Posted by: dstieglitz | September 29, 2010

WHAT HAPPENED TO GM IS HAPPENING TO AMERICA

     Fifty years ago, the Chairman of General Motors (GM) said: “What’s good for GM is good for America!” Today, it’s more accurate to say: “What’s happened to GM is happening to America.” Once a shining symbol of U.S. prosperity, GM was driven into bankruptcy when the Great Recession slowed the demand for new cars and GM ran out of cash. The Federal government stepped in with a $50 billion bailout in exchange for 61% ownership. Bankruptcy seems to have helped GM, but will it help America?

      The bailout of GM, Chrysler, and other Fortune-100 companies sparked fears about the end of capitalism. Historically, government-owned companies are managed to achieve political rather than business goals. Fortunately, even though the bailout favored the United Auto Workers, a key Obama constituent, GM was pretty much allowed to run itself. Just 16 months later GM is producing modest profits and adding jobs. When GM filed with the SEC for an initial public offering (IPO), President Obama declared victory in a campaign-style speech at a Detroit auto plant. The IPO will allow GM to payback $20 billion of the bailout and escape the stigma of “Government Motors.” But high-fives seem premature when annual U.S. auto sales are 11 million vehicles – way below the 17.4 million peak in 2000 that may never be reached again. 

     President Obama’ ability to fulfill his pledge to put a million electric cars on the road by 2015 depends on the willingness of automakers to produce expensive electric cars that consumers may not buy. Nissan’s all-electric Leaf will go on sale in December at a sticker price of $32,500; and early next year GM will release the hybrid Chevy Volt at nearly $40,000. Even after a $7500 tax credit, both cars will be way more expensive than equivalent gas-fueled models like the Ford Focus or Honda Civic which cost around $20,000. Operating costs of the Leaf will be half of a gas-fueled car, but consumers who buy a Leaf must also fork-over $2000 for a home-docking station that recharges an empty car in eight hours. For the next decade, the electric car market will resemble the auto industry in the days of Henry Ford’s Model T with dozens of new companies (e.g., Tesla Motors) competing with auto industry giants to sell electric cars. 

     In addition to decades of greedy unions, weak-kneed management, and stubborn resistance to change, GM must overcome the same social challenges the economy faces to regain its position among the elite. Those challenges include: globalization, global warming, urbanization, aging infrastructure, and an aging population. Like members of the auto unions, U.S. citizens expect more benefits and programs than the tax base can sustain, and Congress refuses to change even when the devastating effects of partisan politics are obvious to everyone. Let’s take a look at the social challenges that both GM and the U.S. economy are facing. 

Globalization.  The demand for goods and services is leveling off in the U.S. and other rich countries, but growing in emerging economies. Once people have enough to eat and a tolerable place to live, they want a car. So the market for cars in the rich world is flat, while car ownership elsewhere is exploding. Fortunately, GM has a presence in China and Brazil where the demand is growing. International alliances are another phenomena that permeates the auto industry. Fiat’s management role in Chrysler is one example. But did you realize that Renault owns 40% of Nissan, which in turn owns 15% of Renault; VW has a 20% stake in Suzuki which is strong in Indian markets; and Peugeot and Mitsubishi are discussing a partnership? Global alliances are a necessity in today’s market, and the trend of moving manufacturing to low labor cost areas is irreversible. Instead of fighting off-shoring with onerous taxes, Congress and the President must implement policies that encourage trade in markets where the U.S. has a competitive advantage in terms of skills and automated tools.  

Global Warming.  The world’s seven billion people currently drive 800 million cars. Explosive growth in Brazil, Russia, India and China will easily push that number past a billion in this decade; and China will pass the U.S. as the world’s largest car market. Expanded use of gas-fueled cars clearly is unsustainable given the energy inefficiency, environmental consequences, unreliable sources of oil, and urban pollution they cause. Despite rhetoric about renewable energy, the blunt truth is that without mass-market electric cars we won’t save a drop of oil. Today’s cars exhaust 10% of the greenhouse gases that contribute to global warming. So our government must encourage, even compel, the use of electric cars by shifting the cost of ownership to favor low-emission cars. A carbon tax would be ideal since it makes owning a gas-guzzler very expensive. Other taxes could work too. For example, gas taxes are higher in Europe compared to the U.S. where they aren’t even sufficient to maintain the roads. In response to lobbying by oil companies and squeals from taxpayer groups, low gas taxes in the U.S. are, in effect, subsidizing pollution and global warming instead of reversing them. 

Urbanization. Today, most cars are driven by people who live in or near cities. In 2007 the UN reported that, for the first time in human history, more people lived in cities than in rural areas, and mass migration of rural poor to cities to find jobs will continue. In 1950, New York was the only metropolitan area with a population over 10 million. Today, there are 25 such mega-cities, most of them in Asia and South America. Electric cars make sense in cities where speeds are low, distances are short, and charging stations could be plentiful. A new business is springing up in cities: car-sharing by companies like Zip-Car. Car-sharing companies promote the “green” aspects of their business, and electric cars enhance that image. So car-sharing companies should become a reliable source of demand for electric cars just like traditional rental car companies were for gas-powered cars. Federal and local policies that promote car-sharing and use of electric cars, especially in cities, would accelerate this trend. 

Aging Infrastructure.  In addition to low operating costs, the ability to conveniently recharge electric cars will influence consumer acceptance. Obama’s stimulus included billions for electric car research, but virtually nothing to build an infrastructure to support the cars. It’s like buying tropical fish without a tank for them to swim in. Without ubiquitous charging stations, electric cars are fish out of water. Furthermore, billions are being invested in alternative energy sources without an adequate power grid to link them together – more tropical fish with no tank! Studies show the U.S. has enough generating capacity to replace most gas-powered cars with electric cars – but only if electricity to recharge the cars is managed carefully. The electrical grids in use today were built nearly a century ago as one-way conduits from power plants to consumers. That approach was sufficient for decades, but new energy sources (e.g., wind and solar power) and new demands (e.g., electric cars and net-zero buildings) make a one-way grid inadequate. The Federal government must incentivize industry to built charging stations and, for the most part, finance construction of smart power grids. 

An Aging Population. By 2020, 40% of U.S. new car buyers will be over 60 compared with less than 30% today. My profile is typical of an “affluent-old” car buyer: I like premium brands but prefer smaller models. Being semi-retired, I don’t need much carrying space and I buy cars with my own money, rather than with a company’s money. In addition, I drive half the miles I did when I worked, so my cars last longer. Taken together, the profile of affluent-old buyers and the improved durability of today’s cars will cause the U.S. demand for cars to fall as the population ages. From the government’s perspective, of course, an aging population also increases the demand for Social Security and Medicare. One problem the Obama-sponsored bankruptcy didn’t solve was the shaky condition of GM’s pension plans. GM’s defined-benefit plans (Social Security is defined-benefit plan too!) are under-funded by nearly $30 billion. Under the bankruptcy agreement, GM can delay payments to the pension plans for three years – but those plans are a ticking time-bomb. If GM earns enough profit, much more than they currently do, the bomb won’t explode. But in a worst-case scenario GM would declare a second bankruptcy, and the Pension Benefits Guarantee Corporation (PBGC) would be forced to rescue GM’s pension plans. That would necessitate another Congressional bailout since the PBGC doesn’t have the wherewithal to fund such a huge loss. At some point, GM must put more money into the plans or renegotiate the defined benefits – just like the U.S. government must do to survive the Social Security crisis. 

     Even with effective government policies and incentives, the transition to electric cars will be difficult. 20 years from now when the transition is history, the U.S. economy will enjoy a huge stimulus like the peace bonus at the end of the Cold War because consumers will save about half the money they spend today on gas for their cars. GM’s bankruptcy will be seen as a turning point in the auto industry, in labor-management relations, and in U.S. manufacturing. Replacing the 250 million automobiles in the U.S. with electric cars will produce a manufacturing boom that could halt the erosion of our manufacturing base. Only senior citizens will remember pumping gas and smelling gasoline on their hands. 20-somethings will consider gas-powered vehicles archaic, much like today’s youngsters wonder how we existed without the Internet. Politicians will blame others for making the transition to electric cars take so long when oil was such an environmental and economic disaster. Instead of using bailouts to save jobs, if Washington passes taxes and incentives to encourage the transition, the auto companies change, and you and I realize we must pay for a clean environment in part by spending more to buy an electric car, electric cars could be a common sight by 2020.

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