So You Think The Auto Industry Should Be Allowed To Fail

Later this week, the CEOs of GM, Ford and Chrysler will return to Washington to make what will hopefully be a much better case for why the government should give their companies $25 billion in support. Leading up to that appearance, technology commentators in Silicon Valley (like this one and this one) have ventured far outside their area of expertise to call for the government to let the auto companies fail. They're being echoed by their Seattle counterparts as well.

Having just returned from the Detroit area where I spent Thanksgiving with my family, I believe wholeheartedly that this is a horrible idea.

Lord knows, much of the criticism of the auto industry is justified. It's true that the CEOs' first D.C. appearance was lamentable, deserving of the lampooning they received on Saturday Night Live and elsewhere.  These guys need to put forward a concrete plan, and it's crazy they didn't present one the first time, especially after Obama had basically given them the answer they should have provided: seriously reforming their business practices while focusing on more fuel efficient vehicles.

And so far, the auto makers (and the Michigan congressional delegation led by Senator Carl Levin) have hidden behind the argument that people just don't appreciate the reforms Detroit has already made.  Levin said on a recent Meet the Press appearance:

GM now produces more models getting more than 30 miles per gallon, twice as many, as any of its competitors.  Ford, Chrysler are moving into the hybrids.  We're doing the plug-ins.  GM is going to lead the way in plug-in hybrids if people will recognize that this isn't the '70s when the, when the Big Three were producing inferior products. 

While there may be some truth to this, it's far from good enough.  The 30 MPG that Levin cites is based on the faulty Corporate Average Fuel Economy (CAFE) measurement, which EPA has shown are 5-20% overstated, or worse. And a March '08 report by the National Highway Traffic Safety Administration showed that even going by the CAFE measurements for domestic automobiles, Honda and Toyota (at 35.2 and 34.7 respectively) outperformed the big three (at 29.5 for Ford, 29.4 for GM, and  29.3 for Chrysler), who barely exceed the minimum requirements. 

So these CEOs need to come back with a plan that goes well beyond just saying that what they're already doing is good enough.  And they need to do it in a big way.  For example, I'd love to see the automakers make a gesture like pledging to stop making new SUVs.  Just leave that part of the market to someone foolhardy enough to stay in it. Or pledge, as Toyota already has, to provide a hybrid option on every vehicle they sell. They've got to show that they understand that any financial support will be contingent on improving fuel economy and helping to reduce our dependence on foreign oil. And the CEOs have got to cut their own salaries, ideally to $0, while this bailout is going on.

They're probably not going to be big enough or bold enough.  If not, Congress needs to spell it out for them even more clearly than Obama already has, and to demand new CEOs. But they cannot allow the auto industry to collapse. Because Michigan is in big trouble already, even with the auto industry more or less intact.

Michigan's unemployment rate has already worsened over the past year so that now it is worse (at 9.3%) than France's (under 8%). Housing prices are through the floor.  If you are a tech commentator living in Seattle or SF and you think the housing market is weakening, just imagine what it would be like to try to sell a home in Detroit right now, where the average price of a home is $73,000, and the average price per square foot has already fallen to $34.  (Average home price in Seattle: $663,000, avg/sq ft: $354.  Average home price in SF: $1,227,450, avg/sq ft: $648.)  And the low price of gas in the Detroit area (at $1.68 late last week) is not enough to help; it's probably only making things worse.

On a national level, for all the comparisons of the current economic situation to the 1930's, things haven't gotten nearly as bad.  But if the auto industry crashes, things are going to get much worse than they are now, starting in Michigan. Congress needs to push the auto industry in the right direction, but it cannot allow it to fail.