x Abu Dhabi, UAETuesday 25 July 2017

Leading US carmakers run out of gas

Having bet their futures on abundant cheap oil and spendthrift consumers, the big three may be doomed.

President Bush decided not to bail out the car makers, but president-elect Barack Obama is likely to offer funds.
President Bush decided not to bail out the car makers, but president-elect Barack Obama is likely to offer funds.

It's the end of the line for America's big car makers. Having bet their futures on abundant cheap oil and spendthrift consumers, General Motors, Ford and Chrysler built massive vehicles, each more wasteful and downright ugly than the previous. Now they are on the verge of collapse with no good case to make for a federal bailout. Outmanoeuvred by Japanese competitors in their home market, burned by their own resistance to tougher fuel efficiency standards and saddled with overcapacity created by easy credit that made it far too easy to buy a new car, the "big three" have no cards left to play. All they have are Democrats.

Barack Obama has pledged to approve a US$25 billion (Dh91.83bn) plan to rescue the "big three" after he is sworn in as president in two months. After all, this is what Democrats do. There are union contracts at stake and Mr Obama owes much to organised labour for his stunning electoral victory. Besides, there are sound economic reasons to keep Detroit alive. Abandoning it, as President George W Bush and his Republican faithful in Congress have vowed to do, could cost between three million and five million jobs along the car industry's vast supply chain.

But enough is enough. The only thing worse than letting the "big three" go is keeping them afloat. Since the 1970s, the US car industry has been a black hole of financial and natural resources. For years, Detroit spurned investment in energy-efficient vehicles like Toyota's wildly popular Prius while lobbying Congress to reject bills that would force them to build more environmentally friendly cars. One reason America's titanic sports utility vehicles are so affordable is because their chassis are taxed at the same rate as ordinary passenger vehicles, thanks to a pliant legislature.

To make money, they increased production capacity and offered cheap financing that encouraged motorists to buy new cars with far greater frequency than their European and Japanese counterparts. They complained that the cost of employee benefits, particularly health care, was eroding revenue but did nothing to support proposals for single-payer medical insurance. They are run by corporate heavyweights such as Robert Nardelli, the Chrysler chief executive who drove Home Depot into the ground before he was finally expelled - with a $210 million severance package - and Bob Lutz, the GM vice chairman who once dismissed global warming to a Texas magazine as a scatology.

Meanwhile, Detroit rivals such as Honda and Toyota, although faced with the same overheads and challenging market conditions, are thriving by turning out top-quality, economical cars in the non-union south. By pandering to Washington for subsidies and entitlements, Detroit has sinned against the free market. And it is the free market, or what's left of it, that should decide its fate. A Chapter 11 bankruptcy filing by a single US car company could cost $176bn in lost employee income and tax revenue, according to the Center of Automotive Research. That's a stiff toll, but the moral and environmental costs of rewarding decades of arrogance and ineptitude by the "big three" is even greater.

The same industry that produced the Falcon, Ford's elegantly understated and fuel-efficient alternative to the tail-finned monsters of the 1950s, is now known for the Hummer, an iconic blot on America's image, perfectly suited to Bush-era gluttony. A federal bailout would only perpetuate a host of prodigals that have conclusively failed to distinguish themselves either at home or abroad. Any conditions that would be imposed as the price of rescue would be drafted by legislators after all, and their loyalties are well known.

Somehow Mr Bush, in the quicksand of his mind, understands this. History may note that after eight years of his disastrous presidency, his final decision - to dump Detroit - was a triumph of principle over politics. One can forgive the administration for its capricious, scattershot attempts to keep the US economy from going under - bailing out the insurance giant AIG, for example, but not Lehman Brothers or the electronics retailer Circuit City - but a rescue for Detroit would violate what was once a revered tenant of Republicanism.

It was Nicholas Brady, the Treasury secretary under George Bush senior, who summed up the party's free-market credo: "If our guys can't take it," he said when pressured to adopt mercantilist import duties, "let 'em fail." Mr Bush's decision to resist the "big three's" entreaties is the right one, just as Mr Obama's commitment to propping them up is a reflexively Democratic mistake. For a president-elect who rode to victory on the welcome mantra of change, there is little to inspire in this, one of his first major policy pronouncements.

sglain@thenational.ae