What I Didn’t Know—and China Can Learn—From the U.S Auto Industry

First it was Fannie Mae and Freddie Mac; then AIG; and then 14 of the country’s largest commercial banks. Every day it seems, more and more companies in the United States are becoming “state-owned enterprises,” a term I had always associated with the Chinese economy.

 

The next round of state ownership—or at least bailout—is likely to be in autos. Executives at General Motors and at Cerberus, the private equity firm that owns Chrysler, are feverishly working to merge the two companies, with Election Day as a deadline to leverage political support—and maximum capital commitments– from the government. Soon, the “Big Three” may even become the “Big One” as rumors abound regarding efforts to put all three companies together.

 

What’s driving these talks? Is it the efficiencies that might be gained in design, production and sales and marketing? Sadly not. It’s even more basic—money. Specifically, a larger share of the $25 billion in loans that the government has already set aside to help the shift to green cars. With Detroit’s prospects looking dimmer by the day, this may in the end become survival cash instead.

 

According to a recent editorial in the The Wall Street Journal, there may be one more thing at stake—political clout. Holman W. Jenkins, Jr., a member of the Wall Street Journal Editorial Board, wrote:

 

The talk is of synergies and cost-cutting, of tapping new lodes of cash to ride out the storm. Don’t believe it. These negotiations are about one thing: creating a political last stand of American auto making that a Democratic Congress and president won’t be able to resist bailing out.

 

 

How did the U.S. auto industry get to this point? The knee-jerk response is to blame it all on poor management, but Mr. Jenkins does not think so. In his words: “The human factor nets out over time.” Instead, his thesis is that, like banking, the auto industry has been around long enough to have taken on an enormous amount of baggage from government intervention. He calls this the “GM Effect,” which he describes in this way:

Why don’t the auto makers limit themselves to paying competitive wages and benefits in line with what workers could earn elsewhere? Because, in the 1930s, Congress passed the Wagner Act with the nearly explicit purpose of imposing a labor monopoly on Detroit to keep wages at higher-than-competitive levels.

Why doesn’t Detroit rationalize its musty brand lineups and dealer networks? Because, in the 1950s, legislatures across the country imposed franchising laws, including the federal “dealer day-in-court clause,” to make such rationalization prohibitively expensive.

Why don’t the auto giants do as Whirlpool and other manufacturers have done, and move their production to cheaper offshore locales? Because, in the 1970s, Congress enacted fuel economy rules to penalize homegrown auto makers if they don’t build the lion’s share of their cars in high-wage, UAW-staffed domestic factories.

 

Understandably, people in the United States are outraged by the huge government bailouts and the greed on Wall Street and self-serving actions of company managements that seem to have gotten the country into this mess. No doubt, managements have not acted responsibly, but there is plenty of blame to go around. In both banking and autos, you don’t have to look far to see the fine hand of government at work.

Interestingly, China is moving in the opposite direction as it privatizes and sells off ownership stakes in its state-owned enterprises. As it does, it should learn from the United States and make as clean a break as possible. Well-meaning regulations, which may not have been detrimental in pre-globalization days, can be lethal in today’s world where every company competes with every other company around the world, every day of the year.

 

 

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