“No one should be confused about what a bankruptcy process means, This is not a sign of weakness but rather one more step on a clearly chartered path to Chrysler’s revival.”
— Barack Obama
The normally articulate president misspoke. Instead, the president might have defended his controversial efforts to save Chrysler from the perspective that his administration felt the fate of this tiny automaker was inextricably tied to his ambitious industrial design for the American economy — the creation of an automaker geared to the manufacture of energy-efficient vehicles.
He could have admitted that the rescue effort could cost taxpayers upwards of $20 billion and that the likelihood of payback was remote, for Chrysler faces formidable survival odds.
Obama pressured Chrysler to merge with Fiat to encourage the manufacture of smaller cars. He discouraged a merger between Chrysler and General Motors because he feared that the latter combination would focus on their traditional strength in larger vehicles such as SUVs, historically a generator of substantial profits.
No American manufacturer to date has made money selling small cars.
The economic consequences of a Chrysler-Fiat focus on small cars could lead to colossal losses.
Even the Japanese, the world’s most efficient auto manufacturers, have produced only marginal profits from selling small vehicles in the United States.
It will be difficult for Chrysler to become a player in today’s global competitive environment.
In recent years, the automaker has focused on trucks and SUVs, not cars.
The April 2009 issue of Consumer Reports magazine showed Chrysler’s brands were among the industry’s least reliable during the past 10 years. It sold only 398,119 automobiles and 1.05 million trucks in 2008.
In stark contrast, Toyota Motor Corp. sold close to 9 million vehicles in 2008. Its products range from the luxury Lexus to the hybrid Prius. The company hopes to develop an all-electric car within a few years.
Marketing studies demonstrate an extensive lag time between the building of better cars and consumer acceptance.
The liquidation of Chrysler makes economic sense. The federal government’s cost to fund Chrysler’s deficits could exceed $20 billion. A White House official indicated that the government would provide debtor-in-possession financing for up to $3.5 billion. The government plans to give Chrysler an additional $4.5 billion in financing when it emerges from bankruptcy. In late 2008, despite congressional opposition, the Bush administration advanced Chrysler $4.5 billion.
Further federal financing will be necessary to fund operating losses and capital expenditures. A combined Chrysler-Fiat would face formidable competition from automobile manufacturers who enjoy much larger economies of scale. Chrysler lost $16.8 billion in 2008. It expects multibillion dollar losses until 2013.
Can the government realistically expect a payback similar to their experiences following their $1.5 billion guarantees of Chrysler debt in 1979? It would be unreasonable for the following reasons.
First of all, in 1980 the Big Three sold about 80 percent of all new vehicles in this country. Today they sell just 45 percent. Secondly, the U.S. government imposed “voluntary” quotas on Japanese automobile imports. Today, to prevent “voluntary quotas,” foreign manufacturers assemble almost all imports in Canada, United States and Mexico. Thirdly, the taxpayer can expect little equity in the new Chrysler.
Chrysler remains in critical condition. Its bailout illustrates the problems with “industrial policies.” Special interest groups get rewarded at the expense of the “invisible constituency.”
While automobile manufacturers obtain subsidies, unemployment soars and millions lose homes.
Politicians have a difficult time turning off the spigot of failed policies.
Originally published in the Sarasota Herald-Tribune
