Saving the U.s. Auto Industry Without a Federal Bailout

The U.S. auto industry can save itself if it chooses, and no government money need be spent in this rescue. The industry quite simply is composed of capital and labor, and it is in the power of the owners of the capital and the suppliers of labor to reach an accord so that the business can survive. Both parties would be quite pleased if the government showered federal largesse on them so they do not have to make any hard decisions or sacrifices about how to work together. A government bailout will only subsidize a dysfunctional relationship between the manufacturers and the main union – the United Auto Workers – but also maintain weak players and hurt the stronger producers.

The U.S. auto industry is not just GM, Ford, and Daimler-Chrysler any longer, although the only manufacturers that have gone begging a bailout from the government are these three manufacturers. Since the late 1970’s, the U.S. auto industry has included many companies, only two of which are considered domestic companies because they are incorporated in Delaware and have their headquarters in Detroit. Chrysler is a mixed German-US company. The U.S. auto industry includes Toyota, Honda, Nissan, Mazda, Mercedes-Benz, Subaru, and BMW, and all employ auto workers in the US, have facilities in the U.S., and pay taxes in the U.S. All of the auto companies including the two remaining domestic companies, GM and Ford, have overseas operations. Furthermore, even if a car is made in the United States, it may have a majority of its content composed of parts made outside the United States.

What is ailing the U.S. auto industry is the worldwide recession and high interest rates; together those forces are causing a global decline in demand for vehicles. That will in the future change and demand will at some point increase as millions of people enter the middle class in China, India, and other parts of the world. However, currently the revenues and profits of the auto manufacturers are suffering. This occurred in every past recession as well; the greater problem in this recession is that it is a worldwide phenomenon, not just limited to the U.S, and thus the results of overseas operations are not balancing weakness in the U.S. market.

GM and Ford are using up their cash keeping their facilities operating at a low level during the recession and continuing to pay out large sums of cash for retiree health and retirement benefits. Without a turnaround in sales soon, GM may run out of cash in the middle of 2009. However, the solution is not for the federal government to give money to the auto companies (although that is the solution the auto companies and the unions prefer); the solution is for the unions to offer some radical solutions to high cost labor so that the companies can survive. The most radical solution, but one that has substantial merit, is for the union to offer to disband to save the jobs of its members. Those are grand sacrifices, but they should be made before money from other citizens is simply given to these two or three automakers so they can avoid making the difficult business decisions that need to be made.

There are other U.S. auto manufacturers and they are not seeking federal assistance. Propping up weak manufacturers will allow them to continue to operate in a marketplace that simply is not large enough to support all of the manufacturers. Accordingly, by spending federal money to prop up weak players in the market, the government will actually be hurting the stronger manufacturers that could survive on their own in the market if the federal government does not intervene. The government should stay out of the market, and let the auto companies work out their own problems. Government intervention will create a larger problem of weakening other manufacturers who will then march to Washington for their bailout too.