The End of the Road?

It is over fifty years ago when the then Chief Executive of General Motors, Charles Wilson, famously told the Senate in 1953 that “for years I thought that what was good for our country was good for General Motors, and vice versa”.

Not any more. It could well be the end of the road for General Motors and Chrysler after a $14 billion rescue deal collapsed last night. General Motors may be bankrupt by Christmas.

The deal collapsed after Republicans and Democrats failed to agree on the timing of deep wage cuts for union workers. “We’re not going to get to the finish line. That’s just the way it is. There’s too much difference between the two sides,”  Senate Majority Leader Harry M. Reid (D-Nev.) announced. “It’s over with,” he said.

The days that what was good for GM was good for America have long disappeared into the history books. Americans now buy fewer than half their vehicles from GM, Ford Motor and Chrysler – 47.7 per cent in November.

The Japanese have taken over. The Europeans have arrived too. It was never going to be a given that the Senate would vote for the package, given the unesasy vested interest of American politics. It is not without co-incidence that two of the rescue package’s most ardent critics, Senators Richard Shelby, of Alabama, and Bob Corker, of Tennessee, are home to Detroit’s foreign-based rivals such as Toyota, Honda, Daimler, Hyundai, Nissan and Volkswagen.

But here it gets interesting –if the Big three survive the next couple of months here is the dilemma, as pointed out by Robert Z Lawrence, from the Harvard Kennedy School in the Financial Times. “The basic problem is that Americans like to drive sport-utility vehicles, minivans and small trucks when gasoline costs $1.50 a gallon. As a result, the big three are really truck companies.”

The Big three have been assisted by Congress’s pathetic record in increasing fuel efficiency. This made them blind to the growing trends in Europe and elsewhere towards cleaner, smaller cars. They ignored the storm clouds of climate change, the credit crunch and growing ecological awareness. Suddenly in the summer, as if court unawares, when the oil price reached $147 a barrel, American consumers were screaming for more fuel efficient engines. But at $40 a barrel, those voices have gone remarkably silent.

So as the FT points out: “There is a distinct possibility that if they really do increase their small car production, in a few years the big three will be back asking for more help, on the grounds that they are losing money by doing exactly what Congress asked.”

The way out of this argues Lawrence is to make sure the price of gasoline in the US stays high, so people demand smaller cleaner cars.  He argues: “The key to changing consumer behaviour and providing incentives for alternative fuels is a guarantee that in the not too distant future, say in five years time, and for some time after that, gas will cost no less than five dollars a gallon (in today’s dollars).  This will lead buyers of cars and trucks to make different choices. It will also provide the incentives for firms to develop domestic energy supplies of both oil and its substitutes.

The worry for the big three is that they should have seen the storm clouds coming. Someone might be making fuel efficient cars in five years, but it might not be them.