A Bridge Loan to the 21st Century
SOURCE: AP/Evan Vucci
This week, the chief executives of General Motors Corp., Ford Motor Co., and Chrysler LLC drive back to Washington to make their case for up to $38 billion in bridge loans before a wary Congress. Their previous effort in mid-November was a disaster. In addition to the flap over using three private jets to fly here, they failed to impress skeptical lawmakers about their plans for reform. Senate Majority Leader Harry Reid (D-NV) and Speaker of the House Nancy Pelosi (D-CA) gave them two weeks to develop and present plans that demonstrate accountability and viability. “Until they show us the plan, we cannot show them the money,” Pelosi explained.
Those plans arrived yesterday, and congressional hearings are scheduled for December 4 and 5. If the testimony persuades congressional leaders that the recovery plans will likely succeed, then Congress will probably consider proposals to grant the bridge loan during the week of December 8. An initial review of one important element of their plans—to build more fuel-efficient cars—indicates the Big Three plan to make important, though incomplete, strides in this direction.
The plans include numerous restructuring measures, including reductions in executive compensation, salary, and hourly personnel cuts; plant closures; elimination of some dealers and models; and other serious steps. A central element in the proposals is their fundamental shift from their failed business model based on cheap oil, weak fuel economy standards, and disregard of pollution to one based on expensive oil, super fuel economy, and greenhouse gas reductions.
Ford and GM’s plans have specific measures to significantly increase their fleets’ fuel economy. Chrysler’s plan has fewer details, so it is unclear whether it can produce the fuel-efficient cars of the future.
Ford plans a significant shift in its product mix from 52 percent trucks, vans, and SUVs in 2007 to 60 percent cars and crossovers in 2010. Ford also detailed specific increases in fuel economy. “From Ford’s largest light duty trucks to our smallest cars, we will improve the fuel economy of our fleet by 14 percent in 2009, 26 percent in 2012, and 36 percent in 2015.” Ford intends to meet these goals partly by speeding the production of hybrid and electric vehicles. It also plans to produce domestic versions of its high-mileage European cars, such as the Ford Focus and other vehicles of that size.
The Ford proposal also includes a “cash for clunkers” program that creates a tax incentive for consumers to trade in older, inefficient vehicles for new, more fuel-efficient cars. It also proposes the creation of a “U.S. public/private partnership to accelerate the development of” high-power lithium ion batteries in the United States. Currently, Japan dominates the advanced battery market.
Ford says that it is “fully committed” to meeting the new fuel economy standards under the Energy Independence and Security Act of 2007. However, the company continues to insist that Congress block efforts by California and 16 other states to adopt the California motor vehicle greenhouse gas emission reduction standards, urging “Congress to maintain one economy-wide set of national standards on fuel economy.”
In fact, the California program would spur innovations that further reduce vehicle emissions. There would be worldwide demand for such super-clean cars, creating new marketing opportunities. The taxpayers in these states should not be forced to loan money to auto companies, and then have their laws voided. Companies that receive bridge loans should agree to cease challenges to the California program and new fuel economy standards.
General Motors also plans to increase the fuel efficiency of its fleet. By 2012, it will increase the average full economy of its cars by six miles per gallon and its trucks by three miles per gallon. The company will also increase its investment in hybrids so that it produces 15 hybrid models in 2012. During this time, GM plans to invest $2.9 billion in alternative fuel and advanced propulsion technologies that could increase fuel economy by 12 percent to 120 percent.
GM plans to produce the first passenger plug-in hybrid electric vehicle, the Chevrolet Volt, by 2010. The Volt would use electricity from a battery for power for the first 40 miles, which is the average daily car mileage. It relies on gasoline for the remainder of the day, and then recharges the battery at night with electricity from a standard outlet. PHEVs have the potential to get 100 to 200 mpg, and would dramatically reduce oil use.
In addition to hybrid vehicles, GM’s fuel economy plan continues to heavily rely on “flexible fuel vehicles” that can run on either gasoline or E85, a mix of 85 percent ethanol and 15 percent gasoline. GM believes that “flex fuels represent the fastest way for the United States to reduce its dependence on imported oil.”
This is a sound theory, but it does not work in practice. Nearly all FFVs use ordinary gasoline because E85 is very hard to find outside a handful of Midwestern states. Nationwide, less than 1 percent of all service stations sell E85. California, for instance, has only seven stations that sell E85. Only eight stations sell it in Florida, and no stations sell it in New Jersey. Oil companies must dramatically increase the public availability of E85 before FFVs will measurably reduce oil use.
Chrysler’s fuel economy plans are the least specific and ambitious. It already is “the largest producer of all electric vehicles in the U.S.,” though these cars are predominately for neighborhood and city use. Chrysler hopes to produce half a million electric-drive vehicles by 2013. Like GM, Chrysler plans to rely on FFVs to reduce oil use. Half of its cars should be FFVs in four years. This will make little difference in oil use unless E85 becomes much more readily available.
All three companies seek loans available under Section 136 of the EISA to provide the funds necessary to retool their factories to produce significantly more fuel-efficient vehicles. In October, Congress granted $25 billion in loans for this program. Yet the Bush administration wants to redirect these retooling loans to use for the bridge loans instead. Such a decision would divert badly needed retooling funds away from these companies, and stifle the production of vehicles that employ new efficiency technologies.
Even if the Section 136 funds are eventually replenished, it would still delay assistance to the Big Three and other companies that are racing to build the super-efficient cars of the future. American car companies would fall further behind their foreign competitors—and there is no time to waste. The Big Three suffered another horrible sales month, with November 2008 sales nearly 40 percent lower than a year ago. This is mostly due to the credit freeze, rising unemployment, and overall economic decline. General Motors and Chrysler remain in dire straits, while Ford’s position is less precarious.
One in 10 American jobs is connected to the auto industry. Failure of any of these companies—let alone all of them—would send shock waves throughout the economy. A bankruptcy filing by any of these companies would take down other companies too, including tool and die makers, parts suppliers, and other small businesses. One study estimates that their failure could lead to 2.5 million lost jobs—double all the jobs lost in 2008 so far.
Some argue against loans and in favor of government-sponsored bankruptcy because this would enable the companies to restructure so that they emerge stronger. This ignores the impact that bankruptcy would have on their already tarnished brands. An independent consumer survey found that four out of five consumers would not buy a car from a company in bankruptcy because of their concern about the warranty, service, and availability of spare parts. Bankruptcy could destroy the companies before their rejuvenation.
To avoid the deadly consequences of bankruptcy, Congress should create a federal bridge loan program that would provide up to $38 billion in loans if the companies agree to avoid excessive executive compensation, fulfill their recently renegotiated health and pension obligations to their hourly workers and retirees, continue to implement plans to build super-efficient cars, and cease efforts to block or weaken fuel economy and greenhouse gas standards. This would stabilize the Big Three, reduce oil use, and prevent an economic catastrophe that could last for years.
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