When the going gets tough, Big Auto goes to Washington, D.C.
Just ask Rick Wagoner, CEO of General Motors Corp., and Alan Mulally, Ford’s CEO, who addressed senators yesterday. The CEOs want a government loan of $25 billion for their companies to build fuel-efficient cars as energy prices spike and the U.S. economy slows.
Apparently, private lenders coping with the collapse of credit and housing markets are not up for extending such funding to Ford and GM. Both automakers have been losing profits and market share to foreign firms such as Toyota recently.
The U.S. taxpayer loan to GM and Ford would fund investment in new machinery, and new research and development. What could be wrong with that outcome? In brief, private lenders see new production lines for GM and Ford to make cars with better fuel efficiency as fraught with uncertainty.
Crucially in the U.S. auto industry, creditors and debtors have imperfect information about the future. Who can say with much accuracy what will be the return on capital lent to invest in new car-making machinery?
If the carmakers’ revenues exceed their expenses, the investment would pay off. If that future scenario reverses course, there would be a loss instead of a gain for debtors and creditors.
Now consider this. What would the carmakers do with their work forces using the new machines to make autos with better and cleaner fuel efficiency? Certainly, there would be job and wage cuts. Ripple effects from such labor force actions would help to weaken buyer demand for the new car lines. Fewer sales equal less revenue.
Moreover, what would Ford and GM do with their new machinery now operating at a reduced capacity? The companies would be hard-pressed to sell these machines to raise revenue to repay the private loans.
Would-be buyers of the machinery would drive a hard bargain. The carmakers would be fortunate to get but a small fraction of their purchase costs.
Unforeseen events can and do happen in the auto industry. Prices for any number of commodities such as oil, rubber and steel to produce and run cars will rise and fall. Foreign competition will shape demand and supply for auto fuel-efficiency in various ways. Nobody knows the future well enough to predict accurately such business outcomes.
Well, one thing is clear. Imperfect information about future business conditions for Ford and GM is part of the equation regarding their flight from private lenders to the U.S. taxpayer for new capital investment.
That wouldn’t be a government bailout, say the CEOs of Ford and GM. The government’s recent rescues of financial firms mired in the crash of credit and housing markets compel Democrats and Republicans to proceed with the appearance of caution in lending billions of taxpayer dollars to Big Auto. Call it the bipartisan consensus for U.S. carmakers.
SETH SANDRONSKY lives and writes in Sacramento. He can be reached at: email@example.com.