strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: July 26, 2013

 
 

The Auto Industry’s Big Bailout Bounce

The rescue of GM and Chrysler came with a cost, but it put them back in the game and even benefited Ford.

Title: Restructuring of the U.S. Auto Industry in the 2008–2009 Recession (fee or subscription required)

Authors: Thomas Klier (Federal Reserve Bank of Chicago) and James M. Rubenstein (Miami University)

Publisher: Economic Development Quarterly, vol. 27, no. 2

Date Published: May 2013

One of the dominant story lines during the Great Recession was the plight of U.S. automakers. The failure of the Detroit Three—the Chrysler Corporation, Ford Motor Company, and General Motors Company—was deemed an unthinkable prospect by many analysts, who warned that their demise could cripple the economy. Ford decided to bull its way through the downturn without Washington’s assistance, but Chrysler and GM applied for and eventually received a controversial government-sponsored bailout from the Bush and Obama administrations.

This paper, the most comprehensive analysis to date of the overarching effects of the bailout and related bankruptcy reorganization, explores how the three carmakers emerged from the wreckage as highly competitive players in a fundamentally changed industry. GM and Chrysler not only came out of the restructuring with dramatically lower labor costs, the authors reveal, but were also able to close many plants and consolidate production in a tighter geographic area, leading to higher capacity utilization. And although Ford made it through the crisis without government help, thus skirting Washington’s oversight, it also benefited from the bailout, wringing many of the same concessions from its stakeholders that the other two companies received in bankruptcy. Now, the Detroit Three are much more in line with their foreign-based competitors and have already won back some of the market share they lost during the crisis.

The recession hit the carmakers especially hard, causing the steepest decline in their sales, production, and employment levels since World War II. After almost two decades of steady performance, the companies saw their combined sales plummet from 8.4 million vehicles in 2007 to less than 4.7 million in 2009, and their collective market share slump from 52 percent to 44 percent. What’s more, skyrocketing gas prices during the first half of 2008 caused a sharp falloff in the sale of light trucks, a highly popular category.

In December 2008, Chrysler CEO Robert Nardelli told Congress that GM and Chrysler “could no longer secure the credit they needed to conduct their day-to-day operations.” Although Ford wasn’t facing an immediate cash crunch because of large loans it took out in 2006, it pressed the government to aid Chrysler and GM, arguing that if even one of the Detroit Three failed, the ripple effects on shared suppliers would be devastating.

After months of debate over whether the government should step in to save private companies, President Bush extended the Troubled Asset Relief Program (TARP)—originally intended only for financial firms—to the desperate carmakers. Chrysler and GM were held to a number of conditions, the most important being that they had to lay out a path toward financial viability, taking into account all current and future expenditures.

Ultimately, according to this study, GM and its credit affiliate received US$67.4 billion through TARP, and Chrysler and its financial arm got $12.4 billion. GM also received $10.6 billion and Chrysler $3.8 billion from Canada, and further subsidies from Mexico.

The restructuring process overseen by the government had profound effects, the authors write. For example, GM’s North American hourly labor costs declined from $16 billion in 2005 to $5 billion in 2010. This was achieved through layoffs and a decrease in the hourly wage. Employment at the Detroit Three plunged from 250,639 in 2007 to just under 170,000 in 2009. And negotiations with the United Automobile Workers union led to the carmakers assuming less liability for retirees’ healthcare costs and instituting a lower wage for new hires. As a result, by 2011, average hourly labor costs for Ford ($58), GM ($56), and Chrysler ($52) were competitive with those of Honda ($50), Toyota ($55), and other foreign-based carmakers at their U.S. plants.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store