A Century Of Cars: Does Detroit Deserve A Bailout?

November 30, 2008 by Douglas A. McIntyre

Ford1Near the Detroit Metropolitan Airport, visible from several major highways, is a four-story tall replica of a Uniroyal tire. It was built for the 1964 World’s Fair in New York and was moved to its present site after that event closed.

Back then, Akron, Ohio was the “Rubber Capital” of the world with the headquarters of most of the major tire companies including Goodyear and Firestone just a little over 100 miles from Detroit. It was one of the twenty largest cities in the US and Detroit was in the top five. Tire executives could make it up to GM in two hours to grab a three-martini lunch and be home by dinner.

Akron was run by evangelists then, led by the world-class TV minister Rex Humbard who broadcast services from “The Cathedral of Tomorrow”, probably the largest church building in the Midwest. Hubbard’s theology was that the righteous would find prosperity on Earth. In Akron, there was not any evidence to contradict him. Detroit was run by the UAW. It had cut contracts with the car companies which gave workers salaries and benefits which were unprecedented in the history of the American workforce. No one seemed to care much who was in charge. There was no foreign competition. Everyone was making money. People did not know that they should also pray for a prosperous future. Things were too good in the present to bother.

Now that Akron barely has enough people to fill a high school football stadium and Detroit is close to bankrupt, the entire world that relies on the US auto industry wants a part of the Paulson bailout money or any other capital Congress might vote to give it. Public, press, and government opinion about the future of The Big Three runs from allowing them to fall into Chapter 7 to be liquidated  or to the creation of a full-scale salvage program which would keep all of the domestic car companies and their employees as well off as they were when they were making money.

Detroit has probably done more for America over the last century than San Diego, Phoenix, and San Antonio, even though each has more people than the Motor City today.

It is fair to argue that Detroit and the satellite cities around it did more to create the American middle class than any other region. Its factories gave hundreds of thousands of workers, most of whom had never seen the inside of a college, remarkable incomes and economic stability. In addition, the American car did make a great deal of the nation’s population mobile.

Detroit also played a critical role in WWII. Its factories were converted to weapons manufacturing operations. The war might have lasted longer without the extraordinary amount of ordinance the facilities shipped to both theaters of the conflict.

Americans are not much for rewarding behavior that has made it to the history books. Saving industries which are no longer viable is not a part of this culture. If a segment of the economy falls apart, it can always be replaced by something newer and better, something which replaces lost jobs with better ones. It is a nice theory which rarely seems to work.

The advocates of keeping The Big Three afloat argue that closing the domestic car companies could cost three million jobs and tens of millions of dollars in lost tax revenue. Several states, with Michigan out in front, would have to go into receivership and essentially be taken over by the US government.

Free market advocates assume that foreign car companies and private equity firms will take the car company assets which still have value and leave shareholder, debt-holders, and the UAW with little to show  for hanging onto a sinking ship.

It is hard to see how Detroit will be helped by government loans. These could paper over the problems of high labor costs and burdened balance sheets. The tire industry hit hard times two decades ago. Much of the ownership of that business is held outside the US today.

Auto executives have argued that Detroit can be resurrected if they are given the time and the tools to cut down debt and labor costs. They argue that American car companies can make vehicles as fuel –efficient as those from Japanese companies, especially Toyota and Honda (HMC). At this point it may only take a year or so for Toyota to pass GM’s US market share and for Honda to pass Ford.

Sisyphus never got his rock back to the top of the hill. American car companies are doomed to the same fate.  The simple reason that Detroit is finished is that it would take several years for it to become competitive in operations, product development, and innovation. The Japanese and Europeans won’t stand still. By the time the American companies reach the point where their rivals are today, the competition will have moved miles and years ahead.

No matter how much the American government and American sentiment would like to cure Detroit, it has already bled out. Some of its pieces may prosper, but they won’t be in the hands of The Big Three.

The Uniroyal tire won’t have a place in Detroit anymore because the car companies will have gone.

Douglas A. McIntyre