Strategy

Auto bailout: Car trouble

Is Obama offering help, or what?

During confirmation hearings in the mid-’50s, Charles Erwin Wilson, President Eisenhower’s nominee for secretary of defense, tried to justify keeping significant stock holdings in General Motors Corp. He could not imagine any conflict between working for the U.S. government and his past executive position at the Detroit automaker, he said, because “what was good for our country was good for General Motors and vice versa.”

Today, it is hard to imagine anyone risking a major political position to keep GM shares (NYSE: GM), which will probably be worthless if the company is forced to declare bankruptcy to secure more government aid. But according to the new guy in the White House, what’s good for America could be still good for GM if stakeholders manage to give Washington what it needs to justify nationalizing the automaker.

Allan Gotlieb, former Canadian ambassador to the United States, says President Barack Obama has entered a tough game without “good cards.” He faces an unprecedented lineup of presidential challenges, ranging from tight oil supplies and global warming to nuclear weapons proliferation and balance-of-trade issues, not to mention economic woes on both Main and Wall streets and wars in Iraq and Afghanistan. And he faces all this with less political support than what Jimmy Carter could muster. “To make a second term, he’ll have to have elements of greatness,” Gotlieb said at a recent gathering of law students in Toronto, adding that Obama has already shown he can stumble. He then offered O. fans some hope, noting: “To be a great leader, you only need one great idea.”

And that brings us back to GM, which was essentially taken over by the White House in late March, when the government replaced CEO Rick Wagoner with president Fritz Henderson. Indeed, at least one influential industry watcher is now wondering if Obama’s big idea is to use GM and Chrysler (if the latter can secure small-carmaker fiat as a dance partner) to drive U.S. energy policy.

Canadian auto analyst Dennis DesRosiers thinks the Obama administration hopes to “proactively use GM and Chrysler” to push Americans into smaller fuel-efficient vehicles, or ones powered by government-funded energy sources. And he says that is a huge risk because most Americans “won’t buy smaller products in serious volume.”

DesRosiers notes electric vehicles will “not reach any sort of volume for perhaps 20 years and maybe 50 years.” And the limited number of “green” automotive consumers in the U.S. typically shop at Toyota and Honda because, he says, these companies offer “spectacular entry-level products.” DesRosiers argues Detroit’s automakers lack the billions of development dollars needed “to come up with a product as good as the Corollas of the world.” And he fears Obama will use protectionist measures to limit competition when his save-Detroit-with-small-cars strategy fails.

“I don’t think Obama is that stupid,” counters independent Wall Street economist Robert Brusca, who believes Washington is playing hardball simply to force GM and Chrysler stakeholders to see bankruptcy as “a real threat” when the automakers were ordered to develop better restructuring efforts. Until Wagoner’s head rolled, he says, everyone involved pretty much assumed Obama would bend over backward to protect the car companies because they employ a good chunk of his electoral base.

No matter what Obama has in mind, Canada will probably shed more Big Three jobs because these firms, including Ford, are losing ground in a declining market (each lost point represents “about $4 billion in top-line revenue in the current market and twice that in a peak market,” DesRosiers says). In 1973, the Detroit trio controlled 73.7% of the combined Canada-U.S. market. Last year, the number was 48.2%. And the trend will likely continue thanks to “the dropping of entire brands, more plant closings and the culling of hundreds, if not thousands, of new car dealers,” says the analyst.

Meanwhile, there is no good reason to suspect that the U.S. market will recover enough to support a rebirth of both GM and Chrysler while keeping Ford out of the bailout game. Over the past decade, annual U.S. sales have averaged about 17 million units. But much of the financing for this demand level will not return since many Americans were taking out second and third mortgages to buy new vehicles. This high-risk credit pushed the U.S. ratio of vehicles per driving age population to 101%. And if reality drops it to Canadian levels (75%), Americans will only need to buy 9.4 million new vehicles per year for an entire decade. That, according to DesRosiers, is the nightmare scenario — or at least it was before Washington started acting like it wanted to take the wheel at GM and Chrysler.