What to Do About the Big Three?

We have a new president-elect, and he (with his predecessor) is facing an old problem: what to do about the Big Three automakers? These companies haven't been innovative or competitive in the marketplace in a generation or more. Now General Motors is looking to the federal government to offer a big aid package to keep the company in business and keep its many thousands of employees working. There is little doubt Ford and Chrysler will follow suit.

This poses a conundrum for anyone committed to bringing about a new Clean Energy System like the one I describe in Hot, Flat, and Crowded. Is it a good idea for the government to rescue GM with a financial package like the ones offered to Wall Street earlier this year, or is such a rescue a way of stimulating ignorance and rewarding the worst offenders, the foes of energy innovation?

If Washington does offer a rescue plan, what terms should the government ask for to hold the Big Three accountable in the new era we are in? Can we really expect the automakers to finally try in earnest to produce plug-in hybrids and other vehicles that use fuel in cleaner, more efficient ways? Is there a good way for the government to extend the rescue to the more competitive, innovative automakers—Honda and Toyota—so that they can take roles in leading the auto business into the Energy-Climate Era at last?

I am eager for your thoughts. Thanks for taking an interest in Chapter 18.

Ideas:

Tom writes':

"Is there a good way for the government to extend the rescue to the more competitive, innovative automakers—Honda and Toyota—so that they can take roles in leading the auto business into the Energy-Climate Era at last?"

----hmmm...I hope that you don't run over anyone in your Lexus. Have a nice day.

Anonymous (not verified)
April 13th 2010, 7:36 pm

Tom,
Any serious American political economic student of history knows our Constitution attendance was to upgrade the Articles of Confederation, not to make the Federalist control, as Hamilton's Central Bank with land speculators to manupulate the public.

Democracy, in founding father's view, was known as mob rule of uneducated and/or our religious zealots who still burned people as witches, right there, during that same Constitutional Philidelphia Convention.

Now, our misrepresentive parties dilude or confuse our uninformed public in ruses or diversions to avoid negative reactions, or retrobution to causal agents in party A or B. Obviously, each hopes not to repeat our last depression by manulipating views away from a prior administration, or historical bias. This neither represents a republic, nor any democracy, we continue to seek.

The constitution denied review of slavery, Native American lands, and our American Revolutionary soldier pay, intentionally.

Hence, how can our public know a history beyond an Oligarchy or Plutocrats who use their lobbyist for candidates, or pay for elections that leaves public interest in wakes of those "managing public goals" or often presidents, by a corporate-political congress as a ROI-profit corporate return on investment or too big to fail. We still cannot afford either of them at this stage.

Does an Oligarchy of corporate leadership help the public, in non-corporate jobs, or instead profit by outsourcing, or mergers, and acquisitions are subsidized by taxes?

Americans must accept democracy has only checks and balances by three branches to slow down "mob rule" under this republic.

Historians know founding fathers hoped to create a democracy, instead embraced the Oligarchy where the Hamiltonian versus Jeffersonian parties compete, but don't compromise goals which hasn't changed.

The Civil War was one result of our last avoidance battle, but I too can't support
anarchy, public, and corporate socialism.

How does our democracy become Imperialist? Congress depends on military service under them for global trade hegemony with bases in 132 nations. The Health Care Industrial complex makes our health codependent, but unaffordable, as incentives. How can this change with a corporate-embedded congress who profit from stock by denying benefits to those outside their pyramidal review?

For us who ask this, check out the rear of our dollar bill-for an eye on the pyramid- symbol, to wonder if this is OUR republic?

Bill (not verified)
January 28th 2010, 4:40 pm

Well Tom,

We need those companies, like we needed them in 1941 when they stopped building cars and started building tank, planes, guns, amo, ships, engines, the works. This complete turnover took our fathers a few month to achive and it stopped Nazi Germany and Japan in their tracks.

Now we are at war with ourselves and the enemy is our economy. This is an even harder battle to fight and we need all ablebodied and ableminded men and women to fight it. The technology is in place to radically green up the economy, free us from carbon use and free us from sponsoring dictatorships that turn their own people against us (remember folks those terrorists did not come from Irak or Afghanistan).

So stop making cars and start making photovoltaic systems and put them on every roof available (using Thin Film Technology). Start harvesting the power of the wind on the great planes by building massive arrays of rotors (and yes it spoils the landscape but so does desertification). Start harvesting the power of the sea by investing in tidal- and wave energy. As Tom puts it, America has lead us (the world) into this "Schlamazzel" then it should also lead us out. Take your responsability and point the way into a greener economy. And don't hessitate just do it! And use GM, Chrysler and Ford as production facilities, use the dealers to sell the stuff and use a rigorous Cap and Trade or even better use a even more rigorous rationing scheme in combination with easy credit (can banks finally do something worthwhile for our society) scheme for those investments.

Greetings,

Ed Kuipers

Greetings, Ed Kuipers

Ed Kuipers (not verified)
July 1st 2009, 6:31 am

Mr. Friedman, I feel the President and Mr. Waggoner have let the country down on this issue. The laws of our land that govern companies that get into financial trouble are the bankruptcy laws. By issuing the bailout money without a filing, the President and the Congress have allowed the wutomakers to skirt the law. Actually I believe this also applies to the financial industry. By letting Mr. Waggoner frame the debate by stating that bankruptcy would mean the end of GM, he took that option off the table. It would have been prudent for Mr. Obama or some of our esteemed Congressmen and Senators to explain to both Mr. Waggoner and the public that "reorganization" allows a company to continue to operate while the courts protect them from their creditors. I would have accepted that debtor-in-possession lending would have been very hard to obtain, and my proposal would have been for a pre-packaged bankruptcy filing with the government providing the funding to allow the company to continue while it reorganized. But that option was never considered. You will notice that after the first tranche of handouts, Mr. Gettlefinger said basically, that the UAW has a contract and would not be interested in givebacks. Which was his right under the law. However under bankruptcy, he would have been required to participate.
Truth be told, I think the auto industry needs to be much smaller, produce many less cars, trucks, and SUV's every year, and find a way to be profitable. I know it's a difficult problem in a country as large as ours, but I for one would love to see public transportation systems that would replace the need for so many one occupant vehicles. I think $800 billion spent on that idea might have started to produce some fruit.
One final defense of my bankruptcy idea. Mr. Waggoner said no one would buy a car from a bankrupt company. I don't believe anyone minded flying on all our bankrupt airlines during the first eight years of this century.

anonymous (not verified)
April 20th 2009, 8:47 pm

If you know anyone (especially anyone that lives here in Michigan) in the market for a vehicle, please pass this on to them and encourage them to Buy American!!

I am writing this because I am saddened by the current state of the economy in Michigan and the future we are leaving for our children here. I am also upset with the number of people ignoring the fall of the U.S. auto industry and only pointing blame for the actions they are being forced to take – as if its collapse doesn’t affect them. I guess if you or your spouse isn't physically sitting on the curb with no job, you just don't care. Well, I have news for you. If you live around here, it does affect you!! We’ve had family and friends lose their jobs recently – almost everyone has. If we wake up, there is a chance to save our future here and provide our kids with a great place to live.

Top Reasons to Buy an American Car Today:

1. Our History

The southeastern Michigan region has depended on the auto industry as its central hub for over 100 years. It has provided our area with countless opportunities for growth and prosperity over many generations. Many of us have grandparents (and some of us even parents) that uprooted their families and moved here for the job opportunities and hope for a better life for their children. The auto industry also was critical in defining the middle class for our country. Without the auto industry, this area has little to depend on. 7 of the top 10 businesses in Michigan are auto-related. In 2000, one out of every three people in the state of Michigan had a job dependent on the auto industry. By 2007, that number was down to one in four. The number must be far worse today. Let’s respect the hard work of our families and buy the products of the companies that gave us the lives we have here in Michigan.

2. Our Future

The population of the United States has increased over 7% since 2000. The population of Michigan has only risen 1.3% in that same time frame – and has actually decreased the past two years. The people and jobs are fleeing and we need to think about the future generations when we are making decisions. If our children are lucky enough to find jobs here, will they even want to stay? They should be given the same opportunities we were – we cannot ignore the future generations. This is a beautiful area and we are letting it crumble. Home values are down 40% in the metro Detroit suburbs and 80% in the city itself. The average home in Detroit sold for $7500 in December, 2008 and you can find some as low as a few hundred dollars. With numbers like these already upon us, what does the future hold? I hate to think what the bankruptcy of one or all of the big 3 will do to our state. There is a study available that predicts some of the effects of the scenarios. It is very sobering:

http://www.cargroup.org/documents/CARPressRel...

3. Quality and Fuel Economy

The U.S. automakers make great products! My husband and I have driven only American cars for the past 16 years. Among them are a Dodge Neon (80,000 miles), Jeep Cherokee (140,000 miles) and a Ford Escort (100,000 miles). When we sold all of them, they were still running great. We currently drive a Chrysler Pacifica and a Dodge Grand Caravan. We have been proud of our vehicles and have found them to be very dependable and have very high quality. The foreign automakers have halos. They are believed to produce superior vehicles with higher quality and better fuel economy. This may have been the case at a point in time (15-20 years ago), but review the data yourself. The gap has closed. Compare the quality of head-to-head competitors at the following location (note the brand with the highest dependability – measured for 3 years in service reliability – is Buick!):

http://www.jdpower.com/autos

Fuel economy numbers are also available for head-to-head competitors at:

http://www.fueleconomy.gov/

The data is out there. You can review specifications, test drives and more. And, if a ½ star rating deficit does exist, just think about the thousands of dollars less you’re paying for an American car. You may site that your foreign car has a higher resale value. This is only because the demand for your car is higher right now (more people buy them). Note that this is a pretty selfish, short-sighted view. You are overpaying in the first place, shipping the profits to Japan, and losing far more money in the equity of your home and other investments in the US while you get your couple thousand dollars back in resale value. Wouldn’t it have been better to support America in the first place and avoid this scenario?

4. Jobs

One of the most obvious and visible impacts of the fall of the auto industry is employment. The job loss in Michigan is staggering:

· Assembly and parts manufacturing accounted for nearly 7 percent of total Michigan payroll jobs in 2000, but was down to near 4 percent in 2008.

· About a THIRD of the state's employment was concentrated in the motor vehicle sector eight years ago, but that dropped to 26.5 percent in 2007 according to the Bureau of Labor Statistics

· Motor vehicle and parts manufacturing in 2000 accounted for $35.8 billion of the state's gross domestic product in current dollars—about 10.6 percent. It dropped to around 6.8 percent (or $25.4 billion) in 2005, the most recent year available from the Bureau of Economic Analysis.

· Michigan has had nine consecutive years of increased unemployment, the longest stretch on record. The January 2009 unemployment rate in Michigan was 12% (the highest in the country). The city of Detroit currently has an unemployment rate of 22%. You can research a ton of economic information about Michigan at the Department of Energy, Labor and Economic Growth website (it includes historical data and forecasts, that you can customize with specific parameters):

http://www.milmi.org/cgi/dataanalysis/?PAGEID=94

· Michigan has lost about half its lucrative auto sector jobs that paid an average $72,505 salary in 2006. A small portion of the loss has been made up with education and health services jobs, but those paid an average salary of only $38,543.

Motor Vehicle Manufacturing jobs in Michigan:
2000 -- 97,800
2001 -- 92,500
2002 -- 85,600
2003 -- 78,800
2004 -- 74,100
2005 -- 67,600
2006 -- 60,400
2007 -- 57,800
2008 -- 47,800
Jan 2009 -- 26,700

Motor Vehicle Parts Manufacturing jobs in Michigan:
2000 --227,000
2001 -- 203,000
2002 -- 191,700
2003 -- 177,800
2004 -- 169,800
2005 -- 158,700
2006 -- 146,400
2007 -- 130,400
2008 -- 111,100
Jan 2009 -- 80,100

TOTAL Manufacturing jobs in Michigan:
2000 -- 898,400
2001 -- 823,100
2002 -- 763,500
2003 -- 719,700
2004 -- 700,700
2005 -- 680,000
2006 -- 650,800
2007 -- 620,100
2008 -- 575,300
Jan 2009 -- 484,300

These 400,000 lost jobs in manufacturing alone are striking – Michigan’s total population is 10 million.

Here are the current foreign automakers and suppliers employees in Michigan (note that Honda, Toyota, Nissan and Kia have ZERO assembly plant or manufacturing facilities here):

Research, Development and Design Facilities:

Company/Facility Employees

Mitsubishi Tech Center 67

Nissan Tech Center 757

Hyundai Tech Center 153

Toyota Engineering Center 497

Toyota Design Research <20

Toyota Design Studio 25

Subaru Research & Development 20

Isuzu Engineering & Testing 125

Isuzu Engineering 40

TOTAL 1,684

Manufacturing Facilities

Company/Facility Employees

ASMO Manufacturing (DENSO) 303

ASMO Detroit (DENSO) 33

DENSO Manufacturing 2405

Automotive Compressor (DENSO) 1022

Paper Products (DENSO) 96

Systex Products (DENSO) 203

TOTAL 4,062

This is a total of 5,746 employees in Michigan for foreign automakers and suppliers. Wow – this will really help offset the hundreds and hundreds of thousands of jobs we’ve lost in the past 8 years!!!

5. What really is American?

Some people claim that a foreign automaker car that is built in the U.S. is more “American” than a U.S. automaker car built in Canada/Mexico. This is definitely not the case. The final assembly location of a vehicle is a very small part of the entire process of designing and building it. Let’s look at Honda, for example. Its headquarters is in Japan – with the bulk of its workforce (designing, engineering, testing, part manufacturing, etc.) as well. All of the Japanese automakers combined employ 100,000 Americans -- with less than 6,000 in Michigan. There are 5 MILLION autoworkers in Japan. That’s a whopping 2% of their workforce located here. The small number of people employed at an assembly plant in the U.S. barely put a dent in their finances – and they were given huge tax breaks to bring their products here in the first place. Yet Toyota sells twice as many cars in the US as they do back in Japan. Honda sells four times as many here as they do in Japan. The profits of every car sale go to Japan. We import nearly $53 Billion worth of vehicles and parts from Japan, while they only import less than $2 Billion worth of vehicles and parts from the U.S.. You can review the statistics at:

http://tse.export.gov/NTDChart.aspx?UniqueURL...

What is American is to support a company and people that are your neighbors – supporting America the most you can.

6. Pride

Whatever happened to American pride? Shouldn’t we stand behind our country and buy its products because they’re great? If we aren’t looking out for the U.S., I guarantee you no one else is. Please buy American and proudly drive American!!!! This is the industry the metro Detroit area depends on -- and we are ignoring it!!!!

We need to realize that we are becoming a nation of CONSUMERS, that don’t PRODUCE anything. How long can an economy survive like that? We are making selfish, short-sighted, uninformed decisions as a country – and it needs to stop!!!

Anonymous (not verified)
March 30th 2009, 10:31 am

What a brilliant idea Mr. Paul Lessard has. We should take an ailing car company who has been attempting to create a more efficient and cost effective operation for the past 80 years and turn them into a Wind Turbine factory. If GM can not profitably produce and sell a product that they have been working at for the past 80 years, what would give anyone the notion that they could make and sell wind turbines at a profit. On NO, I said a Liberal Curse Word..."PROFIT".
That is right, like it or not a company must turn a profit or they eventually NEED to cease and desist. Government subsidies can only last for so long. Maybe there is a correlation here that I am missing, but ailing car manufacturer to profitable Wind Turbine producer does not happen overnight.
"From each according to his ability, to each according to his need". The US government sees that the auto workers are physically able to produce windmills, therefore they should be told to make them for the needs of the US population. This is the cornerstone of another economical thought process commonly referred to as Communism. In theory it is great, why not give it a try?

Mr. Nate Biddle

Nate Biddle (not verified)
March 5th 2009, 3:23 pm

Mr. Friedman, I believe we should not bail out all of the big three. The era of the multi car family is passing into history. The money proposed to bail them out should be in a large part spent on turning one or two of them into green economy manufacturers. I propose that one or two of them should be turned into wind turbine manufacturers.

The USA will need to build HUGE numbers of wind turbines for the next 25 years. The auto companies have a well trained work force and the physical facilities to manufacture wind turbines. I would think a shareholder vote with no proxies allowed would likely see at least one company willing to do this. The prospect of decades of profitable work would be an enticement.

This would also be an effective economic stimulous as people secure in their work future will be more apt to spend money.

Thank you for all of your effort and I hope this idea finds favour.

Paul Lessard (not verified)
February 22nd 2009, 10:46 pm

Along with the 50/30/10/10 in Ten years, we ought to give the big three a mandate with their bailouts. No carbon in ten years time. Their deal should be "The Green Deal." Just like with the CFC model, the entire production can be managed, and those companies in the US (And abroad) that want to produce carbon cars can buy that right from those who don't. Slowly, that cap can be reduced until none can produce carbon cars. Business will either adapt or perish. Just as our economy flourishes, greener, there will be more demand for hybrids, underwritten against their future lower carbon costs (both the cost and the savings amortized going forward as net from the higher carbon cost and lower current carbon vehicle cost). Now is the time to do it, however, because the economy is so bad (and no one believes it's going to get better as a carbon based economy). The plan needs to be put in place, however, on what to do with the displaced carbon industry employees. That's the critical part. And to help the carbon based industries to transform, again, amortizing the cost over time against the future savings of having limitless energy sources that are clean.

Anonymous (not verified)
January 27th 2009, 5:46 pm

I think the government has a big opportunity here. They could "buy" the most economical Hybrid cars that the big three produce against a strongly reduced price. Basically the big three give the government a certain amount of Hybrids in exchange for the bailout.
These cars are then used to enable people with gas guzzling SUV's to trade their cars in and pay a very favorable price on top of that for one of these Hybrids.
The gas guzzlers will be recycled as clean as possible and the money "made" with the trade transactions can then be used to invest in renewable technologies.
This way, the demand for oil will also go down which will decrease the dependence on foreign oil. This will also make it easier for Obama to impose higher gasoline tax and efficiency standards.
I loved the book!

Mees vV (not verified)
January 27th 2009, 5:04 am

Mr. Freidman, thank you for your provocative book.

I may be naive, but it seems to me that from a purely market perspective that there are economies to be derived if if GM, Chrysler and Ford produce the same cars in the US as they do in Europe. The gas-powered cars are much more fuel efficient, not to mention the clean-diesel versions. Surely it could not be too much of an undertaking to re-tool existing manufacturing plants in the US to produce the exact same cars which are tried and tested and being produced in other assembly plants or to initially start producing these cars and importing them to the US. Imagine if we started producing minivans that got 41.g mpg (UK gallons) as does the Vauxhall Zafira and Ford S-Max (which incidently looks better than any of the mini vans being churned out over here)? By producing more efficient cars abroad than in the US they have proven that it can be done, so why not here? Surely it is more expensive to produce twice the number of models for different markets?

To coincide with this, why not bite the bullet and institute a federal CO2 emissions tax on vehicles and set federal standards for fuel economy? As in the UK, the CO2 emissions tax could be phased in and be scaled and by mandating higher fuel economy standards and higher emissions standards.

In the UK, this has led to higher demand for more fuel-efficient and less CO2 emitting vehicles, which then drives what the manufacturers produce. This coupled with a Federal mandate increasing fuel efficiency standards for all vehicle classes should compel the manufacturers to produce more "Made in America" fuel-efficient cars.

This summer, Americans were clamoring for more fuel efficient vehicles as gas costs soared (well, by US standards anyway). Since 9/11, we have become a very reactionary country and maybe we need less of a carrot and more of a stick to ensure that eliminate our reliance on foreign oil.

While I understand that this may not be popular, the Government needs to consider a hefty federal gasoline tax with all incoming derived to be used to develop alternative energies (both for transportation and for the energy grid). Take this money and invest in building solar panel manufacturing plants (and create jobs), in investing in biofuel development (and create jobs), and in funding the re-tooling of automobile manufacturing plants to make more fuel efficient cars.

Hope (not verified)
January 23rd 2009, 2:56 pm

The US administration could simultaneously achieve both goals with respect to climate change / Foreign oil dependence and saving the US manufacturing base (read: Detroit & the big 3), by imposing the regulatory framework that stimulates demand for new energy efficient cars. Why not structure a self funding scheme of incentives and rebates, where super efficient car users are subsidised by the gas guzzlers, and at the same time, demand as part of the bailout that new targets on number of efficient cars be met?

Desmond Kingsford

Des (not verified)
January 13th 2009, 9:03 am

the big three were told meany year's a go to make vecheal's with better fule milige.
the big three scaffet an throw more junk under the hood. $4.00 dallor a gallon gasaline there still not lising..
the taking big ceo pay off's jumping running, leaving the public hanging..

vaughn nebeker (not verified)
January 7th 2009, 5:14 pm

The problem that all car companies have right now is that not enough people want to buy cars, period. Everybody's sales are down, a lot. So giving a car company money to sit around while their cars do not sell does not make sense. The US Government should use its financial resources to buy cars. Specifically, energy efficient cars (hybrids included) for its own vehicle fleet renewal, and for transformation of private fleets (like taxis, etc.). Old vehicles out, new vehicles in. Assuming a fleet vehicle drives 45,000 miles per year, the annual saving of achieving a 1/3 reduction in fuel consumption amounts to at least 20-million barrels of oil per year, for everyone 1-million vehicles. At $50/bbl, that's a $1-billion reduction in oil imports, per million vehicles, not to mention a substantial GHG emission reduction. The USG cannot make consumers buy fuel efficient vehicles, but by massively purchasing them it would allow the companies to re-orient at least some of their production and get better at designing and producing fuel efficient vehicles.

Ford has hybrid technology and could lease it to GM and Chrysler, the same way that Nissan gets it from Toyota. Also, the USG does not have to give these vehicles away to the private fleets. It could simply on-sell them at a discount (since buying a million vehicles might cost $30-billion, e.g., it would be quite expensive if it was a total give-away). But between its own vehicle needs and sales revenue from private fleet operators, the required subsidy might be less than $10-billion (and if the vehicles lasted five years on average, the economic benefits generated just on imported fuel saving would exceed this).

Alan Townsend (not verified)
December 18th 2008, 10:28 am

Today GM announced it is halting construction of a factory to create the Volt because it wants to save money. I find that akin to shooting yourself in the foot, or perhaps this is a hostage situation now. Until the government gives them billions of dollars they aren't going to make better cars, is that it?

As for the comment on why the automobile manufacturers are being singled out instead of Amazon.com and other businesses, I don't see anyone else asking for free handouts from my personal paycheck/tax dollars. Mother's Cookies went out of business, and they didn't ask for government help either.

Brian (not verified)
December 18th 2008, 2:30 am

The total value of the Big 3's stock is supposedly less than the value of the bail out. Is it possible common sense prevailed in the senate over allegiance to the Big 3 and UAW?

A number of other nations have benefited greatly as hosts of manufacturers of parts, components and even complete assemblies for the Big 3. Read - Canada, Japan, Mexico and others. Why haven't we asked them to participate in the bailout? Maybe it is time, with future business or tariffs contingent on their response? I think it is time for hardball.

When the next round comes, and it will, the Treasury and/or congress through DoC should be working Japanese and other car makers to buy the stock inexpensively and set US auto on a new course. US management has failed for decades and UAW is their accomplice not their adversary. Throwing money at this problem won't help long term and enough thrown down the Big 3 "black hole" will help weaken the dollar and possibly extend the recession.

Clean autos under some schedule within reason can be a condition of foreign manufacturers benfiting from this stock fire sale. The whole US market thrown open to them. I hate making such a suggestion but what I hate worse is the continued failure of the Big 3 with no change in sight regardless of the money thrown at them.

Mark (not verified)
December 13th 2008, 5:23 pm

This is such a tough issue, but Michael Moore's essay on The Daily Beast changed my angle of entry.

Since GM's market value today is much less than the money they request in loans, why doesn't the Fed just buy the damn company?

Here's a link: http://www1.thedailybeast.com/blogs-and-stori...

markburris (not verified)
December 8th 2008, 5:04 pm

The problem with the Big 3 is really a problem with our society as a whole. We need to rebuild this industry (if it's even worth saving) by restructuring.

What I mean to say is:

I'm a college student and I can tell you firsthand that students are worried about making money when they get out of school. Our society doesn't value pushing their children to study mathematics, engineering, or the physical sciences like they should. We lack a drive in this regard, instead choosing to focus our studies on other areas.

Math and the sciences aren't valued in our society like they are in other cultures and that's why we lack the ability to innovate - and also why our jobs keep getting exported. (If they are valued in our society at all, they are only to get jobs in medicinal fields. Whilst this is important, we need to encourage students to focus on technology as well.) The problem needs to be fixed from the bottom up.

How to do this? Incentives for math and science. Scholarships for people who choose to focus their studies on these. Programs in elementary school encouraging gifted math and science students.

Another major way to fix this, and something that President-Elect Obama can do, is to increase carbon emission standards.

How will this solve the problem?

It's commonplace to import our cars from Germany, Japan, etc. Have you ever heard of citizens of other countries importing American cars? Of course not. (It may or may not happen... I'm just saying that it's uncommon.)

Problem number 1: it wouldn't even be legal. Every other developed nation in the world has higher fuel emission standards than the U.S. - our cars can't even be sold there (without being modified)! Of course no foreign citizen is going to be an American auto customer!

If we can get laws that even put us on an even playing field with other countries, we at least have half a fighting chance of expanding the consumer base. This would also lead to new innovation within the American auto industry.

Thanks a ton for reading!

Kristin Ng (not verified)
December 8th 2008, 3:11 pm

Tom, how to solve the auto problem overnight:

Provide a government incentive for:

1) Microsoft to acquire Ford Motors
2) Google to acquire General Motors
3) Apple to acquire Chrysler

These innovative hi-tech companies will create a new generation of state-of-the-art automobiles that will crush the foreign competition. America will regain the lead in the automotive industry, along with a substantial increase in American jobs and pride.

Game-Set-Match!

Scott (not verified)
December 7th 2008, 11:55 am

Tom,

Bailing out the big 3 is going serve to prolong the inevitable for several reasons. This has to do with the pace at which technology is evolving and how quickly the big 3 can harness that technology (or more traditionally, not). Basically the integration of change management, and the scalability of technology. Further, I believe the big 3 represent a corporate culture which is dying. The arrogance of companies who have a "monopoly" due to barriers of entry into a market is going to be the straw the broke the camel's back. Technology is removing these barriers and throwing my money at the big 3 simply is throwing good money at bad money. Couldn't agree more with your comments on Face The Nation of 12/07. Keep up the good work.

Ryan Sittler (not verified)
December 7th 2008, 11:30 am

Sad as it may seem, it’s a hostage situation. The government may have no other choice but to bail them out at this time because the effects (both actual and perceived) would be devastating to an already anemic US economy.

However, within a year of the US taxpayer doing so...the Big 3 should be made to break apart into their individual subsidies. Going forward, these smaller companies would (hopefully) have the hunger to survive and therefore innovate (or face a well-deserved extinction).

In the future, if nobody wants to buy a Pontiac or Buick...they can quietly go the way of Packard, Rambler and, most recently, Oldsmobile; with little to no effect on our economy.

Oh, and one more thing...as a taxpayer, I want a return on my investment (I'm thinking 12% is fair)...that should make up for having to push that stupid Chevy Vega all around the place.

Tony Ozelis (not verified)
December 6th 2008, 1:54 pm

On What to do with the Big Three.

I suspect that the government will probably need to provide some money to the Big Three short term (i.e.,over the next six-twelve months until a real strategy can be developed and fixed upon, and the Obama team can get things moving).

I agree with the principles you’ve outlined in Hot, Flat and Crowded, specifically that we need to STOP creating CO2 (or alt least getting it to a bare minimum). Petrol fuel efficient cars and hybrids are just interim steps, and we shouldn’t stop there. I’d invest in battery power and hydrogen, both long and short term.

While I’ve heard “it’s too hard” to do (both hydrogen and batteries), it simply has to be done. I’ve read of some potential hydrogen-production processes, especially one using aluminum, which is abundant and recyclable (the “cradle-to-the-cradle” concept), and I personally believe hydogen-powered vehicles are feasible, we just need to discover the way. (Before I retired, I was an engineer in R&D who learned that many of the “impossible” problems just needed to be challenged as doable from a different perspective.) And there very well might be other non-polluting approaches I don’t know about.

Back to the Big Three, I think the Chevy Volt is a great idea. I know that GM, Honda and BMW have hydrogen powered prototypes. I suspect others do as well. These need to be developed, but the sourcing (creating the hydrogen) and the infrastructure (getting the fuel to the filling stations) issues are the killers and will take government support and probably industry (Big Oil, etc.) to pull it off. For this, President Obama must be behind it.

We’ve been shocked with $4/gal gasoline, now it’s down to ~$1.70/gal in Ohio. This drop is due in part to a shift in consumer choices which has led to less consumption. I’d set the price at $2.50/gallon (increase the Federal tax to $1/gal) to fund this development and others, with the support of the citizens, get the public focused on conservation, the auto companies on fuel efficiency and emissions. Your book, Hot, Flat and Crowded, provides the rationale--this is a BIG WIN. The current recession can provide the incentive for the country to get off it’s focus on materialism and living on credit, and get to being part of something that can change the world for good before it’s too late. We’ve taken our eyes off real progress and the challenges we have before us. [I think there is an essay titled “While You Were Sleeping” which would capture what I’m trying to express here.]

President-elect Obama is right on it in that we need to build up our neglected infrastructure, focus on job creation, shake our “addiction” to oil, take global warming seriously (for what it is) and get America to take charge of its future. The rest of the world is ready to follow our lead. (I personally don’t trust the rest of the world to do what needs to be done.) When Americans set their mind on a goal, especially an “impossible” one, they get it done.

My career as an engineer in research focused on new product development (getting products to the consumer/customer), not just technology development and was not typical. Besides working with teams to find ways to get products into the market, I also worked on (1) learning, developing and using techniques to get teams challenged and moving to solve technical problems, and (2) on the psychology of the American worker (and consumer) to understand first hand that Americans are uniquely “programmed” to go after impossible challenges, are motivated by frustration, have a “just do it” approach and attitude. Just get us focused on a problem and see the goal and the rewards/benefits, far beyond the money, but to the bigger impact our efforts can have for all, there’s little that can stop us. Americans are up for this challenge!

Bill Keeter (not verified)
December 4th 2008, 6:00 pm

As I write this (12/04/08), the top executives of the Big 3 auto firms are in Washington continuing to seek some sort of "bailout" (whatever that means). This looks like bad economics, but no bailout is not likely to be politically feasible (politics being the art of the possible).

I noted in you book that you decried the fact that W. missed an opportunity to impose what you termed a "Patriot Tax" after 09/11. If a bailout is inevitable, this would be an opportunity to impose the gasoline "base" tax to bring the price to at least $4.00 per gallon as a "quid pro quo." This would have many positive effects (ignoring the outcry). Some of the costs of the bailout would be covered by the tax revenue. We know from the experience of mid-2008 that people will respond (quite quickly) to such a price level. People will demand higher level of fuel efficiency, so Congress will need to join the parade. The cost of the tax will be proportional to the level of gas-guzzling of each vehicle, imposing higher costs where they belong.

Since I haven't quite finished the book yet (though I am recommending it to my students to at least get them thinking), I am still looking for the quotation from Pogo, "We have met the enemy, and he is us!!"

John Wiginton (not verified)
December 4th 2008, 11:29 am

Q: Is it just me? Why does it seem like the country is attempting to make the Big 3 solve all the ills of the national energy crisis? Where is the outrage for builders and buyers of homes that are much too large [high carbon sheltering]? Where is the outrage for online shoppers that get overnight shipping [high carbon shopping]? By the same twisted logic that places blame on the auto industry for energy, we ought to place blame on Toll Brothers and Amazon for high carbon sheltering and shopping.
It is much more productive to work on these problems as a system and value chain - where all parties have collective responsibility to improve the entire system. Right now, we as a nation want to impose our will on the Big 3 to not only remedy energy issues but also holistically fix social issues like legacy healthcare, retirement, etc.. while other parts of the "free market" do very little to re-balance the transportation energy value chain and social issues.
In what type of country do we set up rules where we have huge incentives to continue to building more and more assembly line capacity, more and more retail space, more and more housing - all without any sort of plan except "let the free market do what it's gonna do". When these uncoordinated incentives run their course we get disruptions like mortgage crises, automotive transportation supply crises, and other energy economic displacements. Everyone including government needs to get over ourselves and create a coherent strategy and plan.

isitjustme (not verified)
December 4th 2008, 4:22 am

We have to make sure that we define the problem correctly. Current crisis that pushed the auto industry to here is mainly a liquidity crisis. The disadvantage of the auto industry is its highly elastic nature. When an economic slowdown appears at the horizon, one of the first purchases people will delay is the automobile. There are two ways to solve the cash problem for any given company: By selling your products or services and collecting, or by taking the funds from somebody else. Unfortunately, financial institutions are not able to provide the funds necessary due to obvious reasons, which makes the government the single source.

In the short-term, I do not see a problem in a government bailout, as long as the govenment acts like a private financial institution and make sure that the loans yield greater returns. In the end, it is people's money the government would use. The business plan that Big Three is working on should provide some justification.

On the other hand, I am afraid short-term problem solving would not be enough, for this industry in particular. First of all, I think the proposed amount, which is relatively small when compared to the losses these companies made even only this year, would not be sufficient for an effective recovery. Second, converting these companies into cash-generating, profitable, and dynamic entities requires a major overhaul that redefines their organization structure, management style, and R&D based strategies. I truly believe that they are catching up pretty fast and I am positive about their efforts (especially Ford's) on encouraging creativity and innovation in their business.

One last thing, I consistently see a common pattern when I read any kind of material about this industry. The Big Three is almost always compared to its foreign competitors. I think this narrow vision partially blinds the executive team at these companies in a way that they focus their energy and efforts on being like one of those foreign companies. It should be one of the factors, I agree. However, I think it is time for the Big Three to look broader and come up with strategies that define the future, not only for their industry but also for all the business world. They are sure capable of that, and they are way overdue.

Baran Kocal (not verified)
December 2nd 2008, 7:55 am

The Big 3

You can’t solve an the American automobile industry problem with more money, until the BOD fixes the leadership problem. Globally, there are fossil fuel issues to resolve. and you have to make short term decisions that flow into a midterm strategy, which ultimately culminates with the right product, mix, features and cost to recover your company, recover your market share, keep your people employed and finally reward your stockholders.

To simply ask for $25 billion, to save the domestic portion of a very important global business, without a plan in your hands, is a further indication of your lack of even the most basic leadership skills. As a leader you are the conductor of the orchestra - your baton, arms and eyes follow a carefully choreographed plan - leading & teaching your team to success.

The salvation of the American Automobile Industry is not a hockey game - with a bunch of players all dressed in padded uniforms, moving to center ice, waiting for the official to drop the puck right in the middle of us, so we can all fight to gain control. No - it requires planning, skill, training, rehearsal and ends up more like a ballet.

Ford and Chrysler from 2006 have placed leaders in each business, with the correct leadership abilities. Nardelli came from GE and many years of 6-sigma. Mulally came from Boeing and the 777. Mulally appears to be leading Ford, but it is difficult to see what Nardelli has done, until Chrysler starts sharing results and operating plans. GM is floundering and for many, many years this has been a problem - 1st effecting worker job security and ultimately the one element of the business a CEO is charged with - protecting the investors.

Using simple arithmetic - They are requesting $25 billion. It is reported 3 million people will loose their job if the Big 3 file chapter 11. $25 billion / 3 million people = $8333 each. If $72 / hour is the correct number and 40 hours equals a work week - there will be enough to pay everyone for roughly 3 weeks. Will this solve a long term problem for the people or even the car industry? I don’t think so!

If you give $25 billion to the Big 3 - Where does it really go?

My vote is to Get the leadership in place, provide $25 billion plus the ability to increase to $100 billion. Focus on short term fixes to preserve existing market share and fight to regain some of what was lost. Then start to develop technology to support the move from fossil fuels - remembering why Henry Ford made the Model T.

“I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be low in price that no man making a good salary will be unable to own one - and enjoy with his family the blessing of hours of pleasure in God's great open spaces.”

On compensation - No CHAIRMAN OR CEO should be compensated until the investors are. Stockholders equity must increase all the time to earn any money. Plus - a bonus is paid only when Stockholders equity increases along with market share growth, effective introduction of new products and year over year sustainable business savings are achieved, without the need to layoff any employee. If the Chairman and CEO just conduct their orchestras to the above - everyone involved with the business will have a great life.

Anonymous (not verified)
December 1st 2008, 11:40 pm

With every apple that falls from the tree there's potential for rebirth. America's auto industry has decayed on the branch, making it time to drop to the ground and let environmentally clean and fresh ideas come to fruition. Since we are only prolonging the inevitable by fertilizing old technology, we desperately need to nurture new seeds, and fast!

I am with an environmental research and development company, whose technologies are scheduled to break ground January, 2009. Our most difficult struggle has not been with R & D, as you might think. There are thousands of brilliant ideas in this country thirsty for fertilizing dollars in order to sprout.

Instead the battle to defend our business has been against the rotten apples of big business clinging to the branches of an arrogant and complacent government. We have met with both parties numerous times, and been subjected to suspicion, hostility, deception and indifference.

Soon there will be war in our own back yard as oil and gas companies, auto makers and utility plants try to stop the inevitable birth of green technology.

At this time sharing details of our projects would expose our only weapon of defense: surprise. We are coming silently and carrying a big hoe!

Anonymous (not verified)
December 1st 2008, 4:11 pm

I believe that the big three should get a line of credit only if strict controls are in place as to how the money can be spent. All expenditures should be transparent and governed by a team of experts in the fields of transportation manufacturing and new energy solutions. This team should be put together by Mr. Friedman, if he has not already been tapped by the new administration for Energy Czar. In that case he could appoint someone.

I would rather see Mr. Friedman implementing his entire plan, as laid out in his newest book, than just overseeing one aspect of the energy plan.

I would leave it up to Mr. Friedman to decide what type of fuel different vehicles should use. If it has to be combustble at first, I could see using CNG from the U.S. If anything is salvageable from the Volt program perhaps that could be used.

It seems as though letting all the infrastructure already in place, belonging to the big three, to go to waste is just that, waste. Having to build something somewhere else, is also a waste. Why not put to use the idea of teaching kids how to weatherize buildings, install alternate energy systems and recapture any energy that is escaping from the plant to power the plant. One last thing on this, in order to be able to bring down the price of the vehicles, which I feel is imperative, the pay structure should be adjusted so that everyone in the company makes the same amount of money, has the same benefits, and gets the same perks. (Performance based of course).

John Carter (not verified)
December 1st 2008, 3:42 pm

I do not think bailing out the US auto industry will do anything good. Bailing them out does not change the fact that most people will not buy their products because they do not put out a quality product. The consumers preference towards the foreign cars like Toyota, Honda, and now Hyundai is not something that happened over night. It took years for people to learn to trust the foreign cars and now the shoe is on the other foot: it will take years for the US automakers to gain back that trust.

I see all these bailout ideas. What happened to the free market society? Why do not the big 3 become the big 1? They could merge and get rid of extraneous product lines and focus their combined research and development to making products people would purchase. Or perhaps they merge with successful foreign companies. Why should the American citizen bailout these companies? Most of us do not even buy their products anymore. Also, if they get bailout money this does not mean they will survive the ensuing years. They refuse to act upon their innovations and keep putting out shoddy products. The US automakers are the creators of planned obsolescence, they make things to last 3 years and then it falls to pieces. I, and many people I know, would not dream of purchasing a US car. So they get a publicly funded bailout and the average US citizen gets nothing out of this deal.

Let us be honest... You go anywhere in the US you see giant car lots with tons of new cars. What kind of idiocy is this? The car companies over-produce. They need to come up with a scheme where they have a small show room and then you order it and get your car within a week or two. Build as needed. Build cars that last. They would need to restructure their plants I am sure and have less people working at them.

Of course this will impact the people working there but we had an IT/telecom/software problem a few years back where many, many people lost their jobs. None of our companies were bailed out. Many of our jobs were sent to India and China and we had to either get lucky and keep our job or retrain into other jobs. I myself have BS in Electrical Engineering Technologies but also got certified to teach middle grades math and computers in high school as well as going out and getting an AS in Radiography. So I know, firsthand, what it is like to have to start all over. It is hard but not impossible.

I know if the US automakers collapse then perhaps there will be a ripple effect. Is that ripple effect really as bad as people make it out to be? I am not so sure. Obviously these automakers have been in decline for years and as such their disappearance will probably have less of an impact than they would have 30 years ago.

The government should stay out of this. The automakers have options but not ones palatable to them. Let them figure their problem out and learn to compete on their own merits and not the taxpayers dime. If we bail them out they do not learn to be responsible for their own bad decisions. They need to learn to build for tomorrow and quit living in the past.

Anonymous (not verified)
December 1st 2008, 3:05 pm

I've been going back and forth on whether or not to "bail out" the big three. I've seen good arguments on both sides of this debate. The con arguments lean toward the theoretical (sending wrong signals, creative destruction, etc.). The pro arguments are rooted in both practicality (almost 3 million people are gonna get the shaft) and economic jingoism (the prestige of having American automakers).

Most of these are strong arguments (except the prestige ideas), but for me, practicality is winning out. I think we should find a way to help the big three, plus foreign manufacturers who build here and need help. But I don't think we should should have an industrial policy (too few people have to know too much - it hasn't worked that well for Japan), and I think there should be big strings attached to whatever assistance is given (it should be loans).

Creative destruction is a good argument, one that's too often overlooked as we debate the economy. If one of the automakers gets into trouble so deep that it can't keep going, it should go into bankruptcy and be dismantled so its parts can be put to work by other firms. But when it's the whole industry, that's different. First, that many parts couldn't be absorbed fast enough by the remaining industry to prevent a major economic catastrophe NATIONWIDE (it's really national, not just regional). Second, the rest of the industry is in trouble, too, and the cash that they would need to purchase the assets is in short supply (at least in credit markets, where they'd have to go to find it).

Although I'm not an economic jingoist, there are better reasons than prestige to have automakers with roots in the US. Despite occasional lapses of judgement, they are marvels of large-scale manufacturing. They proved their value in this regard during WWII. In early 1942, they turned quickly to stop building cars in order to build what the nation needed. Most of the engines on B-17's and B-24's were built by Studebaker under license from Wright. GM built most of the Avenger torpedo bombers and Wildcat fighters for the Navy so Grumman, the designer of those aircraft, could focus on the F6F Hellcat. Grumman showed GM how to work with aluminum, while GM showed Grumman how to build a lot of stuff fast. We can't depend on foreign-based companies to do things like that out of national interest.

As I mentioned, all of the auto manufacturers are having problems caused by tightening credit, including the companies we think will give us the fuel-efficient cars we need, like Toyota and Honda. Why not help them, too?

What kind of strings? The assistance should be loans, not grants. Federal guarantees of private financing, if at all possible, but direct financing if necessary. Another alternative would be for the government to buy preferred stock in the company. Either way, companies seeking help would have to present a solid recovery plan, and there would have to be a date-certain for repayment with interest to the US Treasury. And they would have to commit to higher CAFE standards and production of plug-in hybrids by a specified date in return for the assistance.

The government should not be in the car business for any great length of time. We can make the strings so burdensome that we wouldn't need to worry about bad messages being sent. The only reason the companies would take the help is for their survival, and future management would alter their behavior to keep from being placed in that position again.

I know it's onerous to have the public saving companies from their own mistakes. But sometimes it works out well for both. Chrysler used its bailout to restructure its management and to produce smaller, more fuel-efficient cars to give it the highest average fuel economy of any of the big three. Combined with the invention of the mini-van, which replaced monster gas-guzzling station wagons, this put Chrysler back in the black, made it an innovator, and saved a ton of jobs. And they paid the loans back early - At a profit to the taxpayer. Everyone won.

Sorry this is so long, but there's no simple answer to this question. Thanks for doing this, Mr. Friedman.

Anonymous (not verified)
November 30th 2008, 10:30 pm

Note to Auto Execs,

Tell the truth. Congress wants you to rationalize your plan. Please tell congress what a viable auto manufacturer looks like; vis-a-vis Tata Motors (India), and Brilliance JinBei (China). Be sure to tell them about all the structural costs that you are bearing that these guys are not especially all the mothballed assets left over from a bygone era. Be sure to tell them about all the legacy costs that you are bearing that these guys are not especially the pension and health care plans.

Be very clear to Congress and to the American people what it means to be a viable manufacturing concern in a global economy, that manufacturing WILL BE performed at the least cost alternative. And that unskilled labor in the US is in direct competition for wages of the unskilled in developing nations. And that American buisnesses should no longer be counted on to pick up the cost of pensions and health insurance. These are all perks of a bygone era, based on assumptions that no longer make sense. England once owned India. Now India owns English name plates Jaguar and Land Rover.

Be very clear to Congress and the people of the world community. Suggest that the UAW consider redirecting its efforts toward organizing a truly international labor movement to bring wages and working conditions overseas up to par with what is a safe and livable standard in the US. Suggest that developing nations welcome the UAW. That higher wages and safe working conditions for workers is the true path to strong tax bases, sustained growth, and a viable middle class.

Auto Execs take this moment to say the thing that needs to be said to our children. Tell American children they must study hard in school, because there will no longer be secure high paying jobs waiting for them if they do not gain skill and knowledge. Tell our children they must come to value knowledge, because the children in developing nations do, and it is to the children gaining skill and knowledge the good jobs will go no matter where they live.

Use your "soap box" to tell congress that they need to act fast on universal health care. Then tell congress how much it will cost to take over your pension obligations. Finally get fair cost value for your nonperforming assets from congress in the same way they have done for the mortgage banks. Be very clear to congress, that if they do not take over your legacy obligations and your useless assets, then you will go bankrupt, and then WE THE PEOPLE will be left with these obligations anyway. Reinforce the dire consequenses of a Big Three Bankruptcy and its subsequent American Automobile Industry collapse, and how it relates to congress' re-election prospects two years from now.

Yours truly,
Malcolm Campbell
One person One vote

Malcolm Campbell (not verified)
November 30th 2008, 9:28 pm

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