Obama's Losing Bet on Detroit

huevonkiller · Apr 2, 2009

Obama's Losing Bet on Detroit
By Steve Chapman

If you had bought $1,000 worth of General Motors stock in 2000, your holdings would now be worth less than $40, for a loss of 96 percent. You could have made worse investments in that period -- with Bernard Madoff, for one -- but not many.

So anyone looking to participate in a viable business would look a lot of other places before they would look there. But the United States government thinks GM might just be a really smart place to put its money.

In its final weeks, the Bush administration lent the automaker $13.4 billion, along with $4 billion for Chrysler. On Monday, President Obama gave GM 60 days to come up with a better plan before deciding whether to sink more cash into it. But he placed a large bet on its survival by promising to guarantee all GM and Chrysler vehicle warranties.

He also held out a shimmering vision of the Big Rock Candy Mountain, expressing faith that his policies can lead to "a 21st-century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us towards an energy-independent future."

Truth is, that industry already exists. The Big Three just don't happen to be a part of it. The United States has robust, job-creating, fuel-efficient automakers, in the form of companies like Toyota, Honda and Subaru.

But they don't count in the eyes of this president, presumably because their employees don't belong to the United Auto Workers union. So he apparently couldn't care less how much they resemble what he fantasizes GM and Chrysler will soon become.

And a fantasy it is. On what basis could anyone expect GM or Chrysler to achieve greatness? It's like expecting a glacier to appear in Phoenix. Just because it happened a long time ago doesn't mean it's going to happen again anytime soon, if ever.

At one time, GM accounted for 60 percent of the cars sold in America, but its market share has fallen to 22 percent. It has lost money for four straight years, including a staggering $31 billion in 2008, and things are only getting worse. Sales in February 2009 were less than half what they were in February 2008.

Chrysler has not exactly set the world on fire either. It torched $8 billion last year. Some of its investors now value their stakes at pennies on the dollar -- or nothing. Its U.S. sales have plunged by nearly half over the last decade. In this year's Consumer Reports rankings of the 10 worst cars, seven are GM or Chrysler products.

The administration's own industry task force doesn't share Obama's unbounded optimism. In a report released this week, it noted that GM's supposed salvation, the plug-in hybrid Chevrolet Volt, "will likely be too expensive to be commercially successful in the short term."

It ridiculed GM's own cheery forecast, which assumes rising profits "despite a severely distressed market, lingering consumer quality perceptions and an increase in smaller vehicles (where the company has previously struggled to maintain pricing power)." Even under generous assumptions, it said, GM would keep losing money.

Given all these sad tidings, it's hard to avoid the conclusion that the only hope is bankruptcy court -- where it could shed some of its obligations by stiffing creditors and rewriting union contracts. Obama seems to think the auto industry is too important to be subjected to such an indignity, though he has not ruled it out.

But to survive in the long run, a company has to provide consumers with products they want at a price that yields healthy profits. That is exactly what GM, like Chrysler, has consistently been unable to do.

In those circumstances, neither bankruptcy nor any other course offers a plausible route to prosperity. Plausibility, however, is not a consideration among politicians determined to keep the Big Three in business no matter what.

In recent months, we've been told that ambitious federal action is needed in the financial sector because unregulated commerce produced disastrously perverse results. But in the auto industry, competition has functioned reliably to reward sound companies and penalize bad ones. So clearly, there are only two occasions for massive government intervention: when the market fails, and when it works.
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http://www.realclearpolitics.com/articles/2009/04/obamas_losing_bet_on_detroit.html

huevonkiller · Apr 2, 2009

Now, Obama 'Owns' General Motors
Obama's economic legacy may hinge on whether he becomes known as the President who saved the U.S. car industry or the one who destroyed it

By Steve LeVine and Theo Francis
SPECIAL REPORT
Auto Bailout

In firing the CEO of General Motors (GM) this week and suggesting bankruptcy may be the best course for that company and Chrysler, President Barack Obama demonstrated forcefully that the Administration will go only so far to rescue even the country's most important icons. But the move, which experts are comparing with a variety of similarly dramatic decisions by his predecessors, is fraught with political risk—and risk for his economic program generally.

Some commentators and bloggers are comparing Obama's actions on the car companies with President Ronald Reagan's 1981 dismissal of the country's air traffic controllers, and British Prime Minister Margaret Thatcher's 1984-85 showdown with her country's coal miners. In both cases, the moves proved pivotal in demonstrating their resolve, and boosted their political support. Others have cited showdowns by Presidents Harry Truman and John F. Kennedy with the U.S. steel industry. Truman shut down the industry in a case involving the Korean War (his decision was overturned by the Supreme Court), and JFK faced down U.S. Steel over a price increase.

It's too early to say how important Obama's ultimatum to the U.S. auto industry will prove. "This could be an important moment," says Lou Cannon, a preeminent Reagan scholar and the author of five books on the former President. But even if it is, the decision could turn out to have starkly different meanings. Obama could be "seen two years from now as the President who saved the American automobile industry, or…as the President who destroyed it," Cannon said by phone from his California home. "Think of the two characterizations."
"You Break It, You Own It"

Because of that uncertainty, Cannon thinks there may be a more apt analogy. It is then-Secretary of State Colin Powell's remonstration to President George W. Bush before his final decision to go to war in Iraq: "If you break it, you own it." "The President of the U.S. owns GM. He put himself in a position in which the success or failure of GM will be blamed on him," Cannon said.

There's another key difference between Obama last week and Reagan and Thatcher in the '80s: The conservative icons acted in the face of blatant opposition, and in the process changed the political equation by showing that government was not going to side with labor, says Richard Reeves, the author of biographies of both JFK and Reagan.

Obama, by contrast, is in a much more fluid situation. The true message of his move remains to be seen. Reeves compares Obama's strategy with that of President Franklin D. Roosevelt's. The economic downturns in the 1930s and now were bafflingly complex. FDR "had not mastered the declining economics of the country," he said. As for Obama, Reeves said, "I can't believe that, with the amount of time that's passed and the people involved, that they have dug so deep into these problems. There's no way that they know what they're doing. You couldn't know so many things in such a confusing time."
Taking a Bold Risk with His Authority

In both cases, the Presidents were "throwing everything against the wall and seeing what sticks," Reeves said. "I think Obama is saying, 'Someone has to be in charge,' and I think he's right. If he was just sitting back, he'd be toast. This country wants a sense that someone is in charge."

But they also want results, and that's where Obama's chutzpah on GM and Chrysler may come back to hurt him, well beyond his auto-industry policy. If the automakers dodge Obama's deadlines, perhaps by finding political cover with Congress, it could undermine his ability to take similarly bold stands on other issues.

"On the most obvious level, if you issue threats or you intimidate business, and in the end business just does what it wants, you lose some of your political capital," says Julian E. Zelizer, a professor of history and public affairs at Princeton University's Woodrow Wilson School of Public & International Affairs. "It will suggest the business community is not so frightened of Obama at a time he needs to be able to lean on them."
Jury Is Still Out

That happened to FDR, too. One of his signature early initiatives, the National Recovery Act, sought to impose voluntary production levels to bring the country out of the Depression. It flopped, even before the Supreme Court declared it unconstitutional, Zelizer says. "Sometimes a President can't use the power of persuasion to get business to act even in a time of major economic crisis," he said.

Not that the NRA's failure hurt FDR's legacy in the long run, of course. But the verdict is far from clear at this point for Obama's GM-Chrysler moment.
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http://www.businessweek.com/bwdaily...op news_top news index - temp_news + analysis

huevonkiller · Apr 2, 2009

Obama: Car salesman in chief
Posted 6h 5m ago

By Chuck Raasch, Gannett Washington Bureau
WASHINGTON — Full disclosure: I drive a 2006 Ford Escape Hybrid.

The SUV is a good ride, although it rarely reaches its mid-30s miles per gallon rating. I take personal responsibility for that, though. Ford did not make my lead foot.

Robert Gibbs, President Barack Obama's press secretary, also drives an Escape Hybrid. As middle-aged men have done for generations, we briefly corresponded on how much we like our American Fords.

But Gibbs' car stories go far beyond that. He has the unenviable task of defending the government's role in the attempted bailout of rivals Chrysler and GM, two teetering giants that have so far needed about $17 billion in loans from taxpayers to stay afloat, and are asking for $21.6 billion more.

Continuing those bailouts is among the most controversial moves by this new president so far, yet many believe failure in Detroit is imponderable. So Gibbs has extolled the virtues of Jeeps and Buicks. And his boss has guaranteed government warranties on Chrysler and GM products. (It's a unique inter-generational warranty: Buy a Chrysler or GM and your kids and their kids will back it, because it's all borrowed money).

What's next? Putting up a tent, hanging plastic red, white, and blue streamers, and driving in some cars for a weekend sales event at 1600 Pennsylvania Avenue? Could we see Obama reprising actor Ricardo Montalban's cult classic '70s Chrysler ads?

The Escape's maker, Ford, is trying to escape bankruptcy by rejecting federal aid. Some think Ford faces a day of reckoning later in the year if car sales don't rebound, and that the government will be less inclined to step in by then.

In the meantime, Ford has gotten concessions on worker benefits and financing that the companies that took federal bailouts weren't able to get. Its leaders seem more bullish than those that partnered with the feds.

"I think clearly the degrees of freedom we have to operate the company are a lot greater than if we had lots of restrictions put on us," Ford Executive Chairman Bill Ford told the Detroit Free Press. "And the (federal) money comes with some pretty powerful strings."

This is an important point that Americans, amid joblessness, economic malaise and angry blame aimed at Reagan-Bush deregulation, have yet to fully comprehend.

What is the long-term cost to American innovation, risk-taking, ingenuity and pluck when the government bails out entire industries with money put on the tab of future generations?

Is the risk of failure necessary, even with the inevitable pain it brings, if it produces a new generation of innovators and risk takers better than the last?

Bankruptcy may eventually be in GM's future, its new government-mandated CEO says. Would it have been better to get on with it, many months and billions of dollars ago?

And finally, can government force-feed innovation?

There's reluctance in taking federal aid, and it's not coming only from Republican governors. The Washington Post reported that small business lenders that were supposed to benefit from a $15 billion bailout to unlock credit markets are not participating because of government restrictions on compensation and demands on ownership rights.

When this economic crisis subsides, look for two phases of post-stimulus hangover.

First, with trillions of dollars in spending and debt for stimulus and financial rescue floating around, it's a pretty good bet there will be as much outrage over what was wasted and corruptly spent as there's been over the financial misdeeds that created the crisis.

The second phase will come when the government tries to untangle its suddenly large stake in private banking, insurance and transportation. Unless the U.S. is to become a social democracy — and Obama adamantly says it will not — that will be a greater challenge than most realize.

Like the war in Iraq, getting out could be just as difficult as the decision to go in.

The government has committed trillions to priming the economy and bailing out failing business. It is dictating who will run companies and what they will be paid. As a condition of further government support, Obama ousted GM CEO John Wagoner.

His replacement, Frederick Henderson, is under a strict two-month government deadline to come up with a plan almost sure to include concessions and downsizing for autoworkers, parts suppliers, and dealers.

In Henderson's words, "We need to reinvent GM and we need to do it in a very abbreviated time... so we do not spend our time careening from crisis to crisis."

And so the White House can get out of the business of selling cars.
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http://www.usatoday.com/news/opinion/columnist/raasch/2009-04-02-newpolitics_N.htm

Bahir · Apr 12, 2009

The problem with the US car industry is that it has avoided making the strategic shifts it needed to make to survive in a world that is demanding more and more environmental friendly and energy efficient products. There is no use letting these companies remain alive in the long run if they don't change their strategies, and that's why, if the government wants to keep them alive, it must force them to make the necessary adjustments. Clearly they won't change by themselves, not only because they can't afford it (due to past mistakes) but also because of the inertia that the industry obviously possesses.

Protectionism isn't a viable solution when your products stink.

huevonkiller · Apr 13, 2009

Agreed, Protectionism to me should be a rarely used option.

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Obama's Losing Bet on Detroit

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