For the last several weeks, the automotive world has been buzzing.
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First, the Cash for Clunkers program, and now G.M. is selling its cars on eBay, the world’s largest swap meet.
This is great stuff if you’re in the market for a new car. On the other hand, if you own the company selling the cars, it raises pretty dicey issues.
In the aftermath of the Obama administration’s bailout of General Motors, the American taxpayers now own 61 percent of the troubled automaker. As owners, we should be thrilled with any program that boosts sales. More sales mean more profit.
It’s not that simple.
Look Who the Boss Is
The history of government ownership and control of private industry is a mixed bag. Economic evidence suggests that extended state involvement in industry rarely works best. Although the Obama administration has vowed to keep its distance from management and sell off its stake in GM as quickly as it can, history shows that government ownership remains a double-edged sword.
Government-backed companies brought blackouts to Eastern Europe and produced the clunky Lada in Russia. In sharp contrast, a government-backed firm – Airbus Industries – also launched the biggest jumbo jet in history. Owned jointly by the French and Spanish governments, with low-interest loans from a host of other European countries, Airbus burned though $15 billion over the past decade to develop the risky A380 superliner. Despite these massive expenditures, the mega-plane, which can seat 853 passengers, is still weighed down by nettlesome production delays.
Airbus has managed to muddle through these problems; and this spring, Singapore Airlines started flying the A380 commercially in Europe. Recent industry reports show that Airbus is poised to surpass Chicago-based Boeing as the world’s largest aircraft maker, based on total sales.
In China, government ownership has produced the largest cell phone company on earth. The economies of scale produced by a company of this size are terrific. Anyone who has followed the flap over internet restrictions in China, however, knows that central government control of communications also poses enormous risks of heightened censorship and domestic spying.
Since the restructuring of G.M. under the government banner, there has been a lot to applaud. Non-performing models have been dropped; management ranks have been thinned; and redundant dealerships have been eliminated.
These are positive developments for you and me, the new owners. To those G.M. employees who have lost their jobs and to dealers who have been forced to shutter their businesses, these changes have been horrendous.
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In the fall of 2006, French executive Christian Streiff was forced out after only three months at the helm of Airbus for proposing a radical restructuring that would have cost thousands of jobs across Europe. If G.M. moves to shift jobs overseas or build factories in the lower-cost countries of Asia or Latin America, it’s hard to imagine that the administration will be able to ignore the political pressure to intervene.
A Volt Jolt
Over the last several weeks, G.M.’s anticipated debut of the Chevy Volt plug-in hybrid has been capturing headlines. Even though the Volt will not be on the market until the middle of 2010, its eye-popping promise of 230 miles to the gallon performance already has consumers salivating.
While sales prospects for the Volt look promising, it will not be the only gas saver on the market. Nissan is getting ready to release the all-electric Leaf. The Japanese automaker is touting a jaw-dropping 367 miles to the gallon for $10,000 less than the projected sticker price for the Volt. Ford has a similar vehicle in the works as does Fiat-Chrysler in which the U.S. government has an 8 percent stake.
Before these cars can post their mileage claims, Uncle Sam must certify the results through monitored tests performed by the E.P.A. (Environmental Protection Agency). With the federal government owning a majority stake in G.M. and a slice of the new Chrysler, the appearance of conflict in interest wherein the government favors its entry over the competitors will be tough to shake.
The government will be faced with a similar conundrum when it comes to crash test ratings, or if G.M. is sued for injuries resulting from dangerous defects. If the government mandates a recall for Toyota or Ford but fails to take the same actions for defects in a G.M. or Chrysler, the charges of conflict will be almost impossible to skirt.
Perhaps the most difficult issue for this government-owned company to tackle will be the looming problem of pensions and employee healthcare.
For several years, American automakers have complained that their ability to compete has been hampered by rapidly rising pension and healthcare obligations that their foreign competitors don’t face. With the taxpayers owning a majority stake in G.M., this problem has landed squarely in the lap of government.
Pensioners vs. preservation of the bottom line.
You make the call.
In a perfect world, the government should stay out of private industry. The world however, especially in the midst of the most dangerous economic crisis since the 1930s, is far from black and white.
Given this understanding, federal ownership of G.M. or any other industry has to be transitional. Governance of the companies should be transparent and, to the greatest extent possible, remain under private control. When a conflict arises, the government must retain dispassionate neutrality despite the costs.
With the raging battle over the future of healthcare hovering on the political horizon, the debate over government’s role in businesses like G.M. is just the appetizer.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
