People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 47

November 30, 2008


Bailout For US Automobile Big-3


IT has been a while since the US Congress approved a $750 billion bail-out package aimed at pulling the US out of the biggest crisis in US and global capitalism since the great depression of the late 1920s. Whatever its original intentions, clouded by the initial blank cheque sought by George W Bush and his Treasury Secretary Henry Paulson and later by the convoluted multi-pronged approach advocated by Congress, these funds are now being used, in a selective and non-transparent manner, to bail out one after another failing bank, insurance company or investment house. Numerous commentators have pointed out that while such firefighting in the financial sector may be required in the short term to prevent a complete meltdown and to re-start the flow of credit, the underlying and hitherto unaddressed crisis in US capitalism lies in a full-blown recession in the US, more particularly in its manufacturing sector and what is ironically termed the “real economy”.

Nowhere is this more apparent than in the crisis being faced by the US automobile industry. The Big 3 US automobile manufacturers, General Motors, Ford and Chrysler have recently made a desperate appeal to the US Congress for a $25 billion (Rs 1,25,000 crore) bailout in order to avert an imminent collapse. Industry representatives argue that their plight is due to the global financial crisis, especially the drying up of credit, while others assert that throwing money at US auto manufacturers will not help because problems lie within the US auto industry itself and its failure to address long-standing structural problems and to adjust to changes in markets and technologies.

If the Big 3 did indeed shut down, this would have huge implications for the US. Domestically, there would be crippling job losses cascading down from the actual manufacturing companies themselves, to materials and parts suppliers, ancillaries and distributors, and to a host of other indirectly linked sectors, reaching down from the big cities to small towns. And internationally, the US could lose its symbolic yet important position as technological leaders of western industrialised countries in which the automobile sector has long held an iconic position.

Pros and Cons

Arguments for and against rescuing the US automobile giants are raging furiously in the US as well as outside. These cover ideological positions (whether the US government should at all rescue private corporations) as well as questions about if and how such a bail-out would affect the long-term health of these companies and the US auto industry in general.

By and large, the Republican right has come out strongly against a bailout, arguing that under capitalism, companies should be allowed to fail if they are unable to cope with changing situations. Republican Senator Richard Shelby for instance maintains that the Big 3 US auto giants are “dinosaurs” and that, unless the Big 3 make “major changes in the way they do business”, a bailout would only postpone an inevitable collapse. Most Democrats, including of course the Governor and elected representatives in the most affected state of Michigan in which the automobile capital of the US, Detroit, is located, argue that whereas a restructuring should happen and some changes have indeed been made, the bailout is necessary in order to save jobs. "How much pain do you inflict on an already very weakened economy?" asked Democratic Congressman Barney Frank, closely linked with US trade unions. The plight of the US auto industry figured prominently during the long election campaign, and president-elect Barack Obama often spoke, including in the context of the bailout request, about the need for restructuring the US auto industry.

The first plea of CEOs and other senior executives of the Big 3 with a presentation to the US Congress was a fiasco. The CEOs made out a very poor case, essentially just asking for money without promising anything in return and emotionally blackmailing the elected representatives with the spectre of huge job losses across America. To top it all, the Big 3 executives came to Washington in separate private aircraft at enormous cost, unmindful of what one Congressman described as the “delicious irony of CEOs flying in on private jets with a tin cup in their hands”. The US companies have been asked to come back with a restructuring plan in two weeks.

With 1 in 10 American jobs said to be linked to the US auto industry, at a time when tens of millions of Americans are already reeling under home loan or mortgage foreclosures and huge losses in savings and investments, it is difficult to imagine that some kind of a bailout will not eventually happen. But the larger questions about the fundamental health of the US automobile industry, and about the status of technology in the US manufacturing sector in general, will remain.

Obsolete technologies

This author too believes that the US automobile industry has been chronically sick for long, pre-dating the current financial crisis by many years. An article in these columns more than a year ago, when Chrysler went belly-up (see “One down, Two to go”, People's Democracy, April 15, 2007) had argued that GM and Ford too were headed in the same directions due to a combination of obsolescent technology, poor management and a reliance on a protectionist US domestic market in which, however, consumer needs were changing rapidly.

The share of the Big 3 in the US auto market has been steadily declining for years to the current around 30 per cent. All the three rely heavily on a small number of fuel-guzzling models of large cars and sports utility vehicles (SUVs), demand for which has sharply fallen due to steep rise in fuel costs and greater environmental consciousness among US consumers. Japanese rivals Toyota and Honda, both now with US manufacturing bases, offer a wide range of fuel-efficient and even hybrid vehicles running on gasoline and electricity, demand for the latter growing at over 40 percent annually. In contrast, none of the Big 3 offer any fuel-efficient models and only GM has a few designs in the pipeline.

Cars made by Japanese and European manufacturers are perceived in the US market as having better performance, being more durable, economical, innovative and user-friendly than US cars which are also increasingly considered as less safe, what with SUVs rolling over and tyres exploding.

Most US automobile factories, especially the main Detroit area plants, were built and tooled during the ‘70s for big cars and painfully re-tooled in the ‘90s for SUVs. These plants have very large and rigid production lines geared for making huge numbers of a few models. Toyota and Honda on the other hand, even within the US, have set up and run highly flexible production lines, capable of switching models and production capacities in short time-frames, and produce many models with frequent introduction of new ones.

US auto manufacturers have high fixed costs, substantial over-capacities and enormous inefficiencies all the way down the manufacturing process. GM’s inefficiencies tolerated and even encouraged similar inefficiency and poor quality among major US components suppliers. For instance, GM sold off its subsidiary, auto components manufacturer Delphi Corporation in 1999 supposedly to boost efficiencies, but given the same old designs and ingrained manufacturing practices, Delphi itself went into bankruptcy protection a few years later. It is hardly surprising that both Toyota and Honda in the US import most of their components from other Asian countries!

All the signs are that the US auto industry has already lost its technological leadership and may have fallen too far behind to catch up. This may well be a part of the “normal” trend in the inter-nation distribution of labour under global capitalism under which countries lower down the technology chain start manufacturing those goods in which the leader or those higher up have lost their competitive edge. So much of car manufacturing has already shifted from the US and Europe to Japan and even further downstream to Korea, China and India. There are after all, no more TVs manufactured in the US, and the US steel industry has all but wound up. In the “normal” run of things, this would be acceptable but for the fact that the US has not taken up R&D or manufacture in other sectors higher up the technological ladder than its rivals. President-elect Obama is pushing for a rapid shift to new “green” technologies in energy, and has also called for a re-tooling and restructuring of the Big 3 but, given poor investments in research in advanced technology over decades, it already appears too late for the US auto industry.

Moribund auto and other manufacturing

GM is losing over $4 billion every year, Ford over $7 billion and Chrysler over $1.5 billion. In fact, these figures would have been much worse if one were to consider only automobile engineering and discount other financial dealings of the Big 3. In the past few years, GM has earned three times as much from property mortgages than from selling cars and, with the meltdown in the mortgage market, GM’s present crisis owes at least as much to sub-prime lending as to poor car sales. Ford too has been dealing in loans and other financial instruments.

Some in the US are blaming this on “unfair” competition by companies like Toyota. Japanese companies, they argue, are able to export to the US and even set up manufacturing bases there, whereas US auto majors are unable to do the same in Japan. In fact, the shoe is on the other foot, with the US auto industry being notoriously insular and resistant to change, for instance refusing to make vehicles with right-hand drive or to make components with metric measurements! Toyota is also blamed for employing non-unionised labour in some of its plants and thus saving over $1700 for each car by not paying health-care and insurance costs. But numerous commentators have nailed these efforts to pass the burden on to the workers by pointing to the huge bonuses taken by Big 3 executives even as it underpays its workers and extracts longer working days.

Many in the US are now arguing that GM and the others should file for bankruptcy protection under the so-called Chapter 11, which would allow them to suspend payments to creditors, renegotiate labour contracts and undertake a painful restructuring process.

But will even this be enough? Chrysler sought and obtained a bailout over 30 years ago, and once again finds itself with cap in hand. If the request for a bailout is now granted along the lines sought, history may simply repeat itself. For the US auto industry seems to be in its death throes, following or even leading a wider trend in the US manufacturing sector which shows a long-term secular decline. The roots of the crisis in the US auto industry lie not only in the structure of the US manufacturing sector and its response to globalisation, but also in the US model of capitalism.

GM used to boast that “what is good for GM is good for the US”. With this motto, GM has for too long pushed inferior products down American throats in a protected market with the support of the state. GM cars may no longer be good enough for the hapless American consumer, but GM may still make this motto come true and drag America down with it!