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Detroit bailout not about saving auto firms

December 17, 2008 16:54 IST

In the ongoing power struggle between Republicans and Democrats, Detroit is the latest, and possibly the bloodiest, battleground. And because it is a battle of ideologies with no apparent connection to pragmatic economic reality, the matter of whether the U.S. auto industry survives takes a backseat to which party gets its way.

That's because the two parties see the fate of Detroit as a watershed moment, the kind of event that could potentially redraw the political landscape forever. By refusing to bail out General Motors and Chrysler, Republicans see a way to end the last vestiges of unionism in America and the unions' longtime backing of the Democratic party -- a political base the Democrats will fight tooth and claw to save.

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  • If neither side can win -- if they destroy the American automobile industry in its entirety and if in doing so they set off a chain reaction that turns out to be the last straw for our shaky economic system -- they don't care.

    How can that be? Simple party politics. Because if these individuals bring down the American economy by destroying Detroit, they'll simply walk away from the disaster saying "It was the other guy's fault."

    Detroit Is Still Viable

    Somewhere along the way this debate seems to have overlooked the fact that Detroit, for all its blunders, is still a viable economic engine, providing jobs to millions and creating some of the world's best cars. For example, the best-selling vehicle in America, even in this downturn, is still Ford's F-Series truck, and second place goes to the Chevrolet Silverado.

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  • Even the Dodge Ram continues to hold a strong position in the Top 20 vehicle list, while sales of the Toyota Prius are down substantially with the fall-off in gasoline prices. (We assume that the Prius is the type of car the left wants Detroit to build.)

    And speaking of Japanese cars, I hate to point out the obvious, but car sales in Japan are lower today than they were 15 years ago, down over 30% just last month. Yet you won't see the heads of the Japanese auto companies on the carpet in front of their government officials, being drilled with questions like, "Why don't you build cars the public wants to buy?"

    What's amazing is that Senator Richard Shelby (R-Ala.) is such a huge critic of using taxpayer money to bail out Detroit. Amazing because the state of Alabama has provided hundreds of millions of taxpayer dollars to lure foreign auto companies to build factories on its soil.

    Tax Breaks for Jobs

    Of course, when Alabama gave Mercedes-Benz $253 million to build a factory there, or about $168,000 per job created, that was considered a good thing. When Honda considered building a new factory there, that was worth $158 million, and Hyundai's Southern site choice forced the state to cough up $234 million more.

    Again, these were considered wise investments because the promise was that they would create more jobs for the chronically underpaid Alabama workforce. However, in the summer of 2003, Mercedes brought in Polish workers on questionable B-1 work visas to expand the factory because they could be paid far less than the local workforce.

    So you had Alabama gifting state tax dollars to Mercedes' factory, only to discover that some of the jobs it created went to much cheaper labor imported from Eastern Europe.

    Look at Senator Bob Corker of (R-Tenn). The former mayor of Chattanooga was one of those responsible for winning the new Volkswagen factory at a cost of $577 million in tax incentives. Moreover, Tennessee got that factory only because Alabama offered the Germans a mere $385 million.

    Mississippi paid $284 million for a new Toyota plant; Kia got $324 million from Georgia. Texas had to fork over only $133 million for Toyota's Tundra plant in San Antonio, while Tennessee gave $197.6 million not for a new Nissan factory but simply so Nissan would move its American headquarters to Nashville.

    There are other factories -- BMW in South Carolina, Nissan in Mississippi, and so on -- but you get the point.

    The Republican senators from these states see no problem whatsoever with paying to bring new automobile production to their states, and the media always quotes them gloating about how smart it is to spend that type of money because it creates jobs.

    The reality is that there's no end to the tax largesse handed out to some of the most successful car companies in the world. And you know their names: Volkswagen, Toyota, Honda, Nissan, Hyundai, Kia, Mercedes-Benz, and BMW. The fact that many of these companies' brand-new, state-of-the-art American plants -- nonunion plants, low cost-benefit plants -- are also struggling seems to have escaped the notice of these same elected officials and the media.

    Scanty Orders

    Mercedes recently offered a buyout to its entire workforce in Alabama, and Hyundai has never gotten its Alabama factory up to full capacity. Toyota will not use its upcoming Mississippi factory to build its Highlander SUV, and Nissan is converting its factory in that state to build commercial vehicles.

    Toyota has been forced to shut its Texas truck plant because of scanty orders for the new Tundra, and so on. So Senator Shelby's statement that Detroit "doesn't innovate. They're a dinosaur," while his partner Senator Jeff Sessions (R-Ala.) brags about the "very large and vibrant automobile sector in Alabama," doesn't exactly ring true.

    So we find that nonunion, low-cost, state-subsidized, state-of-the-art auto plants in America are having their fair share of problems, too. But according to Senate Republicans, the only part of the American car industry that isn't working is in Detroit.

    Worldwide Auto Slump

    Other governments aren't being so stingy -- or mercenary. Sweden gave $3.5 billion to stabilize both Volvo and Saab on Dec. 10. Volkswagen has applied to tap into the bank bailout fund set up by Germany for that nation's troubled financial system -- our Treasury and Fed may be compelled to offer similar help. And China just lent Chery Automotive $1.5 billion to continue operations.

    That's right, other industrialized countries around the world will be stepping in to ensure that their own automobile industries will still be working when whatever financial downturn we are looking at is finally over.

    Moreover, they understand that the world's economy is precarious right now, so they aren't demanding that corporate jets be sold, they aren't demanding new business plans to save the individual companies, and they aren't publicly embarrassing the heads of Honda, Toyota, Mercedes, BMW, VW, Nissan, Renault, and others by demanding that they explain why their profits and sales have dropped suddenly. In the rest of the world, elected officials understand serious downturns in the economy and that the automotive industry is cyclical in nature.

    As for Congress, shame on you for playing politics when so many jobs and, in many ways, the future of American manufacturing is at stake. But then again politics is all you know. Maybe you should let American carmakers get on with what they know how to do: build cars.

    Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at University of California at Los Angeles, and is a member of the American Historical Society.

    Ed Wallace, BusinessWeek.com