Did the Auto Industry Learn Anything From the Bailout?
A year ago last week, the U.S. Treasury sold its last remaining shares in General Motors, officially ending the government's bailout of the auto industry. To hear government officials and industry analysts tell it, it was the happy conclusion to a broad intervention that fundamentally transformed the industry. A year later, however, it's clear that the billions spent rescuing GM and Chrysler have done little to change the fundamental dynamics that have caused the industry grief for decades. More important, it has become obvious that the government's involvement with the auto industry did not end with last year's stock sale.
On the most profound issue facing GM and Chrysler before the bailout -- their inability to improve their standing with American consumers -- the automakers still face serious challenges. Though sales have improved, both companies have failed to capitalize on key product initiatives that might have made them more viable: Long dependent on SUVs and trucks, both firms have sought to diversify their portfolios with midsize sedans like the Toyota Camry and Honda Accord, but the new Chevrolet Malibu and Chrysler 200 have failed to make meaningful gains in either market share or pricing power.
This inability to woo customers away from Japanese and Korean competitors has only been exacerbated by the safety scandals that have surfaced at GM. Within a week of the Treasury's exit, GM's executives were forced to tackle serious safety issues with its vehicles, bringing GM's new chief executive officer, Mary Barra, to Capitol Hill to answer for her company's shocking lapses. Several hearings later, it's still not clear how GM allowed a deadly ignition switch defect to linger for a decade, resulting in the deaths of at least 42 people. Despite the billions spent on rescuing GM, America's largest automaker has not been able to win back the public's trust, cutting its potential recovery off at the knees.
Meanwhile, the area in which GM and Chrysler have been successful -- selling pickups and SUVs -- flies in the face of the bailout's goal of keeping the government deeply involved in the auto industry. GM and Chrysler have benefited immensely from the recovery in truck and SUV sales since 2009, despite President Barack Obama's vow that his "one goal" for the Detroit automakers was that they "lead the world in building the next generation of clean cars." With both GM's Chevrolet Volt and Fiat-Chrysler's government-mandated 1.4-liter turbocharged engine failing in the marketplace, the two automakers find themselves falling further behind in a technological arms race that has as much to do with innovation as it does saving gas money or the environment. With CAFE regulations ramping up in the next few years, this failure will keep GM and Chrysler at odds with government regulators.
And contrary to mounting public perception, the recent SUV and truck boom has little to do with falling gas prices but has instead been fueled by the massive expansion of auto credit. Here, too, GM and Chrysler find themselves on track for more conflict with the government that so recently rescued them. Both firms have seen their biggest lenders (GM Financial and Banco Santander, respectively) subpoenaed by the Department of Justice in the last year as part of an investigation into the lending and securitization of auto credit. There is already evidence that lenders are slowing their auto-credit expansions as loan terms and defaults head upward. As the department's investigation rolls on, expect more concerns to surface about the subprime lending boom that has kept GM and Chrysler in the game over the last five years.
Finally, the fundamental trends in auto manufacturing and employment have hardly been reversed by the auto bailout. The U.S. industry continues to move south, toward right-to-work states and away from United Auto Workers union strongholds. China and Mexico, which contributed nothing to GM's rescue, have enjoyed massive investments from GM in new production plants, while governments that have long supported GM, such as Australia and Canada, have watched their production jobs dwindle. If GM abandons its plant in Oshawa, Ontario -- a move the firm will almost certainly take when its bailout-era "Vitality Commitment" to Canada expires in 2016 -- it will become clear to governments everywhere that even extraordinary public support won't stop GM from moving toward ever-lower-cost production sites. With the UAW gearing up for upcoming negotiations, however, it's obvious that many inside the traditional Detroit power structures don't understand how little has actually changed since the bailout.
The lessons of the last year will doubtless cheer free-market thinkers, confirming that bailouts do little to improve the macro trends and customer-relations dynamics that determine success and failure. They will also take hope in the fact that the foreign automakers that have caused Detroit such trouble are producing more cars than ever in the U.S. But for those who hope to someday see the U.S. auto industry compete with the best in the world and remain viable over the long term, the last 12 months have been deeply disturbing. Credit expansion and cheap gas cannot last forever, and as these tides go out, the U.S. auto industry will reveal itself to be just as deeply troubled as before.
As regulators and investigators continue to look into GM's safety and subprime financing crises, they will either risk further eroding the public's trust in the bailed-out automakers or try to soft-pedal problems that could evolve into the next crisis. Either way, it's becoming increasingly apparent that the government's entanglement in the Detroit briar patch is far from over.
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