Washington Giving Detroit a Second Chance

General Motors (GM) and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.

In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity. And persuade the UAW to accept stock for one half of what these companies owe to fund retiree health care and align wages, benefits and work rules with those of the Japanese automakers operating in the United States.

GM and Chrysler must complete these negotiations by March 31 or repay the money and face bankruptcy.

At U.S.-based Toyota (TM) factories, workers receive about $25 dollars an hour and good health care benefits. But they don't retire at 50 after 30 years or get as much time off and huge severance packages. Toyota does not endure the medieval work rules and job classifications imposed by UAW contracts.

Most other Americans would be happy to get Toyota pay, benefits and working conditions. If Gettelfinger continues stubborn resistance to a better package than most Americans enjoy, then Detroit automakers will continue to require government subsidies or not have enough profits to invest and compete in hybrid and other new technologies that will transform personal transportation over the next decade.

Eventually, Washington will tire of their begging, they will march through bankruptcy, and their factories will be sold off to Japanese, Korean, European and Chinese automakers.

If Gettelfinger takes the Toyota package, then Washington should take a hard look at policies that can promote U.S. automaking as effectively as do industrial policies abroad.

This would include addressing, directly and forthrightly, undervalued currencies in Asia — currencies kept cheap in foreign exchange markets by government intervention in Japan, China and elsewhere.

Over the last two decades, Japan has kept the yen at least 30% undervalued against the dollar, and this provided Toyota with an average subsidy of at least $2,000 on every car it sold in the United States.

Through 2004, the Bank of Japan directly purchased dollars in currency markets to keep the yen undervalued, and since, it accomplished the same by keeping Japanese interest rates very low. This encouraged the so-called "carry trade," where private investors borrow yen, use those to purchase dollars and then invest in short-term U.S. securities to exploit higher U.S. interest rates.

Now, the Federal Reserve has dramatically reduced U.S. interest rates, and the yen has risen closer to its true market value against the dollar. Japanese officials appear poised to again intervene directly in currency markets to restore Toyota's unfair advantage, and Washington should take whatever steps are necessary to head off such Japanese protectionism.

In addition, Washington should take assertive steps to encourage production of fuel-efficient vehicles in the U.S. and create a strong export industry.

Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales.

Washington could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter include Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at a reasonable cost with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Such smart industrial policies would contribute to national efforts to reduce CO2 emissions and reduce oil imports.

Finally, individual Americans should open their minds. Many are considering trading in trucks and SUVs for sedans and are naturally attracted to the Toyota Camry and similar import brands. Visit a Ford (F) or Chevy showroom and test drive a Fusion or Malibu and be pleasantly surprised. Those are high-quality, affordable and reliable vehicles.

Washington is giving Detroit a second chance, and Americans should give its cars a second look.

Comments

[Paul Killinger]

You have very likely predicted the eventual outcome.

2009 Jan 14 11:13 AM

[Speedzzter]

"Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales."

This is a horrible idea that will amount to nothing more than another wasteful welfare plan. It will lead to the loss of historically significant vehicles and will drive up used car prices. It will adversely impact the supply of used and replacement auto parts which are necessary to low income families as well as to millions of automotive enthusiasts, :"tuners," :"hot rodders" and grassroots racers. The Specialty Equipment Market Association (SEMA), car collectors, and motoring enthusast groups will fight such a misguided strategy.

2009 Jan 14 02:09 PM

[cz]

1-15-09
Peter,
With your credentials, it’s apparent that you’re immanently capable of carving out your own slice of ‘free market’ prosperity commensurate with the likes of George Soros or Warren Buffett. However, your recent media exposure where you extol the virtues of union busting seems to have put you squarely on par with renowned political hacks such as Larry Kudlow, Steve Moore and their ilk… which is very perplexing.
You could’ve been one of the ‘Masters of the (capitalist) Universe’, but you chose the path of the coldhearted, shameless, right-wing-nut, ideologues with their psycho-fervent desire to destroy the lowly working class. Stealing those measly $6000.00/yr. GM pensions from little, 70 year old arthritic UAW ladies must provide some sort of inner sense of reward and justice only the lowest form of political species (like you, Kudlow and his CNBC pals… FOX too) can fully appreciate.
Apparently the RNC bulk book purchases (and consulting fees) in lieu of prostituting yourself out as the face of Republican greed and class warfare was the best you could do in these difficult economic times. Perhaps, you could parlay your sleazy sideshow into a more ‘respectable’ lobbying occupation or even gain further notoriety as the resident genius conservative all purpose RNC talking point spewing correspondent on FOX or CNBC.
I’m sure they already love your no-nonsense working class hate-speak and that should allow you to easily make a seamless fit into their ‘right-sided’ ‘news’ broadcasts!!! And, then you’ll be able to achieve that iconic media stature that you are so (obviously) desperately craving. So, good luck with that…
CZ
P.S. grandma says you are a greedy scumbag.
p.s.p.s. what do you expect from a ‘low-class’ union worker who’s being robbed by the most corrupt political regime in history.

2009 Jan 15 10:47 AM

[31October]

Great article. But Washington gives Detroit a "second" chance? More like seven times seven ;-)

Re: "United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors."
-- We all know the obvious answer to that.

Re: "In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity."
-- They did not make GMAC or bank holding companies meet the obligations, and they will not hold GM's feet to the fire.

Based on seekingalpha.com/artic..., you cannot make risk-free money shorting GM. And only an idiot would go long, since equity will be wiped out by debtholders.

But you can make money on GM:
1. XGM, BGM, etc. BONDS currently pay 40% yield.
2. The ex-dividend dates that fall before March 31 are guaranteed.
3. After 31 March, SOMEBODY in government will throw more money at them, regardless of right or wrong.
4. By November 2009, you would receive 120+% of your investment back in interest alone.
5. If bankruptcy did occur immediately after March [the right thing to do, but politically unimaginable], both parties in Congress have mentioned a 30% settlement on debt, meaning no more than a 30% downside risk for a 40% perpetual return on interest or a 100+% return on capital.

If you want to give Detroit a second chance, buy some GM bonds.

2009 Jan 16 04:00 PM

[slowdown]

Peter, I watched the hearings with great interest because I work for one of the OEM’s. I thought you hit the nail on the head when you said that the big three could not compete with Foreign car makers because they don’t have the same legacy costs and the currency manipulation that they enjoy. You are absolutely right and unfortunately it means that there really is no such thing as a free market. I realize that you are a numbers guy and probably don’t have an interest in the human factor side of things so I don’t take exception to what you have to say…. although I wouldn’t want to see you in any position of power over others. One of the issues I have with your story is that I don’t think you fully grasp why contracts were negotiated to include 30 and out and why it is a benefit to both sides to have the guys on the line move on after 30 years. If you ever have the opportunity to visit a manufacturing plant…pay attention to the physical aspects of the job….it is demanding work. Those cars don’t stop and no one there has a sit down job. After 30 years and @ 50 years old….things start wearing out in the human body and it’s only aggravated by this type of work. Roofers and Carpet installers have the same issues as do Nurses. It’s why they generally retire earlier. It’s either retire them…or slow things down to accommodate them. My sister is a Nurse…she’s had a couple of surgeries at 48 to repair damage caused by lifting people. She can’t lift anymore and has to get a helper. If you have a bunch of older Nurses….well you get the message I’m sure.
Offering incentives to people to take the retirement early would have allowed the companies to bring in new younger workers that would have a much reduced compensation package. Unfortunately the economy tanked and sales dropped so fast that new workers aren’t needed.

2009 Jan 17 12:50 AM