severely hampered by the demands of powerful labor unions and the strictures of multiple government regulations.

The recessionary economy and tight credit have placed additional burdens on automakers. New car sales are down, in part, because consumers aren’t spending. Across the economic board, consumers are harboring their financial resources and taking a wait and see attitude about the nation’s economic future. Adding insult to injury, the tight credit market has made it nearly impossible for people who want to buy a new car to get financing. Burned by the mortgage meltdown, banks have reined in lending practices and raised loan requirements.

The news isn’t all doom and gloom, however. Capitalizing on fuel-efficient designs initiated in 2000, Detroit is finally rolling out cheaper, competitive alternatives to the Asian-designed vehicles that dominate that sector of the market. Financial pressure is forcing the industry to consolidate and streamline production practices. President-elect Obama’s reminder to the American people that we will all have to sacrifice if the country is to weather the current economic crisis could play out in more reasonable labor contracts. And that Congressional lifeline is likely to come with lots of strings attached that should give Detroit the needed incentive to redefine itself more competitively.

Next time: Lessons to be learned from the auto industry meltdown

America Needs to Rebuild Industrial Base to Survive

The auto industry bailout and its repercussions are topics of hot debate. It now appears that federal money will come with some long apron strings that will force Detroit to become smarter, leaner and more forward-thinking. That’s never a bad thing for any business and could enable a mighty phoenix to arise from today’s ashes.

Detroit’s problems put a glaring spotlight on America’s loss of the massive industrial base that made us a world superpower. Many of the major industries and manufacturing enterprises that once dominated the American economy have been shipped overseas. To stay competitive with the flood of cheap foreign products that have inundated our markets, American businesses have been moving manufacturing plants overseas where labor and often transportation and natural resources are cheaper. Since 2001, millions of U.S. manufacturing jobs have been lost, contributing to the more than 10 million Americans now unemployed. Politicians are just beginning to understand the high economic price exacted by outsourcing our manufacturing base.

In a recent column posted on the Alliance for American Manufacturing’s blog ManufactureThis, the economic benefits of manufacturing jobs were explained by Peter Navarro, a CNBC contributor and professor at the Paul Merage School of Business at the University of California-Irvine. “Without a robust manufacturing base, the U.S. economy will lack the core strength to sustain any robust longer-term economic growth,” Navarro says. With nearly 3 million American workers relying on the auto industry and its supply chain for their income, America can’t afford to lose an industry that constitutes one-fifth of the 15 million manufacturing jobs left in America.

It’s the “multiplier effect,” the ability to create jobs downstream, that makes manufacturing jobs so valuable to economic stability and growth. Service jobs, which account for the bulk of U.S. jobs today, have a multiplier effect that is less than half that of manufacturing jobs. As Navarro explains, “This means that for every one job created — or saved! — in manufacturing, an additional four to five jobs are created downstream — from cops, firefighters, and teachers to dry cleaners, insurance agents, plumbers, and real estate brokers.”

But the economic effect of manufacturing jobs is even greater because they generally pay more than service sector jobs. This means more money going back into the economy, Navarro points out. Bailing out the auto industry, one of America’s last major manufacturers, is essential to our economic recovery. As Navarro says, “the U.S. economy will still never return to its former levels of long-term growth, glory and prosperity without a full restoration of its manufacturing base.”