Is auto rescue too big a role for government?

In dispatching GM's Rick Wagoner and directing carmakers toward clean cars, Obama indicates tax dollars won’t come free.

By , Staff writer

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    Tough conditions: General Motors workers in Detroit watch President Obama's address Monday. Obama said more concessions were needed from unions and creditors before the carmakers could get further government aid.
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For better or worse, a federal government task force is becoming a guiding force in the automotive industry – stopping just short of actually coming to Detroit to install headlights.

A stronger federal role is the price that two of the big US-based carmakers, General Motors and Chrysler, must pay to win new government funding to help them survive.

The nature of that price became clearer Monday:

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• It can mean turnover in the corner office. GM chief executive Rick Wagoner will depart in what President Obama called an “initial step” toward restructuring. The company’s board of directors, too, will see substantial turnover.

• It can mean tough choices in which the government may be the one picking winners and losers. Chrysler “needs a partner” to be viable, Mr. Obama said Monday. That statement means that Chrysler will step up efforts to bolster an evolving alliance with Fiat. But if that doesn’t work out, the company’s survival is now in doubt.

• Some central goals for the industry may be set in Washington. Obama said he is “absolutely committed” that “the United States of America will lead the world in building the next generation of clean cars.”

All this puts both Washington and Detroit in relatively uncharted territory.

The outcome could be positive, averting the collapse of a major industry at a time when unemployment is rising fast. And the strong government hand is not that different from what any private investor in a troubled firm would expect to have. The Obama task force is trying not just to save jobs but to make sure taxpayer dollars aren’t wasted.

Yet the moves, which signal extraordinary federal willingness to direct private industry, raise some deep questions. Will industry become captive to Washington political interests? If Detroit companies were on the brink of collapse already, what guarantee is there that it will prosper with more hands on the steering wheel?

“I really question the decision of the Obama administration and the task force to become so involved in both General Motors and Chrysler,” says Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, Mich. “The announcement this morning really hurts the industry.”

In responding to the current financial crisis, the government had already begun to take an unusually expansive role influencing companies in the private sector. It has taken a controlling stake in the insurance firm AIG, put mortgage lenders Fannie Mae and Freddie Mac into conservatorship, and become an investor in the nation’s largest banks.

For Mr. Virag, the issue is not whether there should be a government role. Federal loans can provide a lifeline so the companies can keep operating until an economic rebound begins to bring traffic back to car dealerships. He’d also support one idea that Obama mentioned in his speech Monday as a possible new policy: a generous tax credit to consumers who turn in old cars and buy cleaner cars.

Virag worries, however, about negative unintended consequences that could arise from task force decisions. Risks include micromanaging the industry or shrinking it too much, he says. Radically downsizing Detroit, in a bid to ensure viability, could mean that foreign rivals gain even more of the market share when a rebound in sales finally comes.

On the micromanagement front, a push to switch product lines toward smaller, cleaner cars could backfire if it is poorly executed. The strategy may make sense in the long run. But if clean cars clash with consumer tastes or exceed their budgets, carmakers might end up building lots of cars they can’t sell.

These are just a sample of the kind of uncertainties that arise when the government becomes more involved in Detroit’s inner workings. Such worries may have contributed to a stock market slide Monday, in which investors retreated after many days of buying.

Investors were also grappling with Obama’s assessment that the carmakers are still far from viable and that GM or Chrysler could end up in bankruptcy.

After receiving initial federal loans three months ago, the two companies have submitted a plan to restructure with additional government help.

“Neither [plan] goes far enough to warrant the substantial new investments that these companies are requesting,” Obama said Monday morning, flanked by members of his task force.

More cost cutting is needed, the president said. Viability for these firms may “mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.”

Some investment analysts believe that bankruptcy may provide the surest path to writing down debts and closing unneeded dealerships. But it could also make consumers even less likely to buy a car.

Obama signaled that his task force would try to arrange a speedy bankruptcy process, not one that keeps the carmakers in court for years. But no path forward for the companies is easy or cheap.

The president also tried to cushion possible bankruptcies by announcing that the government will stand behind the warranties of newly purchased GM or Chrysler cars.

Ford Motor Co., the other US-based carmaker, has so far not sought federal assistance.

Where some industry analysts worry about too much meddling in the industry, others say the administration is taking needed action and in a manner designed to protect taxpayers.

“The Obama administration is doing exactly what it should do,” says Michelle Krebs, senior editor at Edmunds’ AutoObserver.com in Detroit.

As for the task force’s assessment on what the carmakers must do to be viable, she says, “Their analysis is identical to what ours was a month ago.”

For Chrysler, the outlook is especially tough. The task force concluded that, as the smallest and least global of Detroit’s Big Three, the company won’t be viable on its own. 
The Obama administration will give Chrysler working capital for 30 days to see if it can conclude a definitive agreement with Fiat or some other partner.

GM will get a financing bridge for 60 days, as it seeks to conclude cost-cutting deals with bondholders and the United Auto Workers.

Obama said the government has no desire or intention of running the automakers. But the likely federal role is large and could persist for years to come.

The goal of remaking the US industry as a leader in green cars, Ms. Krebs says, can best be achieved if the auto rescue plan is paired with another Obama goal: comprehensive energy policy.

Such a policy could include incentives for consumers to migrate toward cleaner and smaller cars. Without it, the success of a green-car strategy could hinge heavily on the ups and downs of gasoline prices.

“When gas prices soared, [so did] small-car sales,” Krebs says.

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