What is Richard Shelby’s Problem?

By Chris Haak

12.11.2008

With word that the US House of Representatives has passed an auto industry rescue bill last night, the next step, of course, is to have the same bill passed by the Senate.  As Kevin alluded to at the end of his earlier article, unlike in the House, where a simple majority is all that is required to pass a vote, things are more complicated in the Senate, where the body has a tradition of allowing unlimited debate until 60 senators vote to end that debate.  If the debate goes on in perpetuity, that’s called a filibuster, and either the threat of a filibuster – or an actual filibuster – could kill this legislation.

Democrats, along with the Bush White House, were largely behind the passage of the House bill, but the Democrats have a larger majority in the House than they do in the Senate, not to mention the whole filibuster factor.  And the senator who’s probably most likely to filibuster is Richard Shelby (R) of Alabama, who has consistently been a vocal critic of the idea of any kind of rescue plan, loan, or bailout for the auto industry.  Most recently, he said, “I’m going to oppose the package because I think this is just the down payment on billions and billions to come.  These are failed or failing companies.”

Can we take Senator Shelby at his word – that his opposition is purely on ideological grounds – or is there something more than meets the eye here?  Let’s take a look.

Alabama, the state that he represents, is one of the largest vehicle producers in the South.  Unfortunately or fortunately, depending upon your perspective, this vehicle production does not consist of GM, Ford, and Chrysler vehicles, but instead transplants – Mercedes-Benz, Hyundai, and Honda.  Toyota also has an engine plant in Alabama.  These three companies would not have come to Alabama to build their plants – with scores of suppliers in tow for each of them as well – without substantial incentives, whether those be infrastructure, tax, or other incentives.  For example, the state of Alabama gave Hyundai approximately $253 million in incentives toward its $1 billion facility.  Honda got $158 million from Alabama, and Mercedes-Benz received $253 million.  Not quite the amounts that we’re talking about in the GM-Ford-Chrysler rescue plan, but Senator Shelby’s home state does seem to favor using taxpayers’ money to “help” fairly successful companies.  So, presumably Shelby is OK with giving money to companies that – let’s face it – didn’t need the money, but against giving it to companies that really do need it.

The argument that these companies are failing or failed is partially true, but it’s also naive to think that consumers will continue to purchase new vehicles from a company in bankruptcy proceedings at a similar rate to what they’ve historically done (GM admitted that its November showroom traffic was impeded by talk of the company’s potential doom, and it hasn’t even declared bankruptcy).

Shelby is also naive if he believes that his apparent pro-free market stance will help – or at least not hurt – the manufacturers and supplier base in Alabama.  While Mercedes-Benz, Honda, Hyundai, and Toyota are not as intertwined with the Big Three’s supplier network (which has 80% overlap according to Ford’s testimony), scanning a list of Tier One suppliers that are members of the Alabama Automotive Manufacturers Association members, there are several recognizable names such as Continental, Federal-Mogul, Johnson Controls, Lear Corporation, Michelin, Navistar, and ZF who do have facilities in Alabama and who would certainly be adversely affected – to the point of possible bankruptcy if any or all of the Big Three go down.  Believe me, Toyota and Honda are terrified of a GM bankruptcy way more than they’re licking their chops at the prospect of increased market share, because GM’s suppliers are dependent upon GM purchasing their parts, and if GM isn’t purchasing any parts, that puts a big dent in their revenue.

Finally, if GM, Ford, and Chrysler fail, the ripple effects on the economy will be devastating.  First all – or at least many – of their direct employees will lose their jobs.  Then the suppliers will start to fail.  Then the raw material providers.  Then the small businesses in the surrounding communities as these former autoworkers can no longer afford to patronize the local pizza shop or corner drugstore.  Eventually, fewer people will have money to buy new Hyundais, Hondas, Mercedes, and Toyotas.  And that WILL hurt Alabama, saying nothing for the already-hammered economies of Michigan, Ohio et al.

I find it troubling that a US Senator – one of just 100 individuals so esteemed in the world – would put his ideological bent (at best) before his country’s financial health, or put his misguided attempt at protecting his [non-US] constituents by sentencing their competitors to death (at worst).  Shelby is up for re-election in 2010, and I hope for his sake that I’m wrong and he doesn’t have blood on his hands for killing these former bastions of American industrial might, but if I am right, the voters of Alabama might need to bail him out of office in two years.

COPYRIGHT Autosavant – All Rights Reserved

Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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15 Comments

  1. I agree with this article. I am a republican, but I am embarassed by the stupidity of some of these republican Senators. This is no longer just about the Big 3. This affects everyone. You let financial companies walk out with billions so they can give bonuses and take corporate “retreats,” but you make the symbol of American manufacturing look like buffoons by driving to DC and say we should let them fail. BULL$#@%!!!!!

  2. As a liberal I have no problem with government aiding companies in certain instances. But it’s hard to imagine GM’s or Chrysler’s long term success, even with a bailout. Might as well prop up the typewriter and phonograph manufacturers. This is clearly a case where the market has determined which companies should survive.

    The billions wasted on this bailout would be better spent for research or as development funds for small companies trying to bring innovative battery technology, and the like, to market. That would at least give the US a chance to grow new industries, rather than simply slowing the demise of an old one.

    On the most basic level Democrats are the progressive party that has looked ahead while Republicans have looked to the past. It’s amusing how it’s been reversed in this case.

  3. I believe that these three companies were already doing the right things as far as restructuring in the years leading up to the credit crisis and fuel price explosion of 2008.

    There’s no doubt that these companies could be considered failures (or at least failing, as I acknowledged above in the article). In 2005, I probably wouldn’t have had as much of a problem with these companies going bankrupt during a relatively strong economy. But with millions already out of work, can our economy really afford to suffer another big blow like this? Holding one’s ground on ideological reasons in the face of all-but-certain economic catastrophe seems foolish.

    The typewriter/buggy whip manufacturer argument is B.S., too. GM is not still building ’57 Chevys or Curved Dash Oldsmobiles. All three companies have some dogs in the product lineup (Aveo, G3, Cobalt, G5, LaCrosse, Colorado, Canyon, etc.) but they are making their way out of the lineup in favor of excellent products. I know – I bought a Honda, Nissan, and Toyota in that order until buying a Cadillac CTS late in the summer, and while it’s probably not top of the class in all categories, it’s also far from an uncompetitive relic from another era. I personally think it’s a great looking car with very good performance and a realy nice interior.

  4. By the way, would someone not named Chris please write a comment? The author and the first three commenters (though the third and fourth happen to be the author) all had that name. 🙂

  5. Chris K said “On the most basic level Democrats are the progressive party that has looked ahead while Republicans have looked to the past. It’s amusing how it’s been reversed in this case.” I don’t think that is necessarily the case. It seems that the Dems are tying to find a realistic way to prevent the total meltdown of the US economy and manufacturing base. By keeping people working, and by keeping manufacturers in business, they keep the country moving forward.

  6. The Senator’s problem is that he is right.

    Throwing cash at these companies only delays the pain. Each of these companies has 25-35% excess manufacturing capacity. In order to be viable short term, they need to shutter that capacity (and the associated costs).

    That means either firing 1 in 5 employees (as in goodby, no jobs bank) or leting Chrysler die. Either way clears the capacity.

    Long term they need to get their labor costs in line with their competators, so that they actually make money when the sell a mid-sized car.

    Quality isn’t the problem (for the Big Two at any rate). Ford’s compact, midsize, and full size sedans are as good as, or better than, Toyota or Honda’s. GM’s are getting there, with the Malibu quite good. (Perception of quality is a different matter).

  7. These days, no car maker on the planet (let alone the US) is able to produce cars without government assistance (typically from many more than one) – their business models just don’t support it.

    This isn’t so much about cars (too emotive). This is about capacity to do industrial scale manufacturing….everywhere (again not just the US). Because smart governments accept that the more diverse your skills base is the more competitive & productive your country is. But government investment in capatilism smacks of socialism…apparently…so some individuals and political groupings don’t like that.

    In the end….if the US Gov and people bail out the Big Three now then they’ll save themselves a world of hurt later. If they don’t do it now then the Chinese, Indians and Europeans will have nothing to buy & invest in in the US when the ‘good times’ return….save it now to sell it later. Or are you going to accept the “If I can’t have it then no-one can” approach?

  8. Chris H, I would have to agree. I believe that the automotive companies are suffering now for decisions of the late 80s/early 90s and in many ways are now trying to correct their prior mistakes. I think the most staggering statistic that I heard is that GM (compared to Toyota) has healthcare and pension costs that were $2300 higher, per vehicle. Recently, this gap has begun to shrink, but it is a significant disadvantage. It became a bit of a self fulfilling prophecy. How can you absorb $2300 in the price of a small car? A full size SUV maybe, but a Cavalier? I think not.

    Letting these companies fail or disappear to resolve this issue is not an option. The downstream impacts just can’t be imagined. Do the unions need to come to the table to renegotiate? Yes. Do creditors need to find creative ways of alleviating debt? Yes. Do product lines need to shrink? Yes. But, can the U.S. Automotive industry fail? No.

    I am also guilty of purchasing foreign automobiles, but recent developments have me putting U.S. made autos on my short list. I can’t wait for ford’s eco-boost V6 to land in a Mustang or to drive the new GXP G8. Even in more practical cars, Ford’s Fusion line has passed Toyota’s Camry in buyer satisfaction and reliability. Technology like Ford’s sync is industry leading, especially when you consider price. It feels like the U.S. auto industry is not far away and with some intelligent next steps they could be back on their way to being leaders in the world market.

  9. You know what’s naive? Auto-pundits repeating the corporate pr officer’s lines about how nobody will buy a car from a company in chapter 11. That is an unproven assertion. Passengers fly bankrupt airlines. Freight companies have used bankrupt railroads. Bankruptcy does not mean out of business. Consumers know that.

  10. I live down in sunny Daytona Beach, Florida. There is a local company with 40 employees, manufacturing wheels for the Chrysler SRT program. Think this is all about folks up in the Midwest, think again. It is nationwide. And providing enormous incentives to transplant companies and denying guaranteed loans to domestics is just short sighted. I will be contacting every person I know in Alabama to get this “blind” Senator out of office.

  11. Matt L, putting aside my doubts about your contention for a moment (buying the second-most expensive product next to one’s house, and expecting warranty coverage to be in place for five years is different from your two examples of one-time transactions; once your bankrupt airline gets you to your destination, you’re done with it except for maybe frequent flier miles), bankruptcy will probably mean out of business because of the impact on the supply chain. This is why Toyota and Honda are concerned about a GM or Chrysler bankruptcy.

    If GM goes into Chapter 11, it will reduce capacity dramatically – capacity that its suppliers are counting on to keep their companies running. That supplier will then declare bankruptcy. The tier two and tier three suppliers will declare bankruptcy as the effects ripple through the supply chain.

    I’m just not willing to stand by and let the economy take that kind of hit. My stance has nothing to do with what any PR person wants me to say; in fact, I find the “please save us” PR campaigns from GM, Ford, and Chrysler to be somewhat obnoxious and desperate.

    Back to your original assumption on the consumer side, I can speak from experience that even in late August when I bought my first new GM vehicle (following a Honda, Nissan, and Toyota, in that order), I was concerned about the health of the company, and that was before all of the worst of the news came to light about both the broader economy and this industry specifically. I’m not sure I would have bought the car today, at least at the same price I paid then.

  12. Just look at all the millions Alabama, and South Carolina gave to get Mercedes and BMW to locate in these states!
    And they were mostly freebees not loans!

    If Senator Shelby is such a “free marketer” why dont he do the right thing an give the incentives back to the taxpayers!

  13. Shorter Senator Shelby: Government aid to foreign auto plants in Alabama is capitalism at its finest. Government aid to American automakers in the midwest is vile socialism and must be opposed at all costs.

  14. Does anybody care that Japan manipulates its currency to give its products a $2,000-$8,000 advantage? Add that to the legacy costs and the scope of the problem becomes clearer. Throw in a Value Added Tax syatem that gives them and other auto producing nations another 10% advantage when they sell their products in the U.S. and the hill gets steeper. Then top it off with National Health Care and it is a wonder that the domestics have lasted this long. Ever think they didn’t invest in alternative fuel technology because they had to keep making SUV profits to compete with the cost disadvantage they were under due to Uncle Sams policies? Is it any wonder that an explosion in fuel price and a financial crisis put them on the edge? Even with that they are like every automaker out there – they all are seeking assistance from their government to get through this crisis. Let’s give them a chance now, then change some policies to create a level playing field in America. Last I checked most of the transplants donated nothing after 911 except press releases about their record sales. Guess they couldn’t be bothered.

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