Why United States needs GM - and other American car makers -- to succeed
This article first appeared in the St. Louis Beacon, June 2, 2009 - The United States has more riding on the survival of General Motors than the billions of taxpayer dollars the government is pumping into the now-bankrupt automaker, says T.R. Carr, a former Hazelwood mayor who chairs the department of public administration at Southern Illinois University Edwardsville.
The success of GM -- and of Chrysler and Ford -- reaches far beyond assembly-line jobs and affects engineering and technology, manufacturing know-how and even national defense, he said.
"There is a lot more technology involved than simply snapping together vehicles on an assembly line,'' said Carr, who battled for years to save the Ford Hazelwood plant that eventually closed in 2006.
Automakers drive research and development of new engines and fuels systems, which are vital, but also electronics, metallurgy, glass, plastics and defense equipment.
"If we fail to support and fail to invest in the domestic automotive industry, we relinquish that technology to other countries," Carr said.
Panos Kouvelis, director of the Boeing Center for Technology, Information and Management at Washington University's Olin Business School, also stressed the impact of the auto industry on American technology and manufacturing but warned that the "new GM" envisioned by President Barack Obama is facing a world of challenges.
"We could be seeing the first death of GM before we see the second death of GM," Kouvelis said.
Carr and Kouvelis say that foreign automakers have already positioned themselves to meet growing consumer demand for smaller, more fuel-efficient cars.
"Technology for hybrid cars is much more advanced in Japan," Kouvelis said. "If you're talking about really small and economical cars, they're being developed in Asia. The new American car companies better be able to develop new hybrid cars and new innovative cars that are extremely more efficient and smaller, and I don't know if the new GM, whatever it is, will manage to do it fast enough. Some American car company needs to survive. But it has to be extremely fast and very innovative in an environment that is changing."
Should tax dollars support GM?
In his public statement Monday on GM's bankruptcy filing, Obama insisted that the government does not want to run a car company and will stay out of everyday decisions.
"We are acting as reluctant shareholders because that is the only way to help GM succeed," Obama said.
The government will pump an additional $30 billion into the failing giant, on top of $20 billion in previous bailout funds. In return, the government is carving out a 60 percent share in GM stock.
Carr points out that automakers in foreign countries, such as Japan and Korea, receive significant support from the public sector.
"Some countries have adopted an industrial policy where public-sector dollars flow into certain industries, but the United States never adopted that kind of policy," he said.
The private sector was expected to make the investments to modernize plants and technology, "but after a period of time when you deal with the global economy, the playing field has not been level," Carr said. "So, if you have a Toyota -- or, pick a manufacturer -- and they've benefitted from significant public-sector investments in their own country they're going to have an advantage. We basically provide some tax write-offs but not the kind of investments that are required to keep everything competitive."
At the same time, America's Big Three -- GM, Chrysler and Ford -- were not structured to operate adeptly in the face of stiff international competition.
"We now have Toyota, Honda, Hyundai all assembling vehicles in the United States," Carr said. "What's happened is the Big Three were structured in the '50s and '60 when they were the only game in town and had a fairly close relationship with the United Auto Workers. That all began to change as the transplants began to move in and put assembly plants in Kentucky, Mississippi, Alabama, the Carolinas and as the American public began a shift in buying vehicles."
High labor costs on top of wages added to the problems of GM, Chrysler and Ford -- and were not shared by foreign automakers with plants in the United States, he said.
"The Big Three have been carrying a really significant social burden in terms of health insurance for current employees, their families and retirees," Carr said. "Those are costs that are not borne by the transplants. They will provide insurance for their employee but not for retirees. So, the playing field has not been level."
Carr said that investment by the public sector is important but must be guided and well reasoned.
"But if we don't make that investment, that investment will be made offshore in other countries," he said.
Kouvelis said while many agree that the United States must retain its manufacturing know-how, the question is whether the government should be bailing out an industry, or should just let the market work.
"It's more of a political point," he said.
And the answer to the big question -- whether U.S. taxpayers will see a return on their investment -- is unclear, Kouvelis said.
"One way or the other, the government had to do something. I don't how much it had to be. Whether it was $60 billion or $30 billion, but something had to happen to give a chance to some form of a new GM to have one more chance to compete," Kouvelis said. "But we better realize, it is just one more chance. They have to get it right. Or, a few years down the road we will be talking about the real death of GM."
Slowing down the pain
Obama acknowledged that as part of the restructuring designed to transform GM into a lean, efficient company, more plants and dealerships will close, throwing thousands more out of work -- on top of 400,000 jobs already lost in the auto industry. But he said the other option -- to let GM fail -- would have propelled the national unemployment rate over 10 percent and sent shockwaves throughout the economy.
Kouvelis said the layoffs of about 20,000 union workers are evidence that the plan is not intended to stop immediate job loss but to slow down the process -- to give workers, suppliers and communities time to adjust.
"The optimistic view is that there will be a slowing down and hopefully an opportunity for recovery and the new GM will be much more competitive. That the leadership is going to have a better vision and will be able to adjust to very, challenging adjustments in the global environments," Kouvelis said. "I think every one agrees that right now we can't really afford to suddenly see the market coming in at a very fast pace and eliminating all those jobs. But if we are really solving the problem in the long term is not very clear."
Carr said that he learned valuable lessons while fighting to keep the Ford plant open, including the need for local, county and state officials to work together. The impact of the Fenton Chrysler plant closing, for example, will be felt in small towns across the state because of the far-reaching supply chain.
"When you're dealing with the global pressures Ford was under, a municipality has to build alliances and relationships with the state and county to be successful," Carr said. "Outstate Missouri has a stake in what goes on in St. Louis, and we have to work on that understanding."
Carr said that recovery from the loss of a major employer will be tougher in the current poor economy, but the St. Louis region should work to attract new industries that are developing with the changing times.
"We're good at building things," he said. "We could be really good at building the turbines for wind power. We're not a prime market for wind energy here, but we have the capacity to build the turbines and to improve the operating efficiency of turbines. Another industry is solar. We have a skilled workforce; where can we put them?"
Kouvelis said St. Louis must think innovatively.
"We've got to attract young people with ideas who are going to build new companies in new sectors," he said. "That is what I see as a major weakness of St. Louis. We haven't been very good at being an environment where lots of new companies get started and get venture capital and attract young people."
National defense in a global economy
The professors warn that the loss of manufacturing know-how isn't limited to unemployment and the economy but spills over into the defense industry.
"If we lose the capacity in the civilian market, by definition we lose that same capacity in the military market," Carr said. "The military market goes up and down, it expands and contracts dramatically, and you need the stability of the civilian market to keep those engineers, to keep that technology in place. It's the same thing with Boeing. If you lose those lines at Boeing, then you simply cannot go out and build an aircraft company from scratch anymore. Everything is too sophisticated and too advanced."
Remember that offshore companies with plants in the United States retain control of the technology, he said.
"The technology is Japanese, German, Korean. And the profits are Japanese, German and Korean," Carr said. "So while there is a benefit to them assembling the cars here, the ultimate benefit is in the mother country because they employ the engineers and they receive the corporate profits."
Kouvelis said the crisis with U.S. automakers is part of a much larger issue -- the hollowing out of American manufacturing, which has been outsourced all over the world. He said the current economic crisis has made it apparent that the U.S. economy needs to be broader-based than the finance and service sectors.
"A tremendous amount of know-how has been lost," he said. "But I do think something positive will come out of all these phenomena we're observing -- that people will realize we need a lot more manufacturing at home, keeping the know-how and trying to spread the know-how to other industries. We will need that for our defense."
Kouvelis said that in some countries, corporate profit is considered along with broader objectives.
"In Japan, the companies think in a different way. When you talk to Japanese executives, there is talk about the company but also about the broader society as being the objective. And they try to keep jobs at home as much as they can," he said.
Kouvelis said that offshoring is at times the wrong choice made by corporate executives who are concerned about short-term profits, often tied to executive pay.
"I believe that in many cases outsourcing decisions are wrong. It's not just the cost of the units right now, if you think of what you lose. It is a bigger problem that is driven by corporate culture and incentives that are very myopic. Basically, the only thing that matters is the up side," Kouvelis said. "People have got to realize that we are part of a larger community where the whole community needs to prosper."