Two Can Play the Bailout Blacklist Game

For a week Congressional Democrats have been playing the inclusion game, refusing to back the COVID19 stimulus bill unless it includes a laundry list of pork, special preferences, mandates or policy changes unrelated to the immediate crisis but which promote their partisan ends. Suddenly, this morning, we see them shifting to the exclusion game, in which the power to dispense aid will be used to punish or penalize companies or industries not in the party's good graces.

And perched atop the left's COVID bailout backlist, to no one's surprise, are any ventures or businesses connected to President Trump.   

So, virtually everybody else in the country might qualify for help -- a bailout, if you will -- but any COVID19-impacted businesses connected to President Trump can go bankrupt and go to hell: Is that the vindictive game these plunderers and pirates are now playing?

Okay, so let's play the bailout blacklist game. And let's play it by bipartisan rules.  

Let's also go through the vast investment portfolios of Chuck Schumer, Nancy Pelosi and other members of the Congressional Millionaires Caucus; let's go through their campaign donor lists; let's look at the major employers in their states or districts. Then we'll prohibit federal assistance from going to any companies or industries in which they have in investment stake, or which have a history of supporting them politically. That should bring this nasty little game of stick-it-to-Trump to a halt.

Senator Schumer Wednesday morning denied this was designed to target Trump, claiming, in his usual unctuously phony fashion, that it would apply broadly, to any companies in which members of the executive or legislative branches have "majority control." But since most Congressional lifers don't own or directly control businesses, and wouldn't know the first thing about starting or running a business -- their forte is destroying businesses -- this prohibition in fact would apply to a very, very small group of political leaders.

You can further shrink that group by looking at the businesses or industries they're in. The hotel and hospitality industry obviously is poised to take a major hit. It likely will be high on the list of industries needing aid. And how many people in the legislative or executive branch have "majority control" over hospitality companies?  Hmm. Let me think. I'll come up with somebody.

Political journalists obviously knew who Democrats were gunning for. So who does Schumer think he's fooling?           

We have to be thoughtful, selective and hard-nosed about where we target assistance. Not every company or industry in the country can get a bailout. There's just not enough money in the world for that. But when making those decisions, it strikes me as wrong to arbitrarily discriminate against a Trump-connected enterprise that otherwise qualifies for assistance. If the aid criteria are intelligently crafted -- that's a huge if -- and if the process is applied fairly and equitably -- that's another huge if --  shouldn't Trump-related businesses that meet the standard also be covered? 

Or are the people who work in or for this subset of businesses -- it's those people we're supposedly trying to help, right? -- unworthy of the same help other American workers will get, just because they happen to wait tables or clean rooms at the restaurant or hotel connected to the Trump business empire? Democrats obviously want to destroy Trump, not just politically but personally; that's been their Ahab-like obsession since he unceremoniously tossed them out of power. But who they're really punishing with such vindictiveness are thousands of rank-and-file workers who just happened to fill out a job application at the Trump-owned business, but now find themselves in one party's crosshairs through guilt by association.   

This Trump rage is so unhinged and irrational that it ought to qualify as a new mental disorder.While we're on a crash program to develop new vaccines, why not a vaccine that addresses this psychological problem? Seriously. We'll badly need one -- and the medical lab that brings a cure to market will make millions -- if Trump wins reelection this fall.

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.

Would "Washington Motors" Do Better?

An excellent piece in today's Washington Post poses the question: Can the know-it-alls in Washington do a better job of building an innovative and profitable car company than can the panhandlers in pinstripes from Detroit? Washington seems to think so, judging from all the critiques auto company execs endured when they came grovelling, and all the conditions politicians want attached to any bailout money.

The short answer, of course, is that any car or car company designed according to Washington's specifications would be an Edsel -- just as everything else Washington touches becomes an Edsel. Hasn't anyone in Washington ever heard of the GAZ-M20 Pobeda, which was just one clunky and archaic result of Soviet central planning? And an argument might even be made that the meddling Washington's already done in the industry, in terms of the regulatory burdens and fuel economy and safety mandates it's imposed, contributed mightily to the uncompetitiveness of this American industry (a point made by Holman Jenkins in The Wall Street Journal).

But the long answer, for those who want it, is as follows:

The Car of the Future -- but at What Cost?

Hybrid Vehicles Are Popular, but Making Them Profitable Is a Challenge

By Steven Mufson

Many members of Congress believe they know what the car company of the future should look like.

"A business model based on gas -- a gas-guzzling past -- is unacceptable," Sen. Charles E. Schumer (D-N.Y.) said last week. "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

But the car company Schumer and other lawmakers envision for the future could turn out to be a money-losing operation, not part of a "sustainable U.S. auto industry" that President-elect Barack Obama and most members of Congress say they want to create.

That's because car manufacturers still haven't figured out how to produce hybrid and plug-in vehicles cheaply enough to make money on them. After a decade of relative success with its hybrid Prius, Toyota has sold about a million of the cars and is still widely believed by analysts to be losing money on each one sold. General Motors has touted plans for a plug-in hybrid vehicle called the Volt, but the costly battery will prevent it from turning a profit on the vehicle for several years, at least.

"In 10 years are they [at GM] going to solve the technological problems with respect to the Volt? Sure," says Maryann Keller, an automotive analyst and author of a book on GM. "But are they going to be able to stake their survival, which is really more of a now to five-year proposition, on it? I'd say they can't. They have to stake their future on Malibus, the Chevy Cruze, and much more conventional technologies."

U.S. automakers faced a barrage of demands last week that they provide evidence and assurance that they would use federal bailout money to transform their companies to produce automobiles of the future, using advanced technologies and featuring hybrid or plug-in vehicles. And in his "60 Minutes" interview on Nov. 16, Obama said that before backing a big loan package he wanted to be sure "that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere."

But there's no guarantee that the new business model would be any more viable than the current one. Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more. Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.

That's why one of the mysteries about GM's plans to introduce the Volt in 2010 is how much it will cost to buy one. "What's the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010," said Robert A. Kruse, GM's executive director of global vehicle engineering for hybrids, electric vehicles and batteries. "I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions."

The hurdles ahead for the Volt and other cars with new technologies pose dilemmas for automakers trying to gauge a market that is still very young for cars that don't exist while trying to stay in business during a downturn.

"These are hard choices," said Toyota chief technology officer Bill Reinert, part of the Prius design team. "Do you bet on lighter, smaller, more fuel efficient but ultimately less profitable cars or do you hold back a little on technology development and look at new versions of existing cars."

Many experts say that gas guzzlers will not fade away as long as Congress fails to impose higher taxes on gasoline to steer people toward fuel-efficient cars.

"You'd think from reading the media that we have had a burial ceremony at Arlington cemetery for the last pickup truck," said James Womack, a management expert who has written about the automobile industry. "I can easily imagine three years from now when public is focused on a new set of priorities . . . that this whole thing would go poof."

Eager to reduce U.S. dependence on foreign oil, Obama proposed a $7,500-a-vehicle tax credit for plug-in vehicles during his presidential campaign. Roughly half of Americans don't earn enough to take advantage of such a big tax credit. (A head of household would need to earn almost $50,000 to have a federal tax liability that large.) Many others don't have the cash to purchase an expensive vehicle then wait for a federal refund. To spur sales of new vehicles, the price must be reasonable at the point of sale, say many industry experts.

Womack warned that it takes time to design a new vehicle, change assembly lines and then turn a new product into a profitable one. "For anything that's really new it's still about four years," he said. "To get your money back, you need to make that product for eight to 10 years with only cosmetic changes."

Helping automakers over that hump may take more money and patience than Congress or its taxpaying constituents have.

The experience of Tesla Motors, a Silicon Valley sports car maker, illustrates the challenges of making a radically new automobile. Founded by a group of high-tech multimillionaires, Tesla has been trying to become the first new successful American car company since Chrysler, which was founded in 1925.

Tesla's founders set out to make all-electric vehicles. The company's first: an all-electric sports car with a price tag of $109,000 that can go from zero to 60 mph in a bracing 3.9 seconds. As of a week ago, only 63 had been delivered to customers; a couple of dozen were nearly ready and the company has about 1,200 back orders.

"The reason we started with a $100,000 sports car is that when technology is new it tends to be expensive," says Elon Musk, the co-founder of PayPal who is the chief executive of and a big investor in Tesla. "It just takes time to optimize the right design and work up to economies of scale. . . . Why we didn't start with a Honda Civic is that it would be a $70,000 to $80,000 Honda Civic."

With a chassis made by Lotus in England, body parts made by a French carbon fiber firm Sotira and battery parts from Taiwan, Tesla has had supply-chain problems ranging from customs delays to a fire in the tunnel that goes under the English Channel. Initially a two-speed vehicle, the early Teslas were rough on transmissions, which have been eliminated in new single-speed versions. Recently Musk has hired some veterans from the Detroit automakers to smooth out production problems.

"For sure, this game looks a lot easier than it really is," said Jon Lauckner, GM's vice president of global program management. "You've got to get 3,000 parts all together in one place to assemble a vehicle."

Tesla isn't any different from the Detroit Three in one regard: It too is looking for government assistance. Eager to make a luxury sedan as the next in what it hopes eventually will be a full line of electric vehicles, Tesla Motors has applied for $400 million in low-interest federal loans under the $25 billion loan package approved by Congress a year ago.

But GM and other car companies, while preparing plug-in vehicles, are more likely to live or die based on the sales of conventional cars that get better fuel efficiency through improved transmissions, reduced weight or hybrid technology. GM says it will offer nine hybrids for sale by the middle of next year. Reinert says that Toyota will eventually offer hybrid versions of all its car models.

Still, production of the new cars will be limited. GM, for instance, plans to produce only a little more than 10,000 Volts in the model's first year.

"People ask us when will we produce not just 10,000 but 50,000," said Frank Weber, GM's global vehicle line executive and chief engineer for E-flex systems. "I say when the battery and power train costs have come down significantly." Weber added: "We never said this program in the first generation was there to make money. You cannot expect this type of technology to make money from day one."

The economic downturn has also changed the equation.

"Will the U.S. auto industry ever be as profitable as it was from mid-90s to the early part of this decade?" asks automobile expert Keller. Those days were "magic. It was like printing money for everybody. Everybody from Toyota and GM to Ford and Nissan were feasting on our desire to drive around in those giant vehicles."

But the industry has gone from feast to famine. Auto industry experts say that the basic problem is that the U.S. industry geared up to make 18 million cars and light trucks a year and that it will be lucky to sell 11 million this year. How far sales will climb back -- and when -- is anybody's guess.

"There's fluff and there's reality," Keller said. "The fluff is the Chevy Volt . . . That's not going to save GM in the next five years. What will save GM is more small sedans and more crossovers. That's what people are going to be buying."