Could We Lose the Auto Industry Again?

Detroit -- With GM and Chrysler seemingly bouncing back from their bankruptcies, and the federal government largely repaying its loans, losing the auto industry may seem unlikely -- and it still is, but it is no longer impossible. First, the conventional wisdom that the auto industry would make major sales gains from a conventional recovery in 2011 has been smashed by the failure of the recovery to follow a conventional path. Both Chrysler and Ford reported soft results and declining profits for the second quarter. GM didn't report.

These reports came just as the Big 3 entered contract negotiations with the United Auto Workers; the union had been hoping to recover some of the lost jobs and wages that workers surrendered when Chrysler and GM were going into bankruptcy, but that calculus becomes more complicated if sales slow further because of the depressed, jobless economy. The American companies have been hiring new workers at very low wages, arguing that this is necessary to enable them to make profits on small cars.

But Detroit's recovery to date has in fact been based its new success in marketing small cars. And the reason it is forced to use such low wages in small car plants has little to do with the economics of making those cars -- it is driven by the continued burden American manufacturers face from the way in which pensions and health care are financed in the U.S. by employers, not the government. The current approach taken in the budget and deficit discussions -- shrink the government's role still further -- is going to be lethal not only to autos, but to all heavy U.S. manufacturing, particularly legacy companies in industries like steel, autos, and other rust-belt specialties.

You have to wonder if the U.S. auto companies can continue to make better small cars while being forced to pay lower wages. The economics do not seem terrific. And the companies are quickly slipping back into their old assumption that they must profit by having the ability to sell large, inefficient, and outmoded vehicles at the top of the market -- trucks and SUVs. They fought vigorously to prevent the Obama Administration from establishing new emission and fuel economy standards that would help get the U.S. off its addiction to foreign oil. Today the Administration announced a proposal that is going to keep the pressure on the industry to keep innovating, move to electric vehicles, and cut emissions and fuel use. While short of the 60mpg standard that was feasible and that environmentalists favored at 54.5mpg by 2025, it's still a strong standard and ensures ongoing progress. It will cut about 1 million barrels a day off of current U.S. oil consumption. But the auto industry negotiated for and received special treatment for what they call "work trucks," arguing that these cannot be electrified and are harder to make lighter in weight than cars. (True.) The danger, however, is that the auto industry may choose to exploit this loophole once again, to make vehicles that are really intended for family and passenger use, not genuine work vehicles. This would result in a larger proportion of the fleet being sold with poor fuel economy because of the opportunity for Detroit to once again game the fuel economy rules.

So while the Obama Administration deserves a great deal of credit for both rescuing the U.S. auto industry and keeping pressure on it to innovate and move forward, and while the UAW is sending very strong signals that they think such innovation is a key to the survival of the U.S. manufacturers, there are alarming signals coming out of Detroit that the industry is tempted to bet on low oil prices and heavy, outmoded clunkers.

Let's hope they resist the temptation, and that Obama makes such resistance easier by writing tough rules that limit the ability of Detroit to game the new standards.