Detroit's Lifesaver

by John M. Curtis
(310) 204-8700

Copyright December 6, 2008
All Rights Reserved.                    

              Coming to Congress with hat-in-hand, the Big-3, GM, Ford and Chrysler, begged for cash to keep hope alive, trying to stave off bankruptcy a while longer.  Skeptical members of both the House and Senate don’t see how throwing more money down a rat hole will make a difference in the long run.  All three automakers face spiraling deficits, plunging through cash reserves at a furious pace.  Regardless of their systemic problems, they face an ugly recession in which consumers are sitting on their wallets.  With the latest jobs’ report showing the economy lost 533,000 jobs, prospects for Detroit got a whole lot worse.  While the Treasury and Federal Reserve have spent $7.7 trillion bailing out financial institutions, they showed little generosity for Detroit.  Squabbles at the Treasury, Fed and Federal Deposit Insurance Corp. have left Washington scrambling for how to spend the bailout.

             Detroit was low on the food chain for lawmakers trying to figure out the best way to save the economy.  House Financial Services Chairman Rep. Barney Frank (D-Bos.) urged his colleagues to spare Detroit, believing that bankruptcy at any of the Big 3 would have a catastrophic effect on an already bleak unemployment picture.  “What we need to do is keep this alive until he becomes president,” said Frank, reluctant to fork over the Detroit’s $34 billion request for emergency funding.  “No one thinks it will be the final bill,” reserving the right to revise allocations pending more reorganization.  Unlike some of this Democratic and GOP colleagues, Frank believes saving GM, Ford and Chrysler will pay off someday.  It remains to be seen whether the Big 3 can survive without a merger or acquisition.  GM and Ford currently have profitable division in Europe, Africa and South America.

            GM CEO Rick Wagoner expressed doubt that the once blue-chip company could survive without an immediate cash infusion.  What distresses some is the fact that GM’s European Division named Opel builds state-of-the-art fuel-efficient cars, competing successfully with any European or Japanese line.  Ford, too, commands a very competitive line of in Europe, sporting one of the best-selling brands.  Detroit has wasted years while their foreign competitors have marched ahead with successful product lines.  GM’s Wagoner said his company needs $4 billion by the end of the year and $6 billion more by March.  “Personally, the only course I could possibly endorse would be limited transitional assistance to allow the American domestic automobile industry to return to solvency and profitability,” said Rep. Spencer Bachus (R-Ala.), a member of Frank’s committee.

            Most conventional wisdom seeks to keep GM, Ford and Chrysler from bankruptcy, believing, in the auto business, that bankruptcy would destroy brand- credibility to consumers.  Most elected officials think either black-or-white with respect to the U.S. auto industry, meaning, bail them out or accept bankruptcy.  Like the troubled financial industry, mergers, acquisitions or a government takeover are all viable options.  While there’s been talk about Chrysler seeking a buyer, that option hasn’t presented itself for GM or Ford.  Ford claims it has enough cash to keep operation alive while they pursue an urgent restructuring plan.  GM’s Wagoner made it clear, the company can’t keep going without taxpayers’ cash.  Maybe it’s time to consider GM’s eventual merger or acquisition.

            United Autoworkers union didn’t flinch when Daimler-Benz bought Chrysler May 7, 1998.  All union contracts, employee benefits and company name were preserved.  With GM stock at $ 4 a share, it would be a bargain acquisition for any Japanese or German car company.  Stopgap aid from Congress isn’t the only viable option for the Big 3.  Many taxpayers and elected officials resent an auto industry bailout because they don’t believe Detroit has a viable domestic business model.  Whether or not foreign divisions are profitable doesn’t change the lack of domestic viability.  While the auto industry suffers through a global economic slump, it doesn’t mean that Nissan, Toyota, Volkswagen, etc. wouldn’t be tempted to buy GM.  Europeans know firsthand the success of GM’s German Opel division.  It wouldn’t take long for a foreign company to turn around domestic sales.

            Washington should consider more creative options to preserve Detroit than simply providing more cash.  When President-elect Barack Obama takes office Jan. 20, he should consider encouraging foreign automakers to manufacturer more cars in the U.S. Toyota, Mercedes and BMW already have limited production in the states.  Expanding production of more popular models domestically would take some of the heat off Detroit to preserve what’s left of GM, Ford and Chrysler.  With GM and Ford stock under $5 a share, a foreign carmaker should find either ripe for potential acquisition.  When GM bought Opel back in the ‘60s, it preserved one of Germany’s best lines, while, at the same time, helped GM establish a firm foothold in Europe.  Japanese or German automakers could find the same opportunity here in the states.  Throwing more good money after bad is no answer for Detroit.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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