Is this the End of the North American Auto Industry? - The Intrepid

Saturday, November 08, 2008

Is this the End of the North American Auto Industry?

Probably not. But, the companies that survive won’t be pretty.

Once the symbol of American ingenuity, industry, and strength, American automakers have been reduced to begging the U.S. and Canadian governments for a massive bailout.

On Friday, Ford and GM announced devastating third quarter losses, $3 billion and $4.2 billion respectively. But, even before these announcements, North American automakers were in desperate shape. Rampant deal making suggests that GM might still swallow Chrysler. However, GM itself is on the verge of bankruptcy.

Ford looks little better. The company burned through $7.7 billion in cash reserves during the third quarter and has just announced another series of layoffs. Workers at all three companies are worried about their job security, and whether their employers can pay them come springtime.

These recent dismal reports have largely stemmed from high fuel costs and a looming global recession. However, in many respects, North American Automakers are to blame for their own problems. Although auto companies around the world are struggling against a 20-25% drop in sales, GM, Chrysler, and Ford sealed their fates in the early 90s.

Instead of building fuel-efficient cars in the 90s, automakers pushed the sale of SUVs. These gas guzzling monstrosities had huge mark ups. The big three were losing market share in the regular market to Toyota, BMW, and Volkswagen, but it didn’t seem to matter, as the profits from SUV sales were offsetting losses in other areas. While the big three kept building and investing in SUVs, Toyota began to build fuel-efficient cars, and later, hybrid cars.

Fast-forward to today, and the weaknesses of the American auto industry are clear. All three are on the verge of bankruptcy, the “cash cow” SUV market has completely disappeared, and Toyota and the other car manufacturers have a huge lead in fuel-efficiency research.

In 1996, GM produced an electric car called the EV1 for sale in the California market. The car was designed and built in response to new clean air laws, but was terminated in 1999 as the company felt that the car was unprofitable. California had also amended its clean air laws and abandoned its rather extensive environmental goals in response to legal challenges and extensive lobbying from the auto industry.

Today, GM has gone back to 1996. The Chevy Volt is in many ways a successor to the EV1. Instead developing electric technology over the past decade, GM has had to start from scratch. “If we could turn back the hands of time,” says GM R&D chief Larry Burns, “we could have had the Chevy Volt 10 years earlier.”

The Volt is still years away from the road, but with GM’s numbers, it doesn’t look like the company has more than a few months. Without a bailout, GM, Chrysler, and Ford will go bankrupt.

However, these companies, in addition to producing 4% of America’s GDP, represent part of the country’s identity and status in world. The Bush Administration has already given the big three $25 billion in soft loans to help develop fuel-efficient cars. It is likely that the Obama administration will provide similar handouts, as auto unions were a large part of his win on November 4th.

During the campaign, Obama called for tighter fuel economy standards, something that is deeply unpopular with both the automakers and the trade unions. Whether Obama can live still live up to his promises remains to be seen.

The auto industry cannot be allowed to fail. Too many jobs are at stake. However, as the Economist wrote this week, “...pouring cash into basket cases with no end in sight to the outlay is equally as unpalatable” as the consequences of letting the industry collapse.