A Deal for Detroit?

Congress appears poised to agree upon a temporary bail-out for troubled American carmakers.
Economist StaffDecember 9, 2008

There are two ways of fixing a broken-down car. A nut-and-bolt restoration of the whole vehicle would return it to top condition, whereas a patch-up of the worst problems might keep it on the road. Late on Monday December 8th congressional Democrats agreed in principle to opt for the latter fix, putting off big repairs, but making available $15 billion in emergency loans in exchange for some shares in the companies. It is unclear, however, whether the Bush administration will support the deal.

Car bosses have spent as much time in Washington, D.C., as they have in Detroit of late, trying to convince lawmakers of the urgent need for cash to keep their industry alive. And they learned a little about politics along the way. A first visit to hold out the begging bowl was ill-received, not least because the beggars whizzed in on corporate jets. For the second round of congressional investigation they opted to drive in green vehicles. That piece of belated PR and the prospect that General Motors and Chrysler could go bust before the year ends prompted lawmakers to dip into a previously approved fund which is intended to help carmakers build more fuel-efficient vehicles.Detroit’s “Big Three” have not had it all their way. Between them they had asked for a $34 billion bail-out (in addition to the $25 billion fund to make their cars greener). And such is the plight of GM and Chrysler that Ford, in better shape than its rivals, seemed modest in its request merely for a $9 billion emergency credit line. Given the precarious cash position of Chrysler and GM the money will only help them to splutter and bang into the early days of the Obama presidency.

The intention of the Democrats’ draft legislation is to keep the carmakers solvent until March. By the end of that month they must submit detailed plans for turning themselves into leaner firms that produce the hybrid and electric vehicles that lawmakers assume Americans will want to buy. These plans will be overseen by a “car tsar”, who can demand the cash back if the carmakers fail to deliver the green reorganisation demanded. He will also have some power to knock heads together by convening meetings if the carmakers, union leaders, parts suppliers or shareholders stand in the way of the cost cutting and restructuring. And as part of the deal those private jets must go.

Sceptics will point out that it is most unlikely that the American car industry will fundamentally remake itself within four months, at a time of immense stress. The slow motion car crash that is Detroit has played out over several years. Ever-declining market share, to the benefit of foreign and non-union transplant manufacturers in America, has been met with foot dragging. The firms have struggled to design new models that would satisfy the changing taste of car buyers who began, at least when the price of fuel spiked this year, to care more about miles per gallon than cubic capacity of vast engines. Another difficulty is that union bosses have been slow to make concessions over benefits for workers and pensioners, although a deal struck in 2007 was a step in the right direction.

Perhaps now the unions can be persuaded to take further steps. And maybe the car companies can look to their European arms (where high taxes on fuel have long encouraged more efficient models) and bring smaller, less thirsty, cars in to their line-ups. But it seems unlikely that a complete remodelling will be possible by the end of March. Enormous doubt hangs over a scheme that at its core reckons that government direction can succeed where the forces of the market have failed.

And though investors have reacted with enthusiasm to the likelihood that Detroit will be thrown a lifeline when Congress votes on the matter, Mr Obama should be worried. Sales that were already plunging have fallen ever more rapidly as it has seemed that one or more of the car giants might go bust. That same threat still hangs over the car-buying public but has been extended until March. Who knows what dire straits the car firms will find themselves in by then? Mr Obama, who reckons that the Big Three are too big to fail, will have to dig deeper and deeper into the public purse just to keep Detroit running.