The Critical Business of Car Manufacturing Shows Gap between EU and U.S. Approaches to Reviving Industry     Print Email
Wednesday, 01 April 2009

The auto industry provides an instructive case study of how differently Europeans and Americans are generally approaching the challenge of the economic downturn.

As a broad generalization, American manufacturers are inclined to fire workers (sometimes via restructuring) to cut labor costs and downsize the industry in the hope that government stimulus funds can be devoted to retooling to make new models, usually cheaper and more efficient cars, that they hope will sell when the market for cars comes back. The Obama Administration has taken this approach to the brink, threatening to cut off further subsidies unless companies move radically in this direction. The White House has said that the alternative will be bankruptcy – a prospect designed to concentrate minds in Detroit and force unions and investors to agree on sacrificing jobs and investments before they are ordered to do so by a court. With U.S. car sales down nearly 50 percent compared to last year, General Motors, the biggest U.S. manufacturer, and Chrysler would already have collapsed without massive infusion of tax-payer cash from the government.

In contrast, government financial help for European car-makers usually goes toward helping companies avoid laying off workers. In fact, that is sometimes a condition. As a result, workers with little or no work are idled but stay on the job. In other words, the financial stimulus goes to job protection instead of into capital for research and development and retooling. In France, for example, the country’s two car companies, Peugeot and Renault, have each received € 3 billion ($3.9 billion) bailouts from Nicolas Sarkozy’s government – with strings attached saying that these companies must not lay off workers or close factories in France.

The crisis is worldwide, and many American experts think that Europe will be forced, perhaps belatedly, to follow the U.S. example of merging and downsizing in the car sector. In the current economic climate, automobiles are a “big ticket” item that many consumers are reluctant to buy right now: potential purchasers often shy away because they are afraid of losing their jobs and therefore their ability to make the monthly payments on a car. Auto sales in the U.S. have plummeted from 17 million annually in 2005 to 9 million in 2008. At least two of Detroit’s “Big Three” auto manufacturers would have already collapsed without the assistance of government bailouts. The third, Ford, has not taken any government help.

Now it has become clear that the Obama administration is determined to administer “tough love” to the auto industry by making it restructure itself or go into bankruptcy to be restructured in court – or merge. The administration has taken the rare step of intervening in GM’s management by forcing out its long-serving CEO, Rick Wagoner along with several members of GM’s board of directors. In 60 days, it must come up with a viable blueprint for its future as a condition of getting any more government funding. Chrysler, the number two, has been given 30 days to cut costs and, reportedly, to seal a long-discussed alliance with Italy’s Fiat. The Italian company could provide know-how to help Chrysler bring smaller, cheaper cars to the market quickly.

Bankruptcy faces GM unless it can perform radical surgery on itself. The procedure, according to U.S. officials, would be “surgically” fast – perhaps a month or two instead of being a protracted court case. In practice, any timetable is unclear. Bondholders and other creditors can delay proceedings, with the result that bankruptcies can sometimes stretch on for months. GM executives have warned that bankruptcy would devastate GM by shaking buyers’ confidence, but the Obama administration had pledged to guarantee uninterrupted service for buyers of GM-made vehicles. In bankruptcy court, a judge could break GM’s longstanding labor contracts and wipe out claims of share-holders and other investors. The procedure might produce a “new GM” that would be smaller and make only a few different models while jettisoning its underperforming brands, such as the gas-guzzling Hummer. Its workforce would be drastically downsized, and many “legacy costs” (such retirement and health benefits) would be shifted away from the company’s books to be taken on by unions. The White House threat of pushing companies to bankruptcy is widely viewed as a symbolic pressure tactic to force negotiations with bondholders, though the threat remains real if radical changes are not made quickly by GM itself.

The Obama administration believes that Chrysler cannot survive as a stand-alone company and has required the company to quickly implement an alliance with Italian automaker Fiat – in 30 days or else it will not get the scheduled $6 billion infusion in government aid. Fiat will get stock in Chrysler, but will not take on any of the company’s debt. The plan is for Fiat to use idled Chrysler plants to build new, energy efficient cars and engines in the U.S. The synergy seems good for both companies, and this arrangement would also prevent taxpayer money from going overseas. If Chrysler goes bankrupt anyway, even with U.S. government aid (as many analysts expect), Fiat would be in a position to buy up the parts of the U.S. company it had been using – at fire sale prices. That would remove one of the U.S. “Big Three” and add another low-cost European producer to the list of such companies building cars in the U.S., with better business models (and union terms) than the “Big Three.”

In Europe, moves toward consolidation of this source seem to be on the horizon if the crisis worsens. In Germany, Chancellor Angela Merkel has announced plans to set up a taskforce to negotiate the future of Opel, GM’s Europe-based subsidiary. France has two auto manufacturers – state-owned Renault-Nissan and privately held Peugeot-Citroën. That is probably one too many, experts say. Peugeots’ CEO, Christian Streiff has just been forced out by the family-held majority shareholders – a move that could set the stage for a merger between Peugeot and Renault. The bailout had other EU countries accusing Sarkozy of protectionism in a chorus of criticism led by the Czech Republic, which has been the main beneficiary of outsourced jobs in the French auto industry.

The Czechs were concerned that French-owned factories would be closed in the Czech Republic because the Sarkozy government had forbidden any closures in France as a condition of government bail-out aid. So French workers continue to be paid the same wages even though they have much less work to do. Ironically, Renault is enjoying success with a relatively cheap car, the Logan, which it builds for the Czech market and now sees catching on with French buyers. Its latest made-in-France model, the Laguna Coupé, appears to be too expensive in the current climate.

In the United States, too, there is a big difference in costs and prices between Detroit’s “Big Three” and the dozen other manufacturers (European and Asian) that produce or at least assemble cars in the U.S. These foreign-owned companies are located in the southeast of the U.S. and other areas where unionization is small or non-existent. And these recently-arrived foreign brands do not have “legacy” costs of expensive pension and health-care plans accepted by the “Big Three” in the boom era of auto sales.