The ailing Big Three US automakers, General Motors, Ford Motor and Chrysler,
have so far failed to secure aid from Congress with only two days remaining of
the present legislative session and GM warning that it may run out of cash
before a new Congress can come to the rescue next year.
The
following is the testimony given by Peter
Morici
to the Senate Banking,
Housing and Urban Affairs Committee "Examining the Domestic Automobile
Industry" on November 18. Other panelists included Senator Debbie Stabenow,
chief executives of GM (Rick Wagoner), Ford (Alan Mulally) and Chrysler (Robert
Nardelli), and United Auto Workers president Ron Gettelfinger.
Testimony
The domestic automobile industry has two major components - the Detroit Three
and the Japanese, Asian and European
transplants that also assemble and source components in the United States and
Canada. Both contribute importantly to the vitality of our national economy.
Ensuring these companies have the means to compete globally is vitally
important.
The gradual erosion of the market shares of the Detroit Three over the last
several decades stems from higher labor costs - having origins in wages,
benefits and work rules - poor management decisions, and less than fully
supportive government policies. Although the US government has been sympathetic
to the needs of the industry, the industry has fallen victim to currency
manipulation and other forms of protectionism in Japan, Korea, India, and
China.
The Detroit Three are rapidly running out of cash and face filing for Chapter
11 reorganization. It would be better to let them go through that process and
re-emerge with new labor agreements, reduced debt and strengthened management
that would permit these companies to produce cars at costs comparable to those
enjoyed by their Japanese and other foreign competitors assembling vehicles in
the United States.
Circumstances are dramatically different today than in 1979 when Chrysler
received assistance from the federal government. In those days, the challenge
at Chrysler was to become competitive with Ford and GM, and [Chrysler chief
executive] Lee Iacocca had a clear plan to achieve that objective and
succeeded. Today, the Detroit Three, though improved in productivity and with
lower labor costs thanks to concessions from the United Auto Workers, are still
not as competitive as the Japanese transplants.
Margins in automobile manufacturing are thin and there is no such thing as
being competitive enough. Either a company is competitive or it is not - either
it accomplishes the cost structure enjoyed by Toyota and Honda, operating in
the United States, or it will continually cede market share and run into
financial difficulties.
By assisting the Detroit Three, Congress can delay one or all of them going
through Chapter 11 reorganization but sooner or later one or all will face
reorganization. The communities and suppliers dependent on these companies
would be better off going through that process now than by delaying it with
assistance from the federal government.
Without a new labor agreement that brings wages, benefits and work rules in
line with those at the most competitive transplant factories, and without
reduced debt and other liabilities, the Detroit Three will continue to lag in
product innovation and field too few attractive new vehicles, because their
higher costs, debt and other liabilities require them to spend less on new
productive development than they should.
Also, they are inclined to field products with less desirable content to
compensate for higher costs. As consumers find vehicles made by Japanese and
other transplants more attractive, like those imported from Korea and
eventually from China, the Detroit Three will cede market share of one or a few
percentage points each year.
If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge
from a bankruptcy reorganization process will be smaller and support fewer jobs
than if these companies endure this difficult transition in 2009.
More jobs can be saved among GM, Ford and Chrysler and their suppliers if
bankruptcy reorganization is endured now than in the future.
When Americans buy automobiles from the Detroit Three, more is contributed to
the vitality of the US economy than when Americans buy vehicles assembled here
by transplants or imports. These vehicles have more US content in terms of
jobs, engineering and profits than do foreign nameplate vehicles.
The Congress could take steps to improve the attractiveness of making cars and
parts in the United States by improving the public policy environment. This
would include finally addressing, directly and forthrightly, undervalued
currencies in Asia - currencies kept cheap by intervention by foreign monetary
authorities in China and elsewhere. In addition, assertive efforts to develop
fuel efficient vehicles could strengthen the industry and create export
strength.
For example, Congress could offer an incentive for car buyers to trade in their
gas guzzlers - the newer and the bigger the clunker, the more the car buyer
would receive under the condition the vehicle is destroyed. This would raise
the price carmakers receive from selling smaller vehicles.
Congress could provide substantial product development assistance to US-based
automakers and suppliers. The latter includes 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
[research and development] and first large production runs in the United
States, and share their patents at reasonable costs with other companies
manufacturing in the United States. The huge US market would help attract
producers from around the world and rejuvenate the US auto supply chain.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the US International Trade Commission.
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