Hirsch: Big Three automakers hampered by legacy costs
Nov. 13, 2008
ATLANTA—While Congressional Democrats consider a possible bailout of U.S.-owned automakers, Georgia State University economics professor Barry Hirsch says the Big Three must restructure to remain competitive.
HIRSCH: Whatever that restructuring is, it’s going to involve closing down plants, becoming smaller, having a reduced dealer network and having a loss in jobs for the U.S.-owned auto industry. How do we best get there? That’s not altogether clear. Possibly it makes sense to give them some short-run relief, take some of the current pressure off, until consumer spending gets back on track. Alternatively, some would argue that this is best done under bankruptcy protection just as was done recently in the airline industry for four of the major airlines. [length: 0:37]
But automakers may be reluctant to go the bankruptcy route for a number of reasons, Hirsch says, including cost.
HIRSCH: They are very concerned about reorganizing through the bankruptcy process for a couple reasons: One, it’s an expensive process in and of itself and is very complicated. Moreover, their big concern is that customers are less likely to buy General Motors cars or Chrysler cars if they go into bankruptcy. Now, in the airline industry, that has not proven to be the case. However, that’s a little bit different product in that you fly, and then you’re finished with your flight until the next flight. Here obviously consumers are worried about warrantees and whatnot. I don’t think consumers ought to be so concerned about that but in reality, they may well be. [length: 0:41]
The government may also be reluctant to see automakers in bankruptcy.
HIRSCH: If GM were to go into bankruptcy, one effect that that would have is that their retirees, their pensions would go over to the Pension Benefit Guaranty Corporation, the PBGC, and that’s a massive pension plan. Now, the GM pensions have been relatively well funded until just recently because of the drop in equity value. Much of that would still be funded but there would still be additional costs to taxpayers associated with that being shifted to the PBGC. That’s something else that I think the government would like to avoid. [length: 0:52]
While the faltering economy and squeeze on consumer credit have hurt the auto industry as whole recently, Hirsch says foreign-owned firms, operating in the U.S., don’t face the same challenges as Detroit.
HIRSCH: The widespread perception is that the auto industry in the U.S. has not done well over time. That’s a bit misleading. What is the case is that the U.S.-owned companies have been shrinking over time, but the overall U.S. auto industry, if you look back say to the early 1970s, has about the same employment as it did then but much higher output. Productivity in the industry has increased tremendously. What has changed is that the U.S.-owned firms, the Big Three, Detroit, has been shrinking while at the same time there has been very rapid and steady growth in foreign-owned plants in the U.S., typically located a little farther south with largely non-union workforces. The U.S.-owned firms have what now are called legacy costs which are their promises to retirees for both pensions and healthcare costs. Those were sustainable as long as Detroit’s sales were high relative to the number of retirees. But as sales have withered, their share of the U.S. market has fallen. Now they have, General Motors has, more retirees than they do current workers. That’s hard to sustain. [length: 1:17]
For Georgia State University RadioLine, I’m Michael Davis.
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