America's Two Auto Industries

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Government Aid to GM, Ford, Chrysler Could Preserve Old Way of Building and Selling Cars

Can you imagine life without General Motors Corp.? That's now an urgent question facing America's political leaders.

GM survived for 100 years, steering through two world wars, the Great Depression, and all the booms and busts in between. But on Friday, GM said it faces a substantial risk of financial collapse by the middle of next year unless the economy makes a significant improvement, the capital market freeze thaws, or the government provides the money to sustain the company through the downturn.

The Democratic Congress and President-elect Barack Obama signaled last week they are willing to lend a hand. "The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil," Mr. Obama said Friday.

So the question isn't whether Washington is willing to offer more public money to help auto companies survive. There even appears to be a consensus on how much: Up to $50 billion. The tougher question is what's Washington's goal?

First, Congress and Mr. Obama will need to decide what they mean by "the auto industry."

America has two auto industries. The one represented by GM, Ford and Chrysler is Midwestern, unionized, burdened with massive obligations to retirees, and shackled to marketing and product strategies that have roots reaching back to the early 1900s.

The other American auto industry is largely Southern and non-union, owes relatively little to the few retirees it has, and enjoys a variety of advantages because its Japanese, European and Korean owners launched operations in this country relatively recently. Their factories are newer, their brand images and marketing strategies are more coherent -- Toyota uses three brands in the U.S. to GM's eight -- and they have cars designed for the competitive global market that exists today.

Honda Motor Co. sells one basic Civic world-wide. Ford sells two different versions of its rival Focus compact car. Ford is engineering one Focus to take advantage of global economies of scale, but the new car won't hit the U.S. market until 2010.

The New American auto industry employs about 113,000 people, according to a recent study by the Center for Automotive Research. The economic slump is hammering sales and profits for these manufacturers, too. But they aren't looking for subsidies, and probably wouldn't get any since the rules governing the auto industry aid proposals to date effectively exclude them.

So this debate is strictly about the Old American auto industry, represented by the "Big Three" of Detroit. The Detroit Three employ more than 200,000 people directly, and sustain nearly 3 million more indirectly, according to the CAR study. Diminished as they are, the Detroit Three still account for about 4% of U.S. gross domestic product. They also represent a way of doing business that has run its course. GM's plea for a federal bailout makes that official.

The government could justify subsidies as a way to prevent more job losses at the Detroit auto makers. But that would risk delaying the restructuring the unionized auto makers need to be viable. In the fragmented U.S. auto market of the 21st Century, auto makers will need to be nimble enough to make money on 10-15% market share or less -- not the 29% that GM was aiming for less than a decade ago. Does the government want to get into the business of subsidizing job cuts -- paying for retraining and relocation for those who lose their jobs?

Washington could decide the goal in providing taxpayer-financed subsidies to the Detroit auto makers is to increase the number of fuel efficient and high technology cars on the market. House Speaker Nancy Pelosi hinted at this last week in discussions with Detroit Three executives in Washington.

The success of government-mandated automotive product strategies is mixed. The laughable Trabant was a product of the East German Communist government's ideas about affordable personal transportation. On the other end of the spectrum, government mandates such as the California Air Resources Board's demands for "zero emission" vehicles have spurred auto makers to take risks on new technology they otherwise might have left on the shelf. Modern gas-electric hybrids such as the Toyota Prius exist in part because of bureaucrats.

One thing Washington could do to spur profitable sales of fuel-stingy cars is put a floor under gas prices, which now have dipped below $2 a gallon in some parts of the country. No one's discussing such an idea.

Perhaps the government will decide that its role should be to give the Detroit Three the chance to play the same game as its international rivals when it comes to the costs of health care.

Auto makers with home operations in Europe and Japan start with a big advantage in that they are not directly shouldering on their income or balance sheets the burden of providing health care to the bulk of their retirees. Those costs are largely borne by the government and the costs spread to taxpayers.

The Detroit Three in 2007 set up a mechanism to unload their union retiree health obligations by 2010 to trusts controlled by the United Auto Workers. But those trusts aren't up and running yet, and aren't fully funded. Government subsidies could be used to plug that funding gap, and allow the Detroit Three to put their cash into better cars. This is a proposal the UAW supports.

There's another thing the government could do with $50 billion. It could give a $4,000 to $5,000 tax rebate to everyone who buys a new car or truck made in the United States during the next year. The tax break could be scaled up for people who trade in a low mileage vehicle for a vehicle that burns 15%-20% less gas -- a percentage that's roughly equivalent to the share of oil the U.S. imports from the Persian Gulf.

Leaving it up to consumers what auto companies should benefit from government subsidies might not save GM. But it would save the government from having to choose sides between America's two auto industries.

Send comments about Eyes on the Road to joseph.white@wsj.com.