[A-List] The US Auto Industry Crisis

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

by Bill Totten

Nihonkai Shimbun and Osaka Nichinichi Shimbun (November 10 2005)

I've written a weekly column for two Japanese newspapers for the past several
years. Patrick Heaton prepared this English version from the Japanese original.)


General Motors (GM), the corporation that came to symbolize the United States in
the 1950s, is teetering on the brink of bankruptcy. Delphi Corporation, an auto
parts manufacturer that GM spun off a few years ago, declared bankruptcy at the
beginning of October, making it the biggest bankruptcy in the history of the
auto industry. Ford is in similar straits; slumping sales in North America have
forced it to announce plans to close plants and lay off thousands of employees.


Mortgage Debts

In the era of cheap and abundant oil GM and Ford dominated the top industries in
both the US and the world. There are various reasons why these two companies are
now in crisis, but here I will focus on how difficult it will be for them to
recover.

First, over half of the automobiles sold recently in America have been SUVs.
These vehicles guzzle gasoline and pollute the environment horribly. Yet for
several years both Ford and GM have focused on manufacturing these automobiles
because they could sell them at high prices and reap huge profit margins. It
will not be easy for these companies to adjust to high oil prices by converting
their manufacturing facilities to produce less expensive cars yielding much
thinner profit margins. If oil prices continue to remain high, consumers will
continue to turn away in increasing numbers from SUVs, leaving GM and Ford the
last players in a rapidly shrinking market.

Last year 77% of US consumption was financed by borrowing as spendthrift
Americans mortgaged their homes to pay for consumer goods and services.
Both the Federal Reserve and Freddie Mac say that nearly one-third of
American consumption has been financed by such borrowing over the past decade.

What made this possible is the housing bubble in the US, which was underwritten
by the low interest policy of the Federal Reserve Board along with large-scale
borrowing of funds from Japan and China. Low interest rates stimulated demand
for expensive housing. Rising demand caused prices to rise, and rising prices
raised expectations for even higher prices, stimulating still greater demand
and higher prices. This spiral has allowed Americans to borrow greater and
greater amounts of money against the apparent values of their homes to finance
much greater consumption than they could afford from their own real incomes.
(Perhaps "lured" is more apt than "allowed" here.)


A Decline in Consumption is Inevitable

Many analysts are predicting an end to this housing bubble. When the bubble
bursts, housing prices may fall dramatically, forcing homeowners to curtail
consumption in order to pay off their mortgages more quickly to avoid
foreclosure. This cycle would have a huge impact not only on GM, Ford, and other
auto makers, but also on all Japanese corporations addicted to the US market.

Many US mortgages are based on adjustable rather than fixed interest rates,
meaning that borrowers must pay more just to service their borrowings when
interest rates rise. This will exacerbate, in both speed and magnitude, the
impact on consumption of a deflation (not to mention a sudden bursting) of
the US housing bubble.


Laying off workers is not a method unique to the management of GM and Ford.
The first things US corporations do when faced with straitened finances is to
lay off workers and reduce wages and benefits to those workers they cannot lay
off. GM has already announced it will be cutting fifteen billion dollars in
insurance and health care fees it was obligated to pay to retirees who had
worked many years for the company. If GM, like Delphi, files for bankruptcy,
under provisions of Chapter 11 of the US Bankruptcy Law, it will be possible for
GM also to reduce a variety of benefits to current workers. A vicious cycle may
well result: reduced employment and income for US workers (along with shinking
home values) reducing the buying power of American consumers, making the auto
industry shrink even further.

Moreover, one would not expect US consumers to buy very many cars from companies
tottering at the brink of bankruptcy.

High energy costs are affecting not only the inefficient auto and airline
industries, but also have begun having an impact even on moderately efficient
rail and large-scale distribution systems. As the brief (150 year) period that
depended heavily on abundance of cheap fossil fuel ends, many aspects of our
economy and our very lives inevitably will be affected by high and rising energy
costs.


Influence of American Capitalist Diehards

As is clear from looking at GM and Ford, the most important objective of private
industry in the US is maximization of profit, immediate profit, for stockholders
and for executives charged with achieving that objective. This is the ideology
of America's capitalist diehards. When costs rise, the first steps taken by US
capitalists is to reduce expenses by cutting wages and benefits, and to transfer
the costs to consumers through higher prices while, of course, shirking their
own share of society's tax burden off on those same workers and consumers.

The crisis facing the American auto industry - alongside war and prison, the
very symbol of the United States - has profound significance for Japanese, both
as workers and consumers of corporations addicted to the shaky US market and as
subjects of an oligarchy whose only policies seem to be meekly obeying American
commands and blindly aping American ways.


Bill Totten     http://billtotten.blogspot.com/