Five years ago when the Democrats gathered in Denver to nominate Barack Obama for president, I decided to cover the event in a Ford F-150 pickup truck to remind delegates what I believed was at the root of America’ economic problems.
As I noted at the time, the Ford F Series trucks––the 150, 250 and 350 models––have been America’s best selling pickups for almost 30 years. In 2005, when automotive sales in America hit a record 16.9 million units, Ford led all competitors by selling nearly a million of them. They were the backbone of American agriculture and indispensable to a construction industry then at the height of a housing boom.
As the Democrats gathered that August, mortgage foreclosures were cutting the legs out from under the housing market and auto makers were feeling the pinch. With gas prices topping $4.50 a gallon, the rental companies at the Denver airport were doing a brisk business in sub-compacts (at $468/week) while their inventory of Ford pickups sat idle––even at half the price.
Complacent and Clueless
The rental lot at the Denver airport turned out to be only the tip of an iceberg. Across the country, I discovered that Ford had over 200,000 unsold F-150 trucks sitting on car lots. They were the harbinger of hard times for an auto industry whose sales had slipped from its peak of 16.9 million vehicles in 2005 to 13.2 million in 2008 and finally bottomed out at 10.4 million in 2009.
Despite the evidence of slowing sales, Ford, Chrysler and GM – the Detroit Big Three –- continued to pump out cars on the assembly line because they were locked into union contracts that mandated they pay workers 85 percent of their salaries if they shuttered plants or laid off factory employees. Foreign automakers, unfettered by legacy pension and health benefits, were making better cars at substantially lower costs. But nothing in the design pipeline stirred the imagination of the public.
The auto industry, in short, was a mess. Lackadaisical management, intransigent unions, foreign competition and an over-reliance on gimmicky rebates and sales incentives threatened to bring down an industry that employed one of every five manufacturing workers in America.
A Bailout or a Lifeline?
Less than three weeks after the Democrats left Denver, the malaise I felt in the auto industry blossomed into a full-fledged economic crisis when financial powerhouse Lehman Brothers filed for bankruptcy on September 15. Without massive government interference, President Bush’s Treasury Secretary Henry Paulson feared all of America’s major banks and investment firms would fall like dominos behind it. By early October, Congress and President Bush cobbled together a $700 billion Troubled Assets Relief Program (TARP) to keep the financial sector afloat––and the automakers wanted in on it.
Executives from the Big Three in Detroit flew to Washington on their private jets and asked for a combined $50 billion to avoid bankruptcy. Although the optics weren’t good (especially in the midst of a heated election campaign), Congress committed $25 billion to the companies but put off the details until after the November elections. The decision on what to do for the auto industry, and how to do it, would fall to the newly-elected President Barack Obama.
According to Zachs Equity Research, the bulk of the federal rescue money went to only two of the three Detroit problem children, General Motors and Chrysler. (Just before the crisis, Ford made a bold decision to mortgage the company’s future–including its logo–for operating cash so it did not seek bailout funding.) General Motors received a total of $49.5 billion under the TARP program. Chrysler claimed another $12.5 billion.
This was not the only government support the automakers received. The U.S. Treasury injected another $18.7 billion into their lending affiliates – $17.2 billion for a 74% stake in GMAC (now known as Ally Financial) and $1.5 billion to Chrysler Financial. And Ford applied for and won a $5.9 billion loan from the U.S. Department of Energy to retool two of its domestic plants to produce the fuel-efficient Ford Focus EV and C-Max Energi plug-in hybrid.
Socialism or Smart Planning?
President Obama’s decision to rescue the automakers became a defining issue in the 2012 presidential election. Conservatives who thought Obama was leading America down the road to socialism could find plenty of evidence in the actions his “car czar” took to reshape the auto industry, while liberals savored the calming effect the bailout had in cities and small towns where the automakers and their suppliers had factories. (And pundits noted the political repercussion was that Michigan, Ohio and other rust belt states voted for Obama.) Whatever side of the philosophical divide you were on, everybody knew the government role was anything but benign.
The government forced the CEOs of both GM and Chrysler to resign. The companies were put into bankruptcy; the unions stripped of long-standing health and pension benefits; and the union job bank abolished. Hundreds of dealerships were closed. GM was forced to sell or shut down iconic brands like Hummer, Saab, Pontiac and Saturn. Chrysler was pushed into a convenient merger with Italy’s Fiat; and General Motors had to restructure its stock, giving a portion to the United Auto Workers in exchange for contract concessions and granting 700 million shares to the federal government (roughly 61 percent) to secure the government loans.
The auto industry bailout in 2009 led to the loss of 400,000 jobs in the auto industry, according to the Center for Automotive Research (CAR). But without it, CAR estimates another 1 million jobs would have disappeared and the U.S. government would have lost about $28.6 billion in tax revenues.
On The Road Again
Enough time has passed since the 2012 election to dispassionately assess the pros and cons of the bailout. On the job front, it appears a recovering auto industry has regained about 1.5 million jobs. Chrysler has repaid 90 percent of its loan, and GM has paid down $30 million on its. A measured sell-off of government shares after General Motors went public again in 2012 has reduced government stock ownership to roughly 16 percent. Financial analysts nonetheless believe $1.5 billion of the Chrysler loan will never be repaid, and the U.S. government will ultimately lose about $10 billion on its General Motors investment by the time all the stock is divested in 2014.
But it is clear now is that the auto industry is back on its feet. Auto sales in America are on track to exceed 15.2 million vehicles this year. GM has committed to investing $1.5 billion in its North American plants in 2013, and Ford plans to raise its annual capital spending to about $6 billion (from $4.3 billion in 2011) and add 1,200 new employees by 2015.
And the F-150 pickup is back on top of the heap. In the first five months of 2012, Ford has sold 299,477 F Series pickups –– almost 100,000 more than the runner-up Chevy Silverado. May sales alone crossed 70,000 units for the first time in six years, leading some optimists to speculate Ford may once again sell over 1 million pickups next year.
The 2013 edition of the F-150, moreover, is far better than its predecessor. It features a new EcoBoost engine that gets 35 to 50 percent better gas mileage (17 city/23 highway), a 6-speed transmission with a Tow/Haul mode, high intensity headlamps, and a SiriusXM Traffic and Travel Link computer on the dashboard.
Now where was that baby when I needed it back in 2008? Waiting for some president to come along and make the auto industry come to its senses. Sometimes you have to knock a few heads together to get change you can believe in.