More Bad News for Detroit

Several years ago, when I learned of things like current accounts and corporate expatriation, I tried to avoid purchasing goods that were made overseas or by foreign corporations. However, because of my mother's terrible experience with a Ford minivan, I could never get myself to buy an American car. And even before environmentalism was "An Inconvenient Truth," the immigrant in me could never justify owning a gas-guzzling behemoth. Nevertheless, this aversion didn't prevent me from rooting for Detroit to succeed.

So, in the late 1990's, when the rest of the world had caught the Asian contagion and oil was 10/bbl, it was refreshing to see Detroit earn billions selling high-margin SUVs and trucks. For a while, Detroit was the envy of the automobile world, with the Germans and Japanese trying desperately to enter the SUV market. But $130 oil is a different beast. Today, GM reported that sales were down 27.5% in May; Ford reported a 16% decline. Even vaunted Toyota, now the world's largest automobile manufacturer, suffered a 4% decline.

For a while, all was good. Ford and GM used the SUV cash machine to honor billions of pension promises; at the same time, earnings were also finance Ford Credit and GMAC, their consumer credit arms. As America went through its housing boom, these subsidiaries were so profitable that there were calls to spin off these high-growth divisions. However, now with the housing bubble burst and $4 gasoline, both the manufacturing and finance arms are highly toxic. In a sense, Detroit doubled down and lost big.

Yes, Detroit should have had more foresight and seen the end of cheap oil and invested in smaller, more efficient cars. And yes, the consumer finance arms should have seen the end of easy credit. And yes, Expeditions, Hummers, etc. are not exactly environmentally friendly. Nevertheless, the strange joy that I sense from some of my friends over the Detroit tragedy is somewhat saddening. After all, it was Detroit that created the modern social net, providing pensions that were near the working wages and NO-COST insurance. To disown Detroit now is to ignore the historical advancements that it made to labor. Furthermore, the responsibility to honor these pensions falls on all of us, through the Pension Benefit Guaranty Corporation.

To their credit, both Ford and GM have initiated substantive policy changes for this environment (e.g. "retiring" Hummer, ramping production of the gas-electric hybrid Volt, closing factories, and alas, relocating factories to Mexico), but the inertia required to be competitive will take years. Luckily, they've got billions in reserve, enough to withstand several unprofitable years. However, looming in the background is the $100B+ pension obligation that is guaranteed through the PBGC.

While many have seen the inevitable demise of Detroit, no one could have possibly foreseen the rapidity by which it occurred. Already, stagflation has devoured both the airline and automobile industries. Who's next?