The Issue: Auto Industry Crisis
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THE ISSUEA congressional tug-of-war has been set into motion as automakers plead their case to a Congress seared by recent bailouts. Automakers have emerged from their deathbeds to request an additional $25 billion bailout with their last dying breaths. In November 2008, the Big Three U.S. auto manufacturers - General Motors, Ford and Chrysler - warned that unless they receive their sought-after funding in the short to medium term, they are in imminent danger of declaring bankruptcy.  Spurred by the global financial crisis and the subsquent credit crunch, the automotive industry has been pummeled this year, but the underpinnings of the Big Three’s looming collapse have been brewing for over three decades. In 1980 Japan became the world's leading auto maker, the first year since 1905 that the United States had been outproduced by any other nation. Numerous entities have aided in Detroit’s downfall including Detroit exectutives, state and foreign governments and the union. The auto industry began crumbling when American politicians ordered the industry to build smaller cars to align with new energy policies while Americans were given no incentives to buy the mandated fuel-efficient vehicles. Americans had developed a love affair with SUV’s and showed no signs of abandoning their beloved gas-guzzlers, but the industry continued to pump out fuel-effiecient vehicles no one wanted. Thus GM poured million of dollars into lobbying efforts against stricter fuel economy standards so they could continue manufacturing SUV and truck behemoths, instead of taking advantage in their technological lead in electric cars. Soon after gas prices skyrocketed Americans pined for a more viable mode of transportation, but the automakers, succumbing to demand, were still producing their main cash cow: SUV’s and trucks. Foreign manufacturers had the upper-hand in producing fuel efficient vehicles as they had been perfecting them while the U.S. demanded SUV’s. Foreign brands have been welcomed into the U.S. with open arms for decades, ever since the U.S. Justice Department ruled that Detroit could not tell its dealers to keep foreign brands out of their franchised showrooms. Meaning a Ford dealer could sell a Toyota in the same showroom. Foreign brands were allowed to be imported into the U.S. and placed directly next to American manufactured automobiles. To America’s detriment, we gave foreign automakers a break by allowing them to bypass the start-up costs needed to establish dealerships. They could simply ship their cars directly to our showrooms. Not surprisingly, foreign governments did not return the favor. While we encouraged our foreign counterparts to outsell American manufacturers, they imposed laws and regualtions to keep us out. Koreans used to order an income tax investigation of anyone who bought a foreign car and the Japanese ensured no foreign auto companies could be built in their country. On November 17, House Speaker Nancy Pelosi met with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to persuade them to allow money from the $700 billion bailout package to be spent on Detroit. The Senate plan included $25 billion in 10-year low-interest loans, charging 5 percent interest for the first five years and 9 percent for the remainder of the loan term. The plan also included fast processing, fast turnaround, and no golden parachutes of any sort. Henry Paulson supports help for Detroit, just not out of the Fed’s own financial coffers. He opposes the proposal to extend the Troubled Asset Relief Program to inject capital directly into the Big Three. Paulson stated that the Bush Administration believes any assistance to the automakers should come from the Department of Energy, and that auto manufacturers should focus on producing more fuel efficient vehicles. The Big Three are as key to our manufacturing base as Fannie Mae and Freddie Mac are to the housing market, and should receive consideration as such.  If GM is refused all assistance, the company may be forced to file Chapter 7 bankruptcy, or total liquidation, as it would lack the means to seek Chapter 11 bankruptcy. Since the credit freeze has locked available credit, the auto manufacturer would have no viable means of keeping the bankruptcy court at bay, which is required of Chapter 11 claimants. GM would then be forced to sell itself off. A Chinese company that partners with GM, Shanghai Automotive Industry, has already expressed interest in acquiring this U.S. staple. Losing GM to China would be the nail in the coffin to America's manufacturing base. America has subsidized its own demise, but the blame is on American policies rather than American automakers. Allowing the auto industry to fail would be allowing America’s manufacturing prowess to dissolve. America pioneered the auto industry and if we can no longer manufacture cars, we’ll have nothing left. A country cannot sustain itself if it does not produce anything. EIC POSITION"Automakers have been saddled with unfair commitments that were delegated decades ago. The governement needs to provide assistance to the Big Three automakers, on the condition that the funds, management and labor are regulated and lenders need to develop a plan to make the industry sustainable. America cannot afford to lose another key manufacturing base." WHAT THEY ARE SAYING"For the auto industry to completely collapse would be a disaster in this kind of environment -- not just for individual families, but the repercussions across the economy would be dire," President-elect Barack Obama ``Without fresh capital, we project that GM may not have sufficient liquidity to make it to year end," Deutsche Bank AG analyst Rod Lache wrote in a note to investors. REFERENCES |
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