- Gwyn Morgan, Director, Manning Centre for Building Democracy
Baby boomers here in London must be experiencing déjà vu.
Four decades ago, auto giant British Leyland was desperately seeking government funds to stave off bankruptcy and prevent the layoff of thousands of highly paid unionized workers. After burning through today's equivalent of over $16-billion (U.S.) in taxpayers' money, the firm eventually disappeared, relegating iconic cars like the Triumph to collectors' items. Last Tuesday, British auto makers implored Alistair Darling, Chancellor of the Exchequer, to give them state aid to help them through "unprecedented circumstances."
Citing pending bailouts of U.S. auto companies and government aid pledged to its competitors in Germany and France, the group said: "We need a bridge that mitigates the immediate impact of the economic crisis and helps the U.K. auto sector stay on course for its long-term priorities." Meanwhile, anticipating that the Detroit Three will be bailed out, European auto makers are collectively calling for Euro 40-billion ($50-billion) in government-backed loans from the European Investment Bank, supposedly to help develop cleaner cars. Even Japan has vowed to ensure its vitally important auto sector isn't disadvantaged by subsidies from other governments.
Like the subprime mortgage crisis that started in the U.S. and spread like a global pandemic, the auto-sector crisis has spawned calls for government action. The urgency of each plea is measured by a given firm's remaining cash resources divided by its monthly cash "burn rate." While General Motors CEO Rick Wagoner uses GM's alarmingly small number of solvent months remaining as the centrepiece of his bailout pleas to the U.S. Congress, American law makers and taxpayers would be well-advised to reflect on what the combined burn rates of the Detroit Three would cost, and just how and when government support would end.
In the case of British Leyland, union-driven politicians forced taxpayers to pour good money after bad for more than a decade before the inevitable demise.
Supporters of Canadian bailouts cite three main arguments: GM, Ford and Chrysler are just too important to let fail; the help is only needed until the economic crisis is over; and governments are helping the banks, so why not the auto sector? Let's examine each of these arguments.
First, the Detroit Three are important employers, especially in Ontario, but there are no Canadian-headquartered auto firms, and Honda and Toyota plants also provide jobs. Does it really matter whether Canadian auto plants are controlled from Tokyo, Berlin or Detroit? Businesses in all sectors and of all sizes are being battered by global events. Corporate bankruptcies, most of them in the crucial small-to-medium-size category, are rising. Many of today's struggling businesses are young companies where new ideas and growth potential may well determine our economic future and, collectively, they employ more people than the auto sector. One of their biggest challenges is that their lifeline to financial markets has been severed. Surely these smaller firms could make a more compelling argument if the government makes the policy decision to risk billions in taxpayers' money.
Second, virtually no one thinks North American big auto can survive without radical surgery. These firms are burdened with legacy union agreements that make the cost of a line worker uncompetitive, and they face billions of dollars in unfunded pension liabilities. Caught in a downward spiral, layoffs to save costs only increase pension liabilities. On the management side, the Big Three failed to move on from the big vehicles and aging technology that the car-buying public no longer wants. Even in the best of circumstances, this would take years to remedy, and in the meantime the outlook is for global overcapacity. The hard reality is that global car production will rationalize to those with superior technology and lower costs than the Detroit Three. Radical surgery may save them, but that won't occur if the government puts up cash. A case in point is Air Canada, where the really tough changes to union contracts took place during bankruptcy protection.
Third, government helped out the banks, why not us? On the surface this seems relevant, but it reflects a fundamental lack of understanding of today's financial systems. The banks are intermediaries that serve as a storage place for personal savings, and they facilitate virtually every financial transaction. Without the confidence of personal savers and without the ability of businesses to access these funds, the entire economy would grind to a halt. It's not about bailing out the bankers ... it's about saving the entire financial system.
A fundamental strength of market capitalism is that businesses no longer viable disappear, while businesses with new ideas that meet changing needs and wants, thrive and grow. Fundamental restructuring almost never occurs until a business faces the prospect of its demise. This is creative destruction, and virtually every attempt by government to interfere with this natural evolutionary adaptation process ends up wasting limited resources on businesses whose life cycle is ending, rather than creating and encouraging the enterprises of the future.
Gwyn Morgan stepped down as EnCana's CEO in 2005.
