Bailout: boom or bust? -

Bailout: boom or bust?

Three years on, the debate over whether saving Detroit was worth it still rages

Eric Smith/Demotix/Corbis

In any other industry, the announcement that a U.S. company was expanding sales to China would be hailed as a triumph of American capitalism. But in North America’s auto industry, the news that Chrysler was planning to build Jeeps in China—which it hadn’t done since emerging from the brink of collapse in 2009—was met with a heavy dose of skepticism. “Obama took GM and Chrysler into bankruptcy and sold Chrysler to Italians who are going to build Jeeps in China” was how a Republican campaign ad characterized the move by Chrysler’s Italian majority shareholder, Fiat S.p.A.

The theory was quickly debunked by Chrysler CEO Sergio Marchionne in a letter to employees explaining that a surge in North American Jeep production—nearly tripling since 2009—had been crucial to Chrysler’s quick turnaround and was central to the company’s long-term growth. “I feel obliged to unambiguously restate our position,” he wrote. “Jeep production will not be moved from the United States to China.”

But the argument had traction. By the time Donald Trump posted on Twitter the now-popular view that “Chrysler wants to send all Jeep manufacturing to China,” the carmaker had dropped all pretence of eloquence. “You are full of s–t,” was how the company’s senior vice-president of design, Ralph Gilles, responded to Trump on Twitter.

Three years after General Motors and Chrysler arrived cap in hand at the taxpayer’s doorstep and came away with close to $100 billion in emergency loans from the governments of the United States, Canada and Ontario, the debate over whether the bailout was a success or a failure remains as heated as ever. Automakers are keen to put the bailout behind them, but, like it or not, they remain centrepieces in the argument over the government’s place in the free market.

While Mitt Romney’s campaign sought to win votes in the swing state of Ohio by painting Barack Obama as a President who saved the auto industry by giving away good American jobs to foreigners, Obama was pitching the auto bailout as the shining achievement of his contentious economic policy. “If we had taken your advice, Gov. Romney, on the auto industry, we’d be buying cars from China instead of selling cars to China,” he said in the final presidential debate.

So who was right? The latest stats suggest the auto industry has made a remarkable comeback from the depth of the crash, when it seemed all but certain that at least one of the Big Three would cease to exist. North American auto production is on track to be at pre-recession levels by as early as next year, with sales expected to fully bounce back by 2014. GM saw its sales spike nearly 30 per cent in September compared to the same time last year. Chrysler sales were up 26 per cent in the same period. Ford (which did not need a government bailout) recently reported its best third-quarter results ever, mainly thanks to surging U.S. sales. In Canada, light-vehicle sales had their best October in a decade, with each of the Detroit Three reporting growth.

Those sales have lifted the carmakers back into the black. Chrysler reported a yearly profit in 2011 for the first time since emerging from bankruptcy. General Motors managed to eke out profits in both 2010 and 2011 after five years of steady losses. Both have also moved to settle labour woes that were once huge drags on profitability, with contracts paying new employees less than existing workers, a concession that was at one time unthinkable.

Automotive jobs, meanwhile, have shot up by as much as 33 per cent in Michigan since GM’s bankruptcy. Perhaps buoyed by the rebound in hiring, public support for the bailout has risen in the U.S. from 38 per cent to 56 per cent this year, according to a Pew Research study. The same can’t be said for support of the bank bailout, which remains as low as it did three years ago.

Analysts say the remarkably quick turnaround in the North American auto sector would have taken many more years, if it had happened at all, without government money. Not only did the bailout stave off steep job losses among the automakers and their suppliers, but it pressured the companies to close unproductive factories, overhaul their brands to compete with foreign rivals, and rein in costs. “GM used to be one of the largest buyers of Viagra in the world,” says auto analyst Dennis DesRosiers, of the generous benefit and pension arrangements gutted as part of bailout conditions. “Things like that had to go. It couldn’t have been done if you’d just let the company sit down with the unions. You had to have government do it.”

Nor could the rescue have been done in a traditional bankruptcy with private-sector loans, even with a government guarantee, which Romney advocated at the time, says Tony Faria, director of the Office of Automotive & Vehicle Research at the University of Windsor. In 2009, with major banks clamouring for government bailouts themselves, “there was just no other source for the multi-, multi-billions of dollars that the companies needed,” he says.

While the claims by Republicans during the election that the industry has lost 15,000 jobs since 2009 are true, DesRosiers says most of those jobs were from the “jobs bank,” a hugely expensive program that allowed workers to collect a paycheque even when there was no work for them. “Now probably a third of those workers show up and build cars, and the other ones who should have been laid off in the ’90s are gone.”

Meanwhile, the much-criticized expansion into China, the world’s largest auto market, is crucial for any carmaker hoping to grow profits. Stiff trade tariffs can double the price of imported cars, meaning if North Americans want to sell to China they’ll have to build their cars (and Jeeps) there.

But for all the good news, there are still signs that the bailout may not have been taxpayer money well spent. For starters: despite their economic success, North American automakers have still not entirely shaken their reputation for churning out imperfect vehicles. Last week Consumer Reports issued its annual car reliability report and once again gave Japanese carmakers the top spot while the Americans fell to the bottom. Jake Fisher, the magazine’s chief auto tester, told reporters it broke his heart to downgrade two iconic North American brands—the Corvette and the Mustang—to “below average” reliability.

The idea that 99 per cent of Toyota Prius owners told the magazine they love their cars, while 20 per cent of Ford Focus drivers reported problems with theirs, is hardly good news for an industry trying to prove that it’s in the midst of a profound transformation.

The Detroit Three also continue to lose market share to their foreign rivals. Where they controlled more than 60 per cent of the North American market as recently as 2001, domestic automakers controlled 43 per cent in September, close to their historic monthly low. GM’s market share alone has shrunk from 19 to 17 per cent in the past year. “If this holds for the year, the Detroit Three will have given away all of the market share gained due to government assistance, the Toyota recalls and the natural disasters in Japan and Thailand,” DesRosiers wrote recently.

As for those foreign rivals, instead of increasing their imports of vehicles, they have been building factories in Canada and the U.S., often in states not traditionally associated with auto manufacturing. Over the past decade, as the Detroit Three have struggled, domestic production of vehicles sold in North America has inched up to around 66 per cent of cars sold domestically. The North American auto industry seemed to be holding its own despite the collapse of GM and Chrysler.

Maybe most troublesome is that investors haven’t had a lot of faith in Detroit’s attempts at transformation. Shares of GM are hovering around $25, well off their peak of $39 since going public last year. Chrysler’s major shareholder, Fiat, announced last month that it was holding off on buying full control of the company from a minority shareholder, the United Auto Workers health care trust fund, leaving the likelihood of a public stock offering in limbo.

“The investment community right now has simply not warmed up to the auto industry stocks,” says Faria. “I’m not sure how many consecutive years of really, really solid profits they’re going to need to get their stock prices up to where they should be.”

That’s been a nagging source of frustration for both American politicians and bailout supporters, since the fate of the bailout now rests on the fate of GM’s share price. A recent report from the congressional budget office found that unless GM’s stock hits the stratospheric price of nearly $53 a share, American taxpayers, who still own 32 per cent of the company, stand to lose as much as $20 billion on the bailout. The Canadian and Ontario governments could lose as much as $5 billion on their $14-billion investment in Chrysler and GM, depending on how much they can recoup from selling their remaining nine per cent stake in GM. The stock price ultimately remains the biggest sticking point in the bailout debate.

While the bailout has been a short-term economic success and in all likelihood did save GM and Chrysler from extinction, its legacy may stand as a reminder that two of the most important companies in American history drove themselves to the point of destruction. When critics last month cited GM’s foreign expansion plans as even more proof the car companies were using bailout money to send jobs to China, company spokesman Greg Martin grumbled that the politics of auto manufacturing had “clearly entered some kind of parallel universe.” For that, the Detroit automakers have no one to blame but themselves.

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