The reasons for the collapse of the US car giants are both complex and numerous, says Michael Casey
THE TOP three car manufacturing giants in the US are in serious financial difficulties, despite some Federal assistance in the form of low-cost loans. The credit crunch is being widely blamed for a collapse in the demand for cars, but the issue is a little more complicated than that. It is widely rumoured that without a government bail-out, one of the three giants, possibly GM, could be bankrupt by Christmas.
Ford and Chrysler are also haemorrhaging cash and might not last very much beyond Christmas. All three companies have to finance wage-bills and overheads, and have to dip into scarce reserves to do so, since there is little fresh money from car sales coming in. There is a risk that up to three million workers could lose their jobs in the near future.
Some commentators have suggested that part of the problem is due to over-generous pension and health-care provisions for workers. How far this goes as an explanatory factor is unclear. But it is true that most operating costs have been drifting up for a number of years. In fact, some would argue that Detroit has been in secular decline for decades, barely able to compete with Japanese, German, Korean and French car manufacturers.
It is hard to avoid the impression that the management of the three US giants has been mediocre. There have been failed mergers, eg between Daimler and Chrysler. There has been relatively little focus on new design and ecologically-friendly cars. In this respect, Toyota has been streets ahead, and the hybrid, Prius, is a status symbol in the US. GM, in particular, has depended too much in recent years on the SUV market.
To some extent, car manufacturing could be regarded as "old industry" and not part of the information economy where America's real strength lies. Arguably, the difficulties in the automotive sector are part of the process of "creative destruction" which is the linchpin of long-term economic growth.
After all, cars replaced horses in the late 19th and early 20th centuries and caused much short-term distress to farmers and horse-breeders. But no one would argue that cars and trucks were not an essential component of economic development in the future. If resources had not been transferred into the "new" sector the growth process would have been undermined.
If the US no longer has a comparative advantage in car manufacturing then it makes economic sense to transfer resources into the information sectors where a comparative advantage demonstrably exists. This at any rate is what the capitalist model would dictate. Short-term pain would be more than compensated by long-term gain. In the short-term redundant workers could be retrained and up-skilled so that they could become part of the information economy.
This is not only the theory but it is also the received wisdom of all Western leaders (at least before the recent financial fiasco which could induce a major re-think). President Bush has not committed himself about bailing out the big three US car manufacturers, but President-Elect Barack Obama has come out (perhaps too hurriedly?) in favour of Federal support to the tune of some $50 billion (€39 billion) - more than one-third of Ireland's GNP.
He has also indicated that he would be prepared to put additional funding into helping the motor companies design "greener" cars. This is a clear example of the government straying into the territory of the private sector.
Whether it is right or wrong, if it happens it will alter forever the predominant economic philosophy of the US. It is one thing to bail out banks which have the power to cripple entire economies through a contagion effect; it is quite another to bail out private industries, however large.
How many other industries will queue up for hand-outs? How will President Obama improve the Federal Budget on this basis - and live up to his other promises including lower taxes? It is to be hoped that he hasn't set himself up for a fall.
Predictably, the UK has reacted vehemently against the Obama approach, seeing it as a form of protectionism which would be "a road to ruin". EU countries are prevented from directly bailing out lame-duck industries though some countries have lowered taxes on cars.
The UK has lost its own car industry, at least in terms of ownership. One is reminded of Aesop's fox who loses his tail and goes around telling all the other foxes it is a major improvement.
But if President Obama does as he says the playing field will become distinctly sloped in favour of the US - in the short term at least. And of course there could be various forms of retaliation from other countries and trading blocs. One could not rule out an adverse reaction by China which could do enormous damage to the US - and by extension the world economy - by investing its savings elsewhere.
It is to be hoped that a middle way can be found by the much vaunted private sector in the US, perhaps through a merger of the car manufacturers. Even if the US ended up with one mega car company the anti-trust agency could hardly complain.
There would still be plenty of competition coming from around the globe, and the playing field would remain level. America produces first-rate entrepreneurs for Mainstreet - if not Wall Street. This is an opportunity for them to prove themselves to the world without looking for hand-outs from government.
Michael Casey is a board member of the International Monetary Fund and is a former chief economist with the Central Bank