Government Motors

Barely five months ago, the Obama administration seemed to defy economic gravity as it pumped tens of billions of dollars to keep America’s top automakers afloat. The administration argued that General Motors (GM) and Chrysler were just too big to fail: GM alone employs 88,000 workers. But after burning through some $20 billion of bailout money, GM, the mightiest US automaker, has now followed Chrysler, and filed for bankruptcy. Once the industry leader, GM’s engineering prowess even led it to devise the navigation system for Nasa’s Apollo moon landing and build the lunar rover vehicle that surveyed the moon’s surface. But its failure to adapt to the same process of globalisation that once boosted its fortunes — the company’s CEO Roger Smith coined the word ‘outsourcing’ in 1981 — has now felled the giant. Unable to compete against its Japanese and Korean rivals in design or cost, GM has fallen victim to what economist Joseph Schumpeter called “creative destruction”.

The argument that GM was too big to fail, and that its collapse would bring in its train the loss of hundreds of thousands of jobs, trumped economic logic. A president, who won election on the promise of turning the economy around and bringing jobs back to the rustbelt, could not allow the auto giants to fail in the first weeks of his presidency. While $20 billion in bailout money and a new government-appointed CEO and board of directors earned the firm a new nickname, ‘Government Motors’, it failed to reverse the decline. Years of molly-coddling protectionism supported by Democrats and Republicans alike, poor management and a crippling labour and benefits burden sapped the company of its earlier drive, rendering it incapable of competing against lean and innovative foreign car makers. It was not automobiles produced by low-paid foreign workers but rather better-managed foreign manufacturers located in the US, making the best use of all that globalisation offers, that knocked GM from its pedestal. Its share of the US market has dropped to 19 per cent from more than 50 per cent in 1962. The fact that Hyundai, Toyota and Honda paid a total average hourly wage of $55 to their workers —about half of what GM, Chrysler and Ford were paying — ultimately became an unsustainable burden.

GM’s fall may have been precipitated by the global financial crisis, but it was a long time coming. It failed to adapt to the challenge of capital and technology flow and the innovation it engendered in a fast globalising, environmentally conscious world. It recalls Schumpeter’s analysis of the impact of the railway on regional economies in his seminal work Business Cycles. The introduction of the railroad dramatically changed conditions, costs and the production function of industries introducing new technologies, processes and ideas as new markets destroyed old and created new industries.

This time, the US administration has taken on the task of renewing a capitalist enterprise. On top of the initial $20 billion, it will sink another $30 billion to acquire 60 per cent of the slimmed down company’s equity. The once-powerful United Automobile Workers have agreed to massive layoffs in return for a 17.5 per cent stake.

To prepare for bankruptcy, GM has already announced the closure of 6,000 retail dealership and will shutter about a dozen plants, and discontinue production of the tank-like, gas-guzzling Hummer, and other now-unpopular models. The once-powerful labour union has accepted 20,000 job cuts and the closure of about a dozen plants by the end of 2010. In a last bid to save jobs, the union has secured an agreement to build subcompact cars in the US instead of shipping them from its low-cost factories in China and South Korea.

Will GM emerge from its bankruptcy a leaner, more efficient and profitable company making fuel-efficient cars? That clearly is the hope of the Obama administration. History, though, does not offer many examples of corporations turning around under government control. In any case, the original intent of saving jobs has been abandoned and modernisation would mean contraction of employment. The trend of the past three decades has been steady productivity growth in the automobile industry with an increasing number of robots replacing workers on the assembly line. The Schumpeterian destruction facing GM could be its last chance to emerge as a creative manufacturer. If not, the once-mighty auto company will end up as economic road-kill.