Wednesday, December 3, 2008

Whither an Automotive Industry

I have long argued, partly in jest, mostly serious, that America should just get out of the car industry altogether and focus our capital on things we are good at, such as the service sector, software, or torts. The cost issue was secondary, I would say, if the cars themselves aren't competitive. (Does everyone at GM have huge fingers? Why are the interiors filled with over-sized plastic buttons?)

My bafflement continues with this latest bailout—unlike the financial package, I am against bailing out the US auto industry—and these comments from Ford's chief on the necessity of action:

Ford said in its plan that it could survive through 2009 with its current cash levels and by tapping its credit line with private banks, and that it could return to profitability by 2011. Even though it is better prepared for the downturn, Ford said it wanted $9 billion in loans to draw upon if necessary.

Ford’s chief executive, Alan R. Mulally, said the prospect of a failure of G.M. would cascade through the entire domestic auto industry and put millions of jobs at risk.

"We are very, very concerned, and that’s why we went with G.M. and Chrysler to Congress even though we think we have sufficient liquidity," he said in an interview.

Mulally is saying Ford is financially secure and does not need the bailout to meet payments, but he is worried about the second stage effects from a GM or Chrysler failure.

That seems backwards to me. Ford—and every other car manufacturer—would assuredly benefit from two of its competitors going under. There would be a small drop in demand as supply falls and prices rises, but that drop would be significantly smaller than the decrease in supply. Moreover, the substitution from GM to other manufacturers would overly favor Ford, in contrast to Mulally's statements, as "buy American" types swap one Detroit icon for another. The converse has the government funding a broken GM, propping up supply to the detriment of Ford. I don't get it.

I suppose Mulally could be bluffing, hoping to look good in the eyes of Wall Street and Ford's creditors but still get government help—to have his cake and eat it too. But somehow I doubt his posturing is worth the risk.