Mother Nature And Good Luck, Not Big Government, Saved General Motors… For Now

by Hans Bader on October 15, 2012 · 3 comments

in Bailout Watch, Economy, International, Trade

There are lots of claims that the federal government saved the American auto industry by bailing it out. (Never mind that Ford didn’t get a bailout, and “foreign” companies such as Honda and Toyota make many of their cars in America.)

Critics of the bailout make the valid point “any company can be kept afloat indefinitely with taxpayer subsidies.” They also say the bailouts have resulted in GM becoming politicized and “spending lots of money” on a politically correct car that consumers and car-buyers don’t want “because of pressure from Washington rather than demand from consumers” (as even the liberal Washington Post has noted, discussing the GM Volt). But although these criticisms may be persuasive to newspaper editorialists and economists, they will be unpersuasive to an ordinary person in Ohio or Michigan who desperately wants a job, now, and does not care about how that happens or whether it costs taxpayers money. Such people are likely to be grateful for the bailout if no one explains to them that Mother Nature and good luck, not big government, saved the U.S. automakers.

General Motors never would have recovered as it did if not for the massive Japanese earthquake and Tsunami that devastated its rivals, such as Toyota.  The tsunami so crippled Toyota that GM could regain market share despite the Obama administration leaving GM’s uncompetitive, inefficient work rules and high labor costs largely intact.

General Motors also benefited from another factor that has often been overlooked: the massive Thai floods in 2011, which inundated and shut down Japanese car-parts factories in Thailand for many months, crippling Japanese automakers’ global supply chains. On Dec. 8, Toyota “cut its profit forecast by more than half after Thailand’s worst floods in almost 70 years disrupted output of Camry and Prius vehicles.” The World Bank estimates the floods did $45 billion in damage to the Thai economy and left half its factories under water for substantial periods. By harming Japanese automakers, the Thai floods gave a huge boost to their competitor, General Motors, enabling it to survive despite the Obama administration’s costly coddling of the UAW union in the bailout, which threatens the automaker with future losses in the billions.

GM also benefited from good luck — primarily the huge safety issues and recalls that befell Toyota in 2010. This helped GM and Ford move forward at a time when overall auto sales were rising rapidly. As The New York Times noted in March 2010 “Toyota Motor, estimating that it lost 18,000 sales in the United States last month while its chief competitors enjoyed big gains, introduced incentives Tuesday as it tried to restore consumers’ confidence in its vehicles after three big recalls,” as the company “acknowledged that the recalls had hurt Toyota’s ability to attract new buyers.” Toyota rebounded after it turned out its vehicles were safe, and that crashes of Toyota vehicles were the result of driver error, except for one crash that resulted from a dealer improperly installing a floor mat.

For a brief time, natural disasters so damaged the Japanese automakers that GM once again became the world’s number one automaker. But when the Japanese companies recovered, Toyota once again surpassed GM as the world’s biggest automaker.

The bailouts resulted in new, more inept and politicized management at GM (which replaced a pre-bailout CEO, Rick Wagoner, who had put in place changes that belatedly resulted in improved product lines coming out shortly after his ouster). Auto industry experts are horrified by GM’s recent mismanagement of its European operations:

General Motors’ plan to displace the venerable and respected Opel brand in Europe with a new Chevrolet “global” brand really is as insane as it seems, according to Keith Crain of Automotive News. “It will take decades for Chevrolet to establish anywhere near the recognition that Opel has,” Crain argues.

GM now is concealing the depth of its problems by financing auto sales with risky loans that may never be paid back, resulting in GM’s increasing reliance on selling cars to people who can’t pay for them: “GM Ramps Up Risky Subprime Auto Loans To Drive Sales,” noted Investor’s Business Daily. “The automaker is relying increasingly on subprime loans, 10-Q financial reports shows. Potential borrowers of car loans are rated on FICO scores . . . Anything less than 660 is generally deemed subprime. GM Financial auto loans to customers with FICO scores below 660 rose from 87 percent of total loans in Q4 2010 to 93 percent in Q1 2012.” GM’s CEO has fired or driven away valuable employees and executives at its European branch in what looks like scapegoating for his own bad decisions — and a GM spokesman needlessly trashed departing employees.

Pension funds and non-union retirees were ripped off in the bailouts. (Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.” In The Wall Street Journal, law professor Todd Zywicki called it an attack on “the rule of law.”)

That mistreatment may haunt the auto industry in the future, reducing employment in the auto industry, as companies find it more difficult to raise money through bonds and loans. In response to Obama’s ripping off bondholders and lenders in the bailout, hedge funds said they would be less likely to lend to automakers or other unionized companies in the future.  Even The Washington Post, which endorsed Obama in 2008, had unsuccessfully pleaded with the Obama administration to “stop bullying the company’s bondholders” to avoid economic harm down the road.

The Obama administration has harmed U.S. automakers and endangered their long-run survival by radically ratcheting up federal CAFE fuel-economy standards, which affect U.S. automakers more than their foreign competitors. An estimated 50,000 jobs were predicted to disappear under earlier, less radical proposals, so the ultimate job losses will probably be well over 100,000. And Obama’s climate-change regulations will destroy countless jobs and cut “household purchasing power,” reducing auto sales and Chrysler’s chances of survival. (In a January 17, 2008 interview with the San Francisco Chronicle, then-Senator Obama said that consumers’ “electricity rates would necessarily skyrocket” under his planned regulations.)

Jin Akashi October 15, 2012 at 5:52 pm

Vippennystocksite dotcom, is a very structured and great site for GM stock and I have subscribed to it

David October 16, 2012 at 8:39 pm

I have several relatives who used to own GM bonds who have sworn never to buy a GM product again. I wonder if this gangsterism of the Obama adminstration has generated so much bad faith that GM will be doomed for years. I got to admit, as a taxpayer, I resent being fleeced by GM. So, I am not favorable to buy from them.

Hans Bader October 20, 2012 at 10:23 pm

Obama has derided Romney for saying that GM should have been allowed to go bankrupt (through a managed bankruptcy that would allow the company to reorganize and shed its debts). But GM DID go bankrupt, during the Obama Administration, through just such a managed bankruptcy.

But thanks to the Obama Administration’s policies, the automakers consumed huge amounts of taxpayer money despite filing for bankruptcy. Under the Obama Administration, the bankruptcy process was politicized to ensure that taxpayer money ended up in the pocket of the United Auto Workers Union rather than being used for the benefit of taxpayers. The UAW ended up with a big chunk of General Motors stock — billions of dollars worth — that it would not have received in an ordinary bankruptcy proceeding, where its claims would have been wiped out to give the company a fresh start.

Some analysts argue that credit markets were frozen in 2008 when the auto bailout began under the Bush Administration. But even if that were true, that would only provide an excuse for the bridge loans provided by the Bush Administration in 2008, not the billions more in taxpayer money dumped on the company well after Bush left office in 2009, money that taxpayers will probably never recover in full. It wouldn’t provide an excuse for the tens of billions that the Obama Administration spent on the auto bailouts in 2009, when credit markets were largely back to normal. The Obama Administration astronomically increased the cost of the bailouts.

Nor would it justify the Obama Administration’s decision to give the UAW majority ownership of Chrysler, at taxpayer expense, after infusing billions into the company. The bailouts would not have consumed nearly as much money if the bankruptcy process had been allowed to run its ordinary course, with the UAW and its pension funds absorbing more losses, and the UAW not receiving an interest in the reorganized automakers. (Due to political favoritism by the Obama Administration in the auto bailouts, the UAW received $26 billion it legally should not have, according to bankruptcy law expert Todd Zywicki, a professor at George Mason University).

The bailouts would have cost still less if the UAW had been willing to accept lower wages and more flexible work rules going forward. In short, the bailouts during the Obama Administration included huge costs that were clearly unnecessary to the survival of the auto industry. Moreover, if General Motors had just received relief from burdensome regulations, it could have survived without any government subsidies from Obama.

The Japanese earthquake and Tsunami helped mask the failure to make these necessary reforms. As Mickey Kaus noted at Daily Caller, “Sales and prices” went up at GM “because competing Japanese car suppliers” were “crippled by the earthquake and tsunami.”

For a few examples of other regulations that might be revised, suspended, or preempted to reduce burdens on the automakers, making it possible for them to hire more workers and build more cars in America, see here:

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