Government Motors Inc.

There is a delicious little irony brewing now that the Obama administration has stepped in and engineered a bankruptcy under which the US government now owns 60 percent of General Motors. This is not the bankruptcy on offer 7 or 8 months ago before the new President came into office, not least because this bankruptcy has been shaped more than usually against the interests of bondholders and investors and in favour of the United Auto Workers. And don’t forget that the US taxpayers have now pumped some US$50 billion into GM.

The goal is to save as many jobs as possible of the 25,000 odd employees still left in GM’s domestic operations. And so, having become the owner of AIG, Citi, Fannie Mae and Freddie Mac, the US government now owns GM too.

But here’s the irony I see on the horizon. Start by asking yourself what sort of Americans tend to buy GM products these days. Remember, what GM does best is make light trucks and bigger than average cars. If you had to make a sweeping generalisation, I figure you wouldn’t go too far wrong in saying some of GM’s most loyal customers are what might be described as Sarah Palin Republicans – or rednecks if you work for National Public Radio in the US, or for that matter for the ABC here in Australia.

Seriously, how many of the glamorous Obama supporters in Hollywood or well-heeled New York types do you think would be caught dead in a US made car? Come on, even top of the line Japanese cars won’t suffice for these people. It has to be European and it has to be known to be expensive.  These people don’t buy GM cars and it takes a huge leap of faith to think they’ll start doing so now.  Even the comparatively poor college professor crowd tends to prefer a five year old Volvo to anything made in the US. Chardonnay socialists like their vehicles to come from France or Germany, not motor town USA.

Now I figure somewhere down the road a lot of these regular GM buyers, many of whom are Palin Republicans, are going to refuse to buy cars from a government owned company. As tough as it might be for many of them, they’ll move to Ford before they buy from a company owned by the US government. (And let me here confess to some self-interest on the topic – since arriving in Australia four and a half years ago I’ve been a Ford driver, so along with most of Australia’s cab drivers I’m happy to welcome anyone new to the club.)

I suppose what I’m saying is that a big risk in this bailout is not just that potential buyers will worry about the status of warranties or spare parts for companies in Chapter 11 bankruptcy, worries that government guarantees might well assuage. Another worry is that regular buyers will now refuse to buy from a government owned company, especially one that has already received $50 billion from taxpayers, and may well need more.

This risk is accentuated given the political conflicts of interest we are already observing. The Obama administration is presently pushing better gas mileage requirements, punishing GM in the sense of affecting the vehicles it makes best. It is discouraging small car imports made overseas by GM to meet these higher fuel efficiency targets, so that they will be domestic GM cars built by UAW workers (where the total cost per hour, including salary and benefits, is higher). And we know that the pressure on politicians in Congress, now the owners of GM, to prevent closures of factories in their electoral districts will be immense.

GM wasn’t succeeding when it was focused on building cars and trucks. Add in new political constraints and those imposed by the UAW, and you have to be a real optimist to think this will end well for GM, that out of the ashes will emerge a leaner, meaner, highly competitive GM.  Certainly nothing like that happened when British car makers were faced with a similar sort of crisis.

So I’m even doubtful this politicised bailout will end up saving jobs. If demand goes down, jobs will be cut. It is as simple as that. Yes, the delay might allow time to lessen the wider economic impacts, but it’s coming with a $50 billion price tag. What does that add up to per saved job, be it temporarily so or otherwise?

Car producers around the world are presently facing a situation where capacity is about twice as great as demand. This is an industry where the weak will be winnowed out. GM relies in no small way on the sort of buyers who are likely to detest the thought of buying from a government company.

I’m just wondering if Ford will have the nerve to run advertisements pointing out that it’s the last non-government owned US producer. Loads of people will be thinking it. Whether anyone will say it is another matter.

James Allan is Garrick Professor of Law at the University of Queensland.

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