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June 11, 2009
Exclusive: Auto Industry – Is Gov’t Intervention in Line with National Interests?
On June 3rd, the Senate Commerce, Science and Transportation Committee held a hearing on the planned closing of 1,900 car dealerships by General Motors and Chrysler. The closures are part of their restructuring efforts, now being conducted under the shadow of bankruptcy. The hearing showed the power of local interests to drive the upper chamber of the national legislature while at the same time revealing the failure of the executive branch to think in national terms. The result was to call into question whether the commitment of billions of dollars in Federal money to save the American automobile industry has been accompanied by any deep thinking about what the public purpose is that justified government intervention.
I have from the start supported the use of public money and authority to preserve the U.S. auto industry because it is a core element in the national manufacturing base. It is a leading high-tech industry, both in terms of what is put into the vehicles and how the vehicles are designed and constructed by advanced production methods. The supplier network for the industry involves thousands of manufacturers across the country. Next to homes, cars are the largest purchases that an individual or a family makes. Every other nation with an auto industry is pouring government money as well as guiding private capital into this strategic sector. They are also licking their chops, hoping to grab whatever they can from the markets held by U.S. firms.
The national interest that justifies government intervention is the protection of the American industrial base from foreign rivals whose success in destroying the U.S. industry would result in the vast transfer of wealth and power overseas. It is the economic equivalent of national missile defense. It is national security at the level of grand strategy.
What drove the Senate hearing was, however, much more provincial. Chairman John D. Rockefeller (D-WV) called the hearing because Pete Lopez, who sells both Chrysler and GM vehicles in Spencer, WV, had gotten his ear. The Senator was concerned that “Chrysler is eliminating 40 percent of its dealerships in my state, and I have heard that GM will eliminate more than 30 percent….. My concern runs deep when it comes to the economic viability of Main Street, West Virginia – I will never stop fighting to see that hard working families get a fair shake.” The concern he expressed was bipartisan and shared by every member of the committee.
Several leading Republicans on the committee had opposed “bailing out” the auto industry when it was just some far away corporations based in Detroit. They relished the demise of the United Auto Workers union, and were willing to pay the price of national deindustrialization to weaken what they saw purely as a partisan political opponent. Suddenly, it was brought to their attention that people in their own states, well-to-do business leaders who make campaign contributions and support a wide variety of local activities, from Little League to the United Way, were going to he hurt by the downsizing of the auto industry. They joined the Democrats in calling for protection for their local constituents. Perhaps the dealerships should not be closed. Or if GM and Chrysler did need to consolidate dealerships, they needed to buy up the dealer’s inventories and tools. Maybe they should even compensate the dealers for their land and buildings – levels of support the GOP Senators had not advocated for factory workers in the distant auto plants that were closing.
Sen. Kay Bailey Hutchison (R-TX), the Ranking Member, said, “40,000 people from Chrysler are losing their jobs and General Motors is yet to come. I think it is Congress’ responsibility to look at the whole picture of this economic impact.” Here are the real costs to society of letting a major economic sector be ravaged by foreign competition. It is not just blue collar workers who suffer, which is bad enough, but entrepreneurs, managers, technicians, engineers and all the rest who are tied to the success of major enterprises. Entire communities are harmed when a principle source of income is taken away. The nation as a whole could not offset the lose of such a large sector, one that sold some 10 million vehicles in 2006 (before the recession).
Parts of the Midwest already look like how James Boswell described The Netherlands in 1764. “Most of their principal towns are sadly decayed....Utrecht is remarkably ruined." The cause then was competition from England and France, nations not afraid to use protectionism and subsidies to win the economic contest. The Dutch, once the wealthiest people in Europe, had clung to “free trade” and were driven from the field when more ambitious rivals came on the scene. Central authority in The Netherlands was so weak “they were not a nation,” according to BostonUniversity professor Liah Greenfield. In her history The Spirit of Capitalism, she argues, “The sustained growth characteristic of a modern economy is not self-sustained; it is stimulated and sustained by nationalism,” a spirit more in evidence overseas today than here at home.
Only once during the hearing was the problem of foreign competition directly mentioned. Fritz Henderson, CEO of GM, told the committee, “Over the last 20 years, we have seen particularly dramatic changes and pressures that have come from international trade, volatile energy markets, and increased competition in the U.S. market. Foreign manufacturers who entered this market beginning in the ‘70s had the advantage of establishing their dealer networks in line with modern demographics. Today, more people live in the suburbs of major metropolitan areas, versus rural areas or small towns.”
Several points can be drawn from Henderson’s statement beyond the fact that allowing foreign imports to flood the U.S. market was a strategic blunder. How this economic invasion took place is important at an operational level. Many of the foreign dealerships were set up by existing American dealerships looking to make money for themselves without regard to the impact on the larger economy. Take John P. McEleney, Chairman of the National Automobile Dealers Association, who testified at the hearing. He acknowledged during questioning that he sold not only GM brands, but also Toyota and Hyundai in his Iowa showrooms. He is, thus, part of the problem.
One reason the U.S. runs a large trade deficit in autos is because Detroit cannot penetrate the Japanese and South Korean markets. Virtually no Japanese or Korean businessmen will risk opening an American import car dealership in their country. Anyone who would do such a thing would be considered a traitor in his community and would come under government investigation. Every tax law and regulation would be rigorously applied to punish someone who sided with foreign interests over his countrymen. No such stigma has been attached to Americans who deal in foreign cars, helping to keep factories open overseas rather than here at home. The Big 3 should have been allowed (and encouraged) to forbid their dealers from every stocking imports.
GM and Chrysler want to cut out small, unprofitable dealers. But as Russell Whatley, a Chrysler-Dodge-Jeep dealer in Mineral Wells, TX pointed out, “over 200 towns in Texas that have franchised dealerships have only Chrysler, Ford, or GM stores – that is over 2/3rds of our Texas towns with dealerships.” This gives Detroit a local monopoly that should be defended. As Henderson said, “We know that our strong presence in rural areas, small towns and “hub” towns gives us a leg up versus the competition, which we intend to maintain. When these dealers perform to our standards, they are a huge asset.”
Chrysler came under the most fire because it wants terminated dealers to wind up their affairs in three weeks. GM is giving their dropped dealers until October, 2010 – and a lot can happen by then. What was driving Chrysler was the June 10th deadline for its merger with Italian automaker Fiat.
This raises the question; if the purpose of government intervention and subsidy is to preserve the American industrial base, why are foreign deals part of the mix? The answer is that even though Washington is now the majority shareholder in GM and has given both firms billions, they have not truly intervened in corporate decision-making. They wanted the firms to find their own path to “competitiveness” and “profitability” as if this was still a private matter. President Barack Obama’s Auto Task Force pushed the industry to downsize and accept lost markets rather than take them back. Without better guidance, the corporations made choices counter to the aims of public policy.
GM plans to start importing cars made in their joint-venture plants in China which have cheaper costs. Chrysler will become a conduit for Fiats built in Europe, especially if they count as fuel efficient vehicles in calculating CAFÉ compliance. GM’s sale of the Hummer brand to China’s Sichuan Tengzhong Heavy Industrial Machinery Co. will undoubtedly lead to the manufacturing of Hummers in China and the phase out of American production. The Hummer dealership network will likely become a conduit for a flood of Chinese imports, further worsening the trade deficit.
The strategic American auto industry, along with the rest of manufacturing, cannot be kept viable until the threat from foreign rivals is faced down. This is not an exercise in freshman economic theory, but a central part of the eternal struggle for wealth and power in a dangerous, cutthroat world. Government intervention to protect the economic strength of the nation is not just legitimate, it is a duty. But any intervention must be implemented to fulfill the objectives that called it forth. It is not clear this is what is being done at the moment.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues.
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