The coming auto bailout

2008-11-16

in Canada, Economics, Politics, Rants, The environment

North America’s auto manufacturers seem to be next on the list for a big government bailout. As with other bailouts of private sector firms, there are legitimate worries about the public at large bearing the cost of losses, while gains had accrued to private individuals. In the case of the auto industry, there is the further risk that a bailout will permit North American firms to continue with their existing mode of operations, which had clearly failed before the credit crunch made the situation acute.

That being said, a case can be made that a bailout is the least problematic option. It can also be pragmatically recognized that governments are likely to provide the cash, rather than allow one of more of the firms to fall into bankruptcy.

Perhaps the best way this situation can be turned somewhat positive is to mandate tougher efficiency standards for vehicles, as partial public recompense for the funds. The biggest gains can be made in improving the least fuel efficient vehicles. According to calculations posted on Gristmill, improving the fuel efficiency of dire vehicles like the Hummer H3 (15 mpg), Yukon Denali (14 mpg), and Chevy Trailblazer (13 mpg) is a more promising initial strategy than trying to push the efficiency of cars like Honda Civics (29 mpg) upward.

This strategy is likely to be politically problematic. For one thing, it impinges on the flawed notion that people have a right to drive whatever they want and can afford. For another, the production of highly inefficient, high-margin vehicles is concentrated in North America. Nonetheless, if this is to be a one-off rehabilitation, rather than a temporary reprieve from systemic problems, the North American auto industry needs to shed much of its past philosophy and approach. It is remarkable that no automobile assembled in North America meets China’s fuel-efficiency standard. Along with the structural financial problems in the industry, that is a situation that will need to change.

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{ 39 comments… read them below or add one }

R.K. November 16, 2008 at 1:43 pm

What concrete proposal would you make?

Two ideas:

1. Impose a 100% tax on vehicles that get less than 20 mpg.

2. Impose a 10% tax for every mpg below 25 a vehicle gets.

The revenues could be used to help pay back taxpayers for the bailout, or to bolster retirement and health care plans for auto company workers.

. November 16, 2008 at 3:46 pm

PM, premier warn Big Three

No financial assistance unless firms build more eco-friendly autos Harper, McGuinty say

Nov 15, 2008 04:30 AM

Ottawa and Queen’s Park warn there will be no unconditional “bailouts” for the sputtering North American automakers seeking government help.

Tristan November 16, 2008 at 4:28 pm

A Car does not get a mile per gallon. A car without a driver cannot drive, and even if it is running, will get zero miles per gallon. You only get an efficiency figure after it is being driven by a human. Efficiency figures are based on the “average” driver. In reality, most drivers drive less efficiently than the average, and therefore complain about the mileage figure they get. Also, drivers who choose to drive much more efficiently than the ‘average’ can easily manage 50% better economy than the posted MPG figure of their car.

The obvious solution is to tax fuel – punish people for using more of it, rather than punishing them for buying a less efficient car. The fact is, an idiot driving a Prius might easily get worse mileage than 10L/100km, which I recently was able to average in a 3 ton chevrolet suburban by driving extremely carefully.

The problem is that we concieve of car efficiency in a non-subjective way, the same way we might rate the efficiency of an electric motor. In industrial, constant use applications it is very meaningful to say a motor has an efficiency rating of 90% at 75% load, etc… However, since cars always operate intermittently, driving style makes a bigger different to fuel economy than its static economy figure (i.e. mpg at a flat and level 100km/h would be an approximation of this).

Milan November 16, 2008 at 4:33 pm

Tristan,

You only get an efficiency figure after it is being driven by a human.

True. That being said, and car that is rated at 35 mpg will do better than one rated at 20 mpg, for any particular kind of driver. It is better to change both fuel efficiency and driving patterns, but changing one doesn’t absolve you of the need to change the other.

The obvious solution is to tax fuel

To tax carbon, really, but that isn’t a price we can plausibly extract from the bailout. Fuel and carbon prices seem to be political death right now, while there is a real appetite for more efficient vehicles. The practical solution is to demand that industry makes them.

However, since cars always operate intermittently, driving style makes a bigger different to fuel economy than its static economy figure

Even if this is true, more efficient vehicles are better, with all else being equal.

What would you demand in exchange for the bailout?

. November 16, 2008 at 5:36 pm
Tristan November 16, 2008 at 5:40 pm

I wouldn’t bail them out. They’ve been mis-managed for years, why should that be encouraged? Badly run companies should fail, otherwise the incentive structure becomes perverse.

Milan November 16, 2008 at 6:17 pm

This article makes a somewhat convincing argument, and the pragmatic point remains that a bailout is likely to occur regardless of the logic for or against it.

Assuming there will be a bailout, what would you demand of the auto makers?

Tristan November 17, 2008 at 1:15 am

I think nationalizing them is a better option than buying them out. It’s more honest.

Milan November 17, 2008 at 3:11 am

Once they were nationalized, how should they change their products and mode of doing business?

How could that be most closely approximated in the likely situation where they are not nationalized, but do have an obligation to make changes in accordance with the demands of the people who bailed them out?

. November 17, 2008 at 3:42 am

The Bush administration and many Senate Republicans disagree with such an approach. Instead, President George W. Bush late Friday urged Congress to speed up release of $25 billion in already approved loans to the auto industry. Mr. Bush asked Congress to ease requirements that those loans be used to help the industry retool to meet higher fuel-economy standards, a move opposed by many Democrats.

“We are now actively calling on Congress to pass legislation next week that will amend the loan program and accelerate much-needed funds to the auto companies,” White House press secretary Dana Perino said. “It has become clear to us that the congressional Democrats…are choosing a path that will only lead to partisan gridlock.”

Sarah November 17, 2008 at 12:51 pm

Personally, I’d prefer it if they simply failed – incompetence is a pretty good reason for letting a business fail especially when its products (the fuel inefficiency if not the entire product area) cause profound global harm.
If they’re bailed out, though, then requirements for far more fuel efficient vehicles sound like a good idea and will also have the benefit of opening up exports to markets with fuel efficiency standards, unlike the current & stupid approach of bitching that folks in North America are betraying their nationalism buy buying more fuel efficient & better value imported cars.

. November 19, 2008 at 12:01 am

Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has led to a net reduction in capital of $465 billion…This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”

. November 19, 2008 at 1:13 pm

Op-Ed Contributor
Let Detroit Go Bankrupt

By MITT ROMNEY
Published: November 18, 2008

“IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”

. February 14, 2009 at 11:58 pm

Report: GM considering Chapter 11 filing

Reuters

February 14, 2009 at 1:23 PM EST

CHICAGO — — General Motors Corp [GM-N], nearing a Tuesday deadline to present a viability plan to the U.S. government, is considering as one option a Chapter 11 bankruptcy filing that would create a new company, the Wall Street Journal said in its Saturday edition.

“One plan includes a Chapter 11 filing that would assemble all of GM’s viable assets, including some U.S. brands and international operations, into a new company,” the newspaper said. “The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked.”

. March 31, 2009 at 1:26 am

The People’s Pottage
By Tyler Cowen

I don’t much blog the auto industry because it is so depressing. But this passage, from Francis Cianfrocca, today caught my eye:

“Today, the President of the United States is expected to make significant announcements about GM’s warranty policy. No, that’s not a typo, and yes, it’s remarkable. I didn’t say the President of General Motors, I said of the United States.”

This bit was interesting too:

“Many of GM’s dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That’s disgusting, but it’s required both by GM’s contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)

This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won’t make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.””

. April 7, 2009 at 6:29 pm

Ottawa backs GM, Chrysler warranties

The federal government will spend up to $185-million to help the auto makers, and provide an additional $700-million to the EDC to ensure receivables for parts makers

Tristan April 7, 2009 at 7:14 pm

Increased welfare for corporations, reduced welfare for people. Far better to let the company fail and feed and retrain the workers than prop up corporations in a dying industry.

Matt April 7, 2009 at 9:19 pm

Maybe an instantaneous fuel consumption gauge should be a mandatory piece of equipment for cars to be demanded in the bailout. Tristan is right to point out that driving technique accounts for a large change in fuel consumption, but it is hard to know while you’re driving what techniques result in the best consumption, and most people aren’t even considering this anyway (a gauge may get them thinking about it).

If people are interested, I recommend googling ‘hypermilling.’ Hypermilling is the act of trying to squeeze every last ounce of efficiency from your car. A lot of the techniques aren’t really that practical and some endanger other road users (like drafting). Still, others are quite practical and even if you don’t use all the techniques, it’s at least good to know what basic things positively affect your fuel economy. I’d like to point out, being an enthusiast of manual transmissions, that there are a lot of additional techniques that only apply to standard cars, like full throttle acceleration and early upshifts to reduce pumping loses through a partially open throttle. In an automatic, this just forces a downshift because your car thinks you’re trying to accelerate hard. Also, descending hills in a low gear using engine braking instead of wheel brakes will actually stop fuel flow to the engine completely in a modern (most cars after about 1991) fuel injected car. Some automatics with locking torque converters also take advantage of this, but most don’t.

Tristan April 8, 2009 at 10:23 am

I agree with Matt,

My old ford taurus has an instant fuel econ guage, and that’s how I learned to drive economically. The most important things I learned were a) best econ is at lowest reasonable speed in highest gear, b) exactly what Matt is talking about concerning pumping losses. Although I’ll add that much of that technique can be applied even to an auto car, and also every automatic car I’ve ever seen has had a low gear selector position to enable engine breaking.

Matt, I think it’s completely standard after the advent of multi port fuel injection that the injectors shut off completely in situations like that. Our Taurus does, and its an 89′ model. Actually, engines are not a whole lot more efficient now than the best ones were in 89.

Matt April 8, 2009 at 1:09 pm

I guess as long as the torque converter is locked you’ll get the advantage of the injection shutting down under engine braking scenarios. Not all torque converters will lock in such a situation though, unless as you point out you select a lower gear. Tachometers should be mandatory too, although in most cars they are standard.

Tristan April 8, 2009 at 11:39 pm

It’s all a bit moot if people don’t know how a car works.

I think we should move towards a northern European style licensing system, where it takes 4 years to get a full license, and everyone has to spend at least 6 lessons on a wet skidpad learning car control. Right now we have driving for people who are asleep, and it doesn’t breed the mechanical intuition necessary to have respect for a machine.

Milan April 9, 2009 at 9:06 am

As it stands, the process for getting a license is so time-consuming and annoying that I am unlikely to ever get one.

Tristan April 9, 2009 at 11:31 am

If you don’t think driving is a serious practice, so you shouldn’t be a motorist. Problem is, most drivers don’t take driving to be a serious practice – I don’t see any reason our roads should be cluttered by them either.

Also, because of the way our brains develop, I don’t think people should be able to get licenses after about the age of 25 – all the drivers I know who learned to drive after that never feel properly at-home in a car, the car never becomes an extension of their body in the way that people who drive at the age of sixteen are able to grasp it. Waiting till the age of 30 to learn to drive is like waiting till the age of 30 to use a computer – you’re never going to be as good at it if you start so late.

I think the high age of the motorist was probably ended by the second world war. As soon as cars became cheap and plentiful, there was no longer any necessity that they be understood or cared for. A car now is like a bag of rice. Which is hard to see, because if you actually look at the cars, they are fantastic pieces of engineering.

A lot of people drive classic cars because they think cars were somehow better in the old days – this is a mistake, but based on a truth. It is true that cars were better in the old days in the sense that they were taken seriously. However, the actual car is better now. So, the obvious choice is between the two – drive a modern car, but take it seriously.

Milan April 9, 2009 at 11:54 am

Restricting the availability of licenses to over-25s strikes me as harsh and probably discriminatory.

After all, getting a license now basically requires you to have rich and permissive parents, willing to grant you a lot of access to a vehicle while you are in high school. People whose parent’s don’t have cars, and who don’t have thousands of dollars for driver’s education programs (which won’t take you through the whole graduated licensing process anyhow), only have a real chance to learn to drive later in life, when they might have a friend willing to be generous with a vehicle and their time.

Do you have any evidence that people who start driving after 25 are involved in more or worse crashes?

Tristan April 9, 2009 at 12:00 pm

Having a license means you can drive a car down a street where a momentary lapse of attention means the death of the oncoming motorist.

I don’t see any reason why driver training shouldn’t be state funded – it’s in the common interest that people are good drivers – there is a massive positive externality in the form of reduced accidents.

I’m not a statistics expert, maybe someone else reading this blog has access to that kind of data. I’d be surprised if it even exists, however, it’s the kind of thing there is a reason to surpress.

Milan April 9, 2009 at 12:09 pm

Given that young men cause the bulk of accidents, it is possible that only allowing over-25s to get licenses would actually make the roads safer – though I am not necessarily advocating the approach.

As for the stats, it is worth digging around. It’s rare to find someone who will voluntarily do the research for you to back up your positions, especially if they are no more connected to you than being a fellow reader of the same site.

Tristan April 9, 2009 at 12:09 pm

Honestly, does my computer analogy not convince anyone? Why does no one realize that we’re cyborgs, and not as a result of our intents but our habits?

. April 9, 2009 at 12:11 pm

AAA Analysis Finds Teen Crashes Cost Society More Than $34 Billion Annually

Washington, D.C. – 4/4/2008

AAA calls for improved graduated driver licensing to counter nearly one million crashes involving 15- to 17-year olds annually

. April 9, 2009 at 12:13 pm

Young drivers: The hard facts

Young drivers are at a much higher risk of having a crash than older drivers and are therefore at risk of losing their lives or being seriously injured on the road, often killing or injuring their young passengers or other road users too.

Tristan April 9, 2009 at 12:13 pm

Hey – of course there are lots of accidents caused by young drivers. The question is – are there lots of accidents caused by new-older drivers?

AAA should look at what kind of crash numbers young drivers have in countries where driving is taken seriously.

The number of accidents caused by an age group is meaningless if it is not contextualized to the size of that group, and to the size and number of accidents of other groups. It’s just a number.

Milan April 9, 2009 at 12:26 pm

Yes, but you are the one arguing that they should be stripped of a right with considerable economic and personal importance. At the very least, you need some strong data to back your claim.

Even if good data exists showing that those who learn after 25 are more dangerous, that may not be sufficient cause for a ban. After all, men drive much more dangerously than women, but I doubt you would support banning them.

All this being said, I do think the world would be a better place with dramatically fewer drivers, roads, and cars. Certainly, government shouldn’t be subsidizing the creation of new ones.

Tristan April 9, 2009 at 1:16 pm

Insofar as we have cars, the state should encourage us to take them seriously, to drive them carefully and considerately, and to preserve them (because the production of new ones is ecologically damaging).

I see a pretty hopeful future for motoring – the existing concept LOREMO proves that four people can be moved around by such little energy that there is no reason why an electric version should not be a part of the future.

However, cars in cities are a total disaster, and we really need to get rid of them by a combination of reducing their use and making public transit and cycling the better solution.

But still, I think, or hope, there will always be a place for the car, and for the long distance road trip – but this is something that should be done out of pleasure, out of a search for adventure, not because it is the cheapest and most convenient.

http://en.wikipedia.org/wiki/Loremo

6kw/h per 100km! So, compared to say my fathers car which gets about 9L/100km at 1.50$ per liter, that’s 13.50$ per 100km – so, for it to cost the same to drive the loremo, electricity would need to cost over 2$ per km/h! Right now it’s about 7 cents. I know energy costs will go up – but I don’t think we’ll ever see a 2$ kw/h (inflation aside).

!!!

. April 30, 2009 at 5:32 pm

Ottawa, Ontario to lend Chrysler $3.8-billion
Federal and Ontario governments secure 2% stake; car maker agrees to maintain 20% of output in Canada

KAREN HOWLETT AND RICHARD BLACKWELL

Globe and Mail Update

April 30, 2009 at 4:34 PM EDT

TORONTO — Canadian governments have agreed to lend Chrysler LLC a total of $3.77-billion to help the company restructure its operations.

In return, the federal and Ontario governments will receive 2 per cent of the equity in Chrysler, one seat on the nine-member board and a pledge from the company to maintain at least 20 per cent of North American auto production in Canada.

The announcements came as Chrysler sought Chapter 11 protection in the United States from creditors Thursday and formed a new partnership with Italy’s Fiat SpA.

. May 8, 2009 at 11:34 am

Toyota reports worst annual loss

Toyota, the world’s biggest carmaker, has made its worst annual loss as the global economic downturn has hit demand for its vehicles.

The Japanese company said it made a net loss of 436.94bn yen ($4.4bn; £2.9bn) in the year to 31 March, compared with a record profit the year before.

Toyota said expected to make a bigger loss in the current financial year.

. May 8, 2009 at 10:38 pm

Energy and Global Warming News for May 7th: Ford to spend $550 million to retool SUV/truck factory to make small cars, electric vehicles

It looks like Ford is finally entering the real world, one where global warming and, even sooner, peak oil, will drive consumer decisions about automotive purchases. Indeed, as soon as the global economic recession is over, oil prices will quickly rise back above $100 a barrel. They will almost certainly reach record levels in the next decade. For gasoline to be significantly below $5 a gallon by 2020 would take a miracle — or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020“). See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015“).

The future belongs to car companies that make profitable, well-designed fuel-efficient cars, plug-in hybrid electric vehicles, and pure electrics, which seems to be a core element of Ford’s trategic plan for survival and revival (see “Whose bailout plan is best: Ford drops hydrogen while GM remains confused about ethanol“). Today’s news is evidence that they are putting their plan into motion:

. June 3, 2009 at 10:24 am

Which Side Are You On?
How the UAW’s new ownership stake in GM and Chrysler will defang the union.
By Daniel Gross
Posted Tuesday, June 2, 2009, at 4:34 PM ET

It’s been a long time since American devotees of Marx (Karl, not Groucho) have had much to cheer about. But with the bankruptcy filings of General Motors and Chrysler, and the transfer of stock ownership from the firms’ long-suffering shareholders to the government and unions, communists of the world can rejoice. The workers are now, finally, significant owners of the means of production. The United Auto Workers control about 65 percent of Chrysler and 17.5 percent of General Motors.

For many ardent capitalists, this state of affairs represents a kind of Armageddon. These people didn’t rage about the somnolent boards, the incompetent management, the failed economic policies, and the massive destruction of shareholder wealth. No, what really angers folks like Jack Welch—his grumpiness was on display at a recent panel and during an unintentionally hilarious CNBC gabfest on the future of capitalism—is the prospect of an unholy alliance of government bureaucrats and union bosses controlling the fate of a few failed companies.

. June 10, 2009 at 7:01 pm

Chrysler and Fiat complete deal

Fiat and Chrysler have completed the strategic alliance that will put Chrysler’s good assets into a new firm.

Fiat chief executive Sergio Marchionne will take control of the new company, which will begin operating immediately.

Fiat is not paying any money for its 20% of the new firm but will contribute technology to make smaller Chryslers.

. December 23, 2013 at 3:53 pm

General Motors appointed Mary Barra as chief executive, its fifth in five years. Ms Barra, currently head of product development, worked her way up the company from a job in engineering that she started at 18. She is the first woman to run one of Detroit’s Big Three carmakers. Meanwhile, the Treasury Department announced that it had sold its remaining shares in GM, bringing an end to its 2009 bail-out. The Treasury recouped $39 billion of the $49.5 billion bail-out money. See article

. February 5, 2015 at 1:49 pm

Ontario sells remaining GM shares acquired from bailout

The Ontario government has unloaded the last of its shares in General Motors as it looks for cash to build public transit and highways.

The sale, announced hours after the markets closed Wednesday, is expected to reap $1.1-billion. Finance Minister Charles Sousa’s office said all of that money will be placed in the Trillium Trust, a fund dedicated to paying for the $29-billion worth of transportation infrastructure the province plans to build in the next decade.

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