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Friday, Jun 9, 2023

Careening Auto Industry Doesn’t Need Rescuing

Anyone who keeps track of such things may have read a couple of weeks back that Toyota Motor reported a mere $5.5 billion in profits for the end of its fiscal year , a third less than projected at the start of the year.

The U.S. auto industry should be so lucky.

The Big Three, Chrysler, Ford Motor and General Motors, have been on the ropes for years , on a collision course with the fates, in large part due to costly labor contracts with their assembly workers.

The three have agreed over the years to those pay packages to keep the labor peace (at any cost), which put them into the position of not being able to compete with the likes of Toyota and other foreign competitors.

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Now, they’re paying the price, so to speak, of such costly overhead. With new car sales down 30 percent to 50 percent, the Big Three are hemorrhaging cash at alarming rates, and are on the brink of bankruptcy.

This is certainly not pleasant news, but certainly not surprising.

The industry used to account for about one in every seven jobs nationwide, including here in San Diego County. Think how pervasive it is; it includes not only dealers, but repair and parts businesses.

As a friend is fond of saying, “It’s huge.”

And the importance of those businesses to the tax structure at both the local and state levels is huge, too.

New and used car registrations account for a large chunk of state revenues, and new and used car sales account for another large chunk of sales taxes flowing to local cities and counties.

(One of Gov. Arnold Schwarzenegger’s proposals to offset a $24 billion deficit is to increase the car registration fee, another “huge” issue in the 2003 recall campaign of then-Gov. Gray Davis.)

Meanwhile, sentiment is building in Washington, D.C., to bail out carmakers, in large part because of the huge (there’s that word, again) number of jobs involved in this very important segment of the economy.

As an advocate of the free market system, we should let the fates have their way with the Big Three.

But I am not politically naive soon-to-be President Barack Obama (not to mention 535 House and 100 Senate members) fears that the auto industry, like the U.S. banking sector, is just too damn big to fail. And maybe he’s right.

Divided Loyalties

There was a time when Americans divided loyalties between Ford and GM. My dad, for example, was a Ford man. A couple of uncles were Chevy men; they wouldn’t consider anything else. Chrysler products (along with GM’s Buicks, Oldsmobiles and Pontiacs, not to mention Cadillacs) appealed to those willing to pay up for image.

The invasion of the Germans with the popular Volkswagen in the late ’50s and early ’60s, and later the Japanese in the late ’60s and beyond, changed all of that, especially as U.S. automakers couldn’t meet changes in the market during oil price surges in 1973 and 1979.

Ever since, it’s been a downhill ride without brakes, as Ford and GM, in particular, have gradually lost market share to Toyota, which is now about to become the world’s largest auto manufacturer.

I philosophically oppose a bailout. But I’m enough of a realist to know that I’m in the minority.

But let me offer a couple of thoughts, for what it’s worth.

Automakers should be allowed to file bankruptcy, if that’s what they must do. I don’t think Washington should step in and waste billions, tossing good dollars after bad.

To be honest, the industry as now constituted is not sustainable, especially given the rapid downsizing that’s needed so that supply meets dwindling demand.

If the Big Three do go bankrupt, carmakers could restructure labor pacts and write off unneeded plants, among other actions, to ensure survival.

Once they are restructured, then Washington can jump in, if needed. It will cost us taxpayers far less.

As I have noted before in my recent notebooks, we’ve become so averse to pain, especially economic pain, that in our efforts to avoid pain, we make it worse.

The government can’t squeeze out the risks of business cycles.

We have to retain the major elements of the free enterprise system, if we are to survive not only economically, but politically and socially.

Tom York is editor of the Business Journal.


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