Saturday, December 13, 2008

GM, Chrysler and the Recovery Program

Time to shift frames on the auto bailout. The question lurking behind current thinking is “How can these companies make money again producing and selling cars?” This explains the obsession with labor costs, future product lines and the like. The short answer is probably, they can’t. Even if they do everything right from now on, a steadily shrinking car market is the logical implication of serious, grown-up carbon regulation. (I will post on that topic soon, focusing on the news from Europe.)

For an alternative, step back into history and consider the story of Lucas Aerospace, brilliantly chronicled by Hilary Wainwright and David Elliott in The Lucas Plan: A New Trade Unionism in the Making? Lucas made military aircraft and was facing devastating (but socially desirable) cuts in demand for their wares. Seeing the handwriting on the wall, production workers teamed up with engineers and conducted a detailed inventory of their firm’s capacity: what skills and resources they comprised. Then they canvassed a range of nonprofit organizations to find out what kinds of products served important social needs but were not being provided in the market, like improved prosthetic devices and equipment for upgrading railroad crossings. Putting two and two together, they proposed production plans to give the company a new lease on life. The final piece, however, never materialized. The social agencies needed the government to allocate funds for these new products, but the government didn’t come through, and Lucas eventually folded.

You can probably see where I’m going with this. Obama is proposing to spend hundreds of billions of dollars on public projects to restart the economy, and forward-thinking observers, like Jamie Galbraith, are pointing out that we need long-term restructuring, not just a quick burst of stimulus. Who will build the transit systems, smart two-way electrical grids and other components of a clean, green America? If the auto companies are liquidated, we lose a ton of capacity it will be difficult and expensive to replace.

Message to the Obama team: begin formulating the reconstruction plan as a set of receivables and be ready to energize producers from the outset, perhaps with contracts having a loan component.

Message to the UAW and progressive-minded professionals in the auto industry: don’t wait for your top management to shuck the business plans they’ve staked their careers on. Begin a Lucas-like process of discovering what you can produce, and convey this directly to the federal recovery folks.


Robert D Feinman said...

Worldwide demand for autos is booming, that's why Ford and GM have been working on increasing their international presence, both through acquisitions and alliances.

Just because the US market is saturated doesn't mean that they can't make money making cars. In fact the boom in personal transit vehicles is one of the most worrisome things for those concerned with increased resource (read oil) use and GHG emissions.

Until the last year the US auto market was also selling record number of vehicles domestically, even if the proportion of those made by the US firms declined slightly.

Let's not confuse the short (or medium) term credit squeeze and production lags with the long term prospects for the industry. I'm all for them finding new product areas to go into, but without a government industrial policy that will provide the infrastructure support, the best ideas can't go anywhere.

We need to rethink personal transport as it relates to land use patterns, exurban development, commuting to central cities and sprawl among other things. We also need to rethink the idea of shipping things vast distances because it saves a small amount of labor costs, but neglects the impact on the environment.

The warning shot was fired in the oil squeeze of the 1970's and it is almost 40 years later and the situation has only gotten worse.

Kevin Carson said...

Peter Dorman: Damn straight. But demand will fall with or without carbon regulations, as a result of Peak Oil. The simple fact is, we're producing about as much oil as we ever will, and output will steadily decline from here. So price is governed entirely by demand, and price will spike higher and higer every time demand goes back up. At the peak of the last spike, $130/barrel, the airlines came close to shutting down a fifth of their routes and the trucking industry was close to a similar downsizing. As the price spikes higher and higher, the most valuable real estate will be close to where people work and shop, and communities will gradually rebuild around bikes, walking and public transit.

Robert Feinman: I think what you're describing is increased demand in China and other emerging economies. And that demand is totally unsustainable. It results from the fact that China subsidizes energy inputs to the economy so that demand is not governed by rational economic feedback (just as the old USSR promoted gigantism by pricing energy at a third its real cost). But that clearly can't go on past the time the Chinese state bankrupts itself. The Chinese government can set prices at any artificial level they want, domestically, but when oil hits $200 or $500/barrel, the oil producing countries won't accept fiat money for it. As China's domestic industry gobbles up subsidized energy inputs at higher and higher rates, China will be less and less able to earn sufficient foreign exchange to buy enough oil to meet the demand.

Peter Dorman said...

RF: Whether China and India will automobilize as we have is one question. But even if they do, their cars won't be built in North America.