All Roads to Ruin -- and Perdition -- Run Through Washington

Can Washington save the automakers? Should Washington save the automakers?

Perhaps a better question -- one posed in the thought-provoking piece below -- is whether the Big 3 can survive Washington's "help," given the straight jacket of strings that will come attached. The piece also underscores a point I made last week: that a history of meddling by the Experts on Everything inside the Washington Motor Company contributed significantly to the industry's plight -- just as it contributed to the larger economic car crash that's unfolding.

I don't endorse all the writer's conclusions -- especially his view that the company's are owed a bailout because of the burdens Washington imposed -- but his analysis is otherwise sound.

But enough of my commentary. Here's the piece:

Can the Big Three survive a bailout?
By Jack Nerad

IRVINE, California (CNN) -- The Big Three automakers yesterday presented impressive plans to Congress that justified their need for bridge loans to help them regain their competitiveness in light of a vehicle market that has crashed into a wall.

Such loans won't simply help support a vital portion of American industry, they will help prevent a much greater potential economic disaster. The commercial and strategic importance of the auto sector simply cannot be overestimated.

That being said, we are reminded of the old phrase, "Watch what you wish for; you might get it." Because as we watched the chief executives of the Detroit automakers make their second trek to Washington to seek loans from the federal government that could stave off disaster, we have to ask the unexpected question, can the Big Three survive a federal bailout?

An undiscussed but critical part of whether government intervention will succeed is determining whether the inevitable strings attached to the federal funds will bind the Big Three into untenable positions like Gulliver in Lilliput.

Loan assistance from the federal government that tries to control the companies too tightly, that forces them to bring to market vehicles that the public may not want, might simply assure that they fail somewhat later rather than sooner. And in that scenario the American taxpayer and consumer is the biggest loser.

That question must be asked because the historical dynamic between the federal government and the domestic auto industry is a relationship that has been, at best, rocky and often openly antagonistic.

Jump back to 1975 and the institution of the Corporate Average Fuel Economy requirements designed to limit our reliance on foreign oil in the wake of the Arab oil embargo. Instead of simply limiting foreign imports or adding federal taxes to fuel costs to give consumers an incentive to buy more fuel-efficient vehicles, the government instituted byzantine regulations that required American manufacturers to build (or at least market) fuel-efficient cars just so they could continue selling the cars and trucks they were already known for.

Since the United States had always been a country of "cheap gas," (a tradition that continues, by the way) American car companies were not geared up to build small, fuel-efficient cars, but foreign manufacturers were. The result was that Americans were almost forcibly exposed to import vehicles, and many American consumers liked what they found.

The CAFÉ regulations accompanied by inexpensive gasoline were analogous to plopping consumers into the middle of a giant candy store and then forcing the candy manufacturers to somehow persuade a percentage of consumers to buy broccoli instead.

When all was said and done, the CAFÉ rules ended up giving a strong leg up to the Big Three's import competitors, putting their market share on an upward curve that hasn't ceased climbing.
Of course, having helped push American consumers into import cars, albeit inadvertently, the federal government then tried to reverse the trend through new intervention.

At the urging of the U.S. government, the Japanese manufacturers adopted "voluntary"
restraints on their exports of vehicles to the U.S. beginning in 1981. The goal was to give U.S. companies "breathing room" so they could catch up to the Japanese in producing small, fuel-efficient vehicles. (Sound familiar?)

Again, this might have seemed a worthy plan at the time, but it had several unintended consequences that ended up doing much more harm to the domestic manufacturers than good. In the short term it limited supply of popular Japanese-built vehicles, which resulted in windfall profits for the dealers of the top imports, helping those brands establish very strong dealer networks.

It influenced the import manufacturers to move up-market both by building more expensive vehicles and by establishing luxury brands like Acura, Lexus and Infiniti. And it gave strong impetus for the import manufacturers to build plants here in the United States. Today a large percentage of the "import brand" share of the U.S. market -- more than 50 percent of the total light-vehicles sold here -- are vehicles built by Americans in foreign-managed factories on U.S. soil. Ironically, to counteract this, the Big Three automakers have increasingly moved production from the U.S. to lower-labor-cost countries like Mexico.

So what are the implications of this history lesson? The first takeaway is that a portion of the woes the domestic Big Three are suffering today are the result of current and past federal government policies, so it seems fair that they be accorded government assistance now in time of dire need.

But equally important, while the Big Three automakers might well be accused of not correctly gauging the needs and desires of the American buying public, one group that is demonstrably much worse in that endeavor is Congress. If the U.S. government were a car company, it would not only be deep in the red, but also have miserable customer satisfaction scores.

So a second takeaway is that doing the wrong thing -- and by the wrong thing we mean attaching assistance to a web of politically motivated strings to federal loans -- will only lead to a bigger catastrophe down the road.

If Congress acts to aid the ailing Big Three car manufacturers -- and I strongly suggest it should -- then it is equally important that the domestic carmakers be allowed the latitude to conduct their business based on the dictates of the American consumer, not the politicians.

The opinions expressed in this commentary are solely those of Jack Nerad.

Editor's Note: Jack R. Nerad is Executive Editorial Director for Kelley Blue Book and kbb.com, and co-host of "America on the Road," heard on more than 300 radio stations. In the 1980s he served as Editor of Motor Trend magazine. Nerad is the author of "The Complete Idiot's Guide to Buying or Leasing a Car," "Chevrolet Corvette: The Power & the Glory," and his latest book, "The Complete Idiot's Guide to Hybrid and Alternative Fuel Vehicles," published recently by Alpha Books.