30 December 2008

Auto Bailout Caps Flawed Relationship

As posted by: Wall Street Journal

The news of the once-mighty Big Three auto makers getting a financial lifeline from the federal government is a fitting climax to the long and rocky relationship between Detroit and Washington.

Detroit's car makers helped America win World War II by churning out tanks and planes. They then powered the rise of the blue-collar middle class. More recently, General Motors Corp. helped jump-start the U.S. economy after the Sept. 11, 2001, attacks by promoting zero-interest financing on cars and trucks -- though that move artificially boosted sales, which forestalled painful restructuring moves and left executives unprepared when market conditions contracted.

Over the years, Detroit's auto makers also irritated powerful Washington constituencies by fighting efforts to boost fuel efficiency and vehicle safety, and resisting calls to do more about climate change.

Now, the companies may have no choice but to focus on smaller, more fuel-efficient cars and alternatives to gasoline-fueled motors, as a condition of their rescue by Washington. President-elect Barack Obama, whose administration will pass judgment on GM and Chrysler LLC's restructuring plans, shot a warning at Detroit's management on Friday following the announcement of President George W. Bush's rescue plan.

"I do want to emphasize to the Big Three auto makers and their executives that the American people's patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable," Mr. Obama said. Mr. Obama has long been a supporter of shifting Detroit's emphasis toward alternative fuels and more efficient technology.

How Detroit's auto makers will be able to stabilize financially in the short run is unclear, since it takes years to redo their product lines. The fastest way to profitability for the Detroit Three, beyond giving haircuts to bondholders and slashing workers wages, would be to take advantage of falling gas prices to sell more of the gas-hungry sport-utility vehicles and large pickup trucks that Mr. Obama and congressional Democrats don't like.

The public ups and downs overshadow a more complex interdependence that has contributed to the troubles now faced by GM, Chrysler and Ford Motor Co.

The Detroit Three's post World War II business strategies -- which relied on large, powerful cars built by richly paid union workers -- were doomed from the day in 1982 when the first Honda Accord rolled off a nonunion assembly line in Ohio. Since then, in good years and bad, the companies missed opportunities to overhaul themselves.

Washington's policies, and the way the government exerted regulatory control over the auto makers, often worked against the profound changes the companies needed to make to compete with foreign makers.

Consider GM Chief Executive Rick Wagoner's concession in recent congressional testimony that GM has "made mistakes," and that one of them was relying for too long on sales of comparatively gas-thirsty pickup trucks and sport-utility vehicles.

Up until this year, Detroit had few reasons not to lean on trucks and SUVs for profits -- and government policy all but invited them to do so. Since the 1980s, Washington's de facto energy policy has been to keep gasoline prices, and gasoline taxes, low. By contrast, European nations for years have boosted fuel prices to around $6 a gallon through taxes, which pushed consumers toward small cars.

The result: U.S. consumers gravitated toward ever larger and more powerful vehicles because the costs to fuel them were relatively low. In 1987, the average American vehicle got 22 miles to the gallon, weighed 3,221 pounds and accelerated from 0 to 60 miles per hour in 13.1 seconds. By 2007, the average car weighed 4,144 pounds, accelerated to 60 miles per hour in under 10 seconds -- and averaged 20 miles per gallon.

Federal fuel-economy rules allow car makers to average the fuel usage of most of their products. They could sell fuel-efficient small cars and trucks at little or no profit to make up for the high-profit, gas-hungry luxury cars and big SUVs they promoted.

Federal tariffs imposed on imported trucks and other quirks in Washington's fuel-economy regulatory scheme also encouraged U.S. auto executives to push trucks and SUVs.

In recent years, GM, Ford and Chrysler made money on trucks -- with profits of as much as $8,000 a vehicle -- and lost money on cars. Detroit made enough money to forestall painful reckonings with spiraling health-care and pension costs.

Federal rules caused Detroit "to cede the car market and make all their money in trucks," said Mike Jackson, chief executive of AutoNation Inc., the nation's largest dealership chain. "If they had been forced to compete up front much sooner, they would not have become overdependent on trucks."

Some in Detroit had misgivings about a strategy that relied on relatively inefficient vehicles. In late 2000, Ford Chairman William C. Ford Jr., great-grandson of automotive pioneer Henry Ford, addressed top executives at the company's product-development center. The topic: Why Ford should invest in hybrids and other fuel-efficient technology to prepare for an era of high oil prices.

Mr. Ford opened the floor for questions, and received just one from the cadre of executives, according to a person who attended the meeting: How could Mr. Ford justify spending billions on unproven technology amid healthy profits in trucks, SUVs and new, powerful luxury brands? Japan's Toyota Motor Corp. and Honda Motor Co. had hybrids on the road, but gas prices were only about $1.50 a gallon and Ford has just posted a profit of more than $7 billion in 1999. The group chuckled.

Mr. Ford briefly reiterated his vision and, after a long silence, left the room.

A Ford spokesman wouldn't confirm the meeting and declined to comment further.

Now, Ford's current chief executive, Alan Mulally, is aggressively trying to shift Ford's lineup toward smaller, fuel-efficient cars, despite the recent slump in pump prices.

"We adopted a point of view that fundamental demand for fuel would outstrip capacity," pushing gas prices up long term, Mr. Mulally said in a recent interview. Unlike GM and Chrysler, Ford said it doesn't need immediate government aid.

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