Why General Motors and Ford Should Not Be Allowed to Fail
By Roger Simmermaker
September 7, 2008
I've been asked to do many interviews recently on Fox News when automotive issues top the current events for the day and a guest is needed to defend the American automobile industry. But my most recent interview on August 1, 2008, had me defending General Motors against the misguided opinions of an economist that was calling for the outright failure and bankruptcy of GM while claiming such a national calamity would actually be in the best interest of America.
Here's why GM and Ford in particular deserve the support of the American car-buying public, and why the failure of either one or both would cause severe damage to our economy.
Reason #1: You simply cannot take billions of dollars out of the U.S. economy without there being a negative fallout that will affect every American. General Motors and Ford top the list in terms of spending on research & development in America, spending over $12 billion annually. In third place is Microsoft. Last year, GM spent $4.75 billion supporting their retirees and $2.1 billion in advertising (fourth highest in the U.S.)
Gannett Co., publisher of the USA Today and other major newspapers, just announced on August 14, 2008, it was eliminating 1,000 jobs, partly due to falling ad revenue, reinforcing the notion that if the revenue pockets at GM dry up, so do other pockets of the economy.
Reason #2: GM and Ford combined have nearly 100 major plants in the United States. Toyota, Honda and Nissan each have eight. Ford and GM both get at least 80 percent of their parts from American factories, while Toyota, Honda, and Nissan get only 45-55 percent of their parts from here. German-owned Volkswagen, which gets only three percent of their parts from America, just agreed to build their first U.S. plant only after getting a record-setting $500 million in tax giveaways, courtesy of your tax dollars, to employ 2,000 people.
Tennessee already enticed Nissan with a tax-incentive package in 2005 to move their North American headquarters there from Los Angeles, but state officials wouldn't specify how much tax breaks would cost. And what is Nissan doing now? As of July 31, 2008, per the Wall Street Journal, they're cutting 1,200 jobs through worker buyout offers, after cutting 300 factory jobs in 2007. Tennessee shouldn't put a lot of faith in keeping promised jobs at their new VW plant, either. In 1989, Volkswagen shuttered its plant in Pennsylvania and has imported 100 percent of its vehicles ever since.
Maybe all these tax-giveaways to foreign companies are why the Government Accountability Office recently found 72 percent of foreign-owned corporations operating in the U.S. paid no taxes for at least one year from 1988 to 2005. According to the IRS, American-owned companies pay nearly twice as many taxes as foreign-owned companies.
Tennessee's tax giveaway amounts to $250,000 per job and is a huge sum of tax dollars that could have gone to shore up the 25 percent of America's bridges that are labeled either structurally deficient or functionally obsolete. And speaking of taxes, GM and Ford have paid more of them to the U.S. Treasury for America's benefit than any foreign company ever dreamed of paying. Few people realize that companies like GM and Ford created the market that foreign automakers are infiltrating now. Had it not been for the better-than-average wages paid by American automakers, not to mention the millions of people that receive pension benefits and health care courtesy of Ford and GM, there would be no market for foreign automakers to tap into.
Reason #3: Many economists believe that a GM bankruptcy would roil the markets, which is especially unattractive as they struggle to stay out of bear territory. According to a July 2, 2008, Wall Street Journal article, GM has already saved the Dow Jones from a bear market at least once already this year. And according to a May 9, 2005, Business Week article, the 54-day strike at GM in 1998 cut the economic growth of the entire country by a full percentage point for that quarter. The article continues by saying that it is "undeniable" that what is bad for GM is bad for America, citing that GM either directly or indirectly supports the employment of 900,000 Americans.
The anti-American car crowd continually points to Toyota as the shining example of what a car company should be like. They also seem to believe that GM apparently made a "mistake" over the last two decades by simply responding to supply and demand and focusing on trucks and SUVs. America fell in love with the SUV back in the 1980s when Ford practically invented it with its Explorer. From 1987 to 2007, the average vehicle gained almost 900 pounds, almost doubled in horsepower and was 8 percent less fuel efficient. Americans drove over twice as many miles in 2006 compared to 1975. According to a Business Week survey, we bought 10 percent more gasoline in the first six months of 2006 than the first six months of 2000 even though gas prices rose 75 percent in that period.
But it wasn't just American companies making automobiles that were growing bigger and guzzling more gas. The 2006 Lexus 470 SUV, for example, boasted of an increase of 40 horsepower and 12 ft. lbs of torque compared to the 2005 model. Toyota's Tundra and Sequoia, Nissan's Titan and Armada, and Honda's Ridgeline make it impossible to deny the entry of foreign automakers into the profitable big truck and SUV market. American trucks and SUVs usually get the better gas mileage, too. Chevy's Tahoe gets better mileage than Toyota's Sequoia, and Chevy's Silverado and Ford's Ranger get the best mileage in their segments.
Should GM and Ford have turned their back on consumer demand considering it resulted in higher profits? Of course not. General Motors has the number one market share in the world and in the U.S. precisely because they've been making what consumers want to buy. How else does one garner the number one market share? And they have the second-highest market share (behind Volkswagen) in China (the world's second-largest car market behind the U.S.) because China prefers big luxury cars and SUVs. In China, where hybrids like the Prius don't sell well, the top selling automobile is a Buick minivan.
But General Motors doesn't just produce in China to sell to that market. According to a June 18, 2008, Wall Street Journal article, GM will export $1 billion worth of vehicles, machinery, component kits, and other equipment to China between now and 2010.
Everything that American automakers are dealing with is also being dealt with in the foreign car company camps in one degree or another, so it's unfair to single out GM or Ford for their struggles in adapting to fast-moving marketplace changes. Toyota made an ill-timed push into the big truck and SUV market earlier in this decade considering the recent onset of high gas prices, and now has too much manufacturing capacity in North America. Beginning in 2009, Toyota will no longer make the Sequoia SUV and Tundra in Princeton, Indiana, but will instead consolidate production to the San Antonio, Texas plant. According to a July 28, 2008, Wall Street Journal article, the Big Three and Toyota all placed bets on trucks. And yes, the domestic sales for GM and Ford are falling. But domestic sales for Japanese automakers hit a 25-year low in June, according to Business Week.
All automakers are idling some plants and ramping up or adding shift to others. GM plans to close two American truck/SUV plants, but recently announced a $350 million investment in Lordstown, Ohio, for its next generation of small cars. The Chevrolet Volt will also be made in the U.S. for the 2010 model year. On July 25, 2008, GM dedicated a new state-of-the-art 450,000 square foot, $463 million Powertrain Engineering Development Center in Pontiac, Michigan that will employ 1,200 workers.
A Wall Street Journal article on August 22, 2008, pointed out GM currently generates little, if any, profit selling passenger cars in North America, but they continued to stay here to employ and support Americans anyway. Yet Japanese companies are cutting production here and ramping up back home. According to Honda president Takeo Fukai, "The time has come for our Japan operations to once again take the initiative."
Business Week detailed in its June 9, 2008, issue that all the major Japanese automakers are either investing in existing plants at home or building brand new ones. Honda is pouring $1.5 billion worth of investment into a plant near Tokyo. Toyota is building a new car plant near Tokyo. Nissan is expanding another Japanese factory by 22 percent.
GM alone has 17 models that get 30 mpg or more, and they're considering bringing the 40 mpg Chevrolet Beat mini car – a vehicle now sold overseas – to the U.S. Ford spokesman Jay Ward told the Wall Street Journal on July 5, 2008, that Ford has "small cars on the shelf all around the world." Bill Ford recently told Business Week that his company is bringing over successful, profitable, award-winning, fuel efficient and well-appointed smaller cars from Europe, mentioning that they don't have to "create these products from scratch."
What about quality? The Chevrolet Malibu won the 2008 J.D. Power Initial Quality Award, the Mercury Milan won it for 2007 and the Buick Century won the 2008 Vehicle Dependability Study. Ford's quality ratings now approach those of Toyota, saving Ford $1 billion in warranty costs in 2007. And according to the Consumer Reports' 2007 Annual Car Reliability Survey, 93 percent of Ford, Lincoln, and Mercury models scored average or better, while the redesigned Camry and Tundra both scored below average.
At Edmunds.com, it's clear that American consumers are finally taking notice of American quality where a list of consumers' top rated picks for 2008 reveals the Saturn Astra, Buick Enclave, Lincoln MKX, and Chevrolet Avalanche all won first place in their respective classes. The top consumer hybrid pick according to Edmunds.com is the Mercury Mariner SUV, not the Toyota Prius. The sales success, however, of Toyota's Prius may be at least partly due to their patent infringement on drive trains used on hybrid electric vehicles. The U.S. Supreme Court upheld a $4.3 million ruling against Toyota back in 2005 for using patented designs equivalent to those of Paice LLC, of Bonita Springs, Florida.
But I don't have to look at quality awards to know American cars are deserving of American consumer dollars. My 1996 Michigan-made Lincoln Town Car has over 228,000 miles and shows no signs of letting up, averaging 23 mpg. Not bad for a big American "gas-guzzler."
If you're looking for the least expensive car to own, look no further than the Chevy Aveo. According to Edmunds.com's "true cost to own" survey which includes considerations like vehicle cost, depreciation, fuel cost, insurance premiums, and repairs, Chevrolet's Aveo tops the list.
To ensure a level playing field and fair competition among the foreign competition, the U.S. Congress should release the already- approved funding for the research of plug-in hybrid vehicle technology. Governments of countries like Japan, China, and India have already committed significant funding for their auto industries.
GM and Ford don't deserve to go bankrupt any more than any other automaker since all of them are taking their hits because of higher gas prices. GM suffered a bigger decline in sales than Toyota in July of this year but Toyota suffered a bigger decline in sales than GM did in June.
Some economists, like the one I debated on Fox News on August 1, 2008, try to make the case that GM in particular deserves to go bankrupt because they supposedly relied on profitable trucks and SUVs for too long. But when I asked the economist if he was out beating the drums for a Nissan bankruptcy in the 1990s when that company almost went bankrupt, he was mysteriously silent.
If any company deserves to go bankrupt, why shouldn't Nissan instead of GM? According to the Wall Street Journal on March 24, 2008, Nissan's resurgence from near bankruptcy in the 1990s relied on steady growth in markets like the U.S., which is now in decline. The point is no company can place bets that pan out in their favor every time. I've yet to meet a poker player who has won every hand, and I doubt I ever will.
Roger Simmermaker is the author of How Americans Can Buy American: The Power of Consumer Patriotism and writes "Buy American Mention of the Week" articles for WorldNetDaily.com and his website www.howtobuyamerican.com
. Roger is a member of the Machinists Union and National Writers Union, has been a frequent guest on Fox News, CNN, and MSNBC, and has been quoted in the USA Today, Wall Street Journal and Business Week among many other publications.