The car industry
Pass the plate
If Detroit’s disintegrating carmakers are bailed out, Europe’s will be next in line
IT IS not just in Washington, DC, that a fierce debate is being conducted about whether to provide state aid to the beleaguered car industry. On Tuesday November 18th, just as the bosses of General Motors (GM), Ford and Chrysler were lining up with their begging bowls before the Senate banking committee, the directors of the European Investment Bank, the European Union’s lending arm, were considering whether to give Europe’s carmakers €40 billion ($51 billion) in soft loans. The previous day, the German chancellor, Angela Merkel, had met executives of GM’s European subsidiary, Opel, to discuss guaranteeing a €1 billion liquidity line in the “worst case” of its parent company in America going bankrupt.
Despite the appearance of similarity on both sides of the Atlantic, however, there are big differences. For one thing, the plight of the Detroit Three is much more urgent. GM’s boss, Rick Wagoner, told the senators that the economy faced “catastrophic collapse” if bridging loans were not quickly made available. He gave warning that by the end of the year, GM might not have enough money to pay its bills. Ford’s cash position is stronger—company insiders reckon that it might just be able to scrape through on its own resources—but its chief executive, Alan Mulally, was not on Capitol Hill just for the ride. He fears that if either Chrysler or GM (particularly the latter because it is so much bigger) were to fail, the impact on the parts suppliers on which all three firms depend could bring down Ford as well.
The Detroit Three can be reasonably confident of getting some help—eventually. Next year a sympathetic President Barack Obama, and big Democratic majorities in both houses of the new Congress, should ensure that. But will that be too late? On Thursday the Senate will prepare to vote on a bill to allow funds from the $700-billion package, set up to rescue the financial system, to be channelled to the carmakers. But Republican opposition is strong and President George Bush could veto the bill were it to pass.
The condition of Europe’s carmakers is hardly healthy, but unlike their Detroit counterparts they are still some way from the critical list. According to the latest forecast from J.D. Power, a market-research firm, the western European market will shrink by 7.9% this year, compared with a 16% drop in America. But things are getting grimmer by the day. J.D. Power expects a further 10.5% contraction in Europe in 2009. Renault, which is cutting 6,000 jobs in Europe, thinks the market could shrink by 20%.
But as in America, there is disagreement both within the industry and among politicians about whether special aid is needed and, if so, what form it should take. Already there has been a chorus of dissent over the possibility that Opel might be singled out for help. And if aid is provided, what strings should be attached? The European Commission, which has been fighting a battle with the carmakers over the introduction of tough carbon-dioxide emission rules in 2012, is certain to want some linkage between the granting of soft loans and assurances that the industry will redouble its efforts to produce more fuel-efficient vehicles (an echo of the $25 billion package approved by Congress in September, which has yet to disburse any funds).
The German firms, who make the biggest, fastest cars, and who are therefore having to spend most to reduce their emissions, are in favour of such a subsidy. But the French and Italians, who specialise in producing economical cars, say they are quite capable of complying with the new rules without any help from the taxpayer—and do not see why the Germans should benefit from their own profligacy. They would prefer Europewide “scrapping” incentives to encourage owners of older cars to buy less polluting new ones.
Even within the commission there are differences. “I’d welcome it if everything was done to prevent an important and traditional car producer in Europe from dropping out of the competition for reasons it is not responsible for,” says the industry commissioner, Günter Verheugen. But Neelie Kroes, the competition commissioner, rejects any comparison between the car industry and the financial sector, and has warned member countries against offering their carmakers unfair subsidies.
Much depends on what the Americans decide to do. One option for Europe, assuming the Detroit Three get their money, would be to complain to the World Trade Organisation. But Ford and GM are too important for Europe’s car industry to make that probable. The betting is that Europe’s carmakers will get a helping hand too—even if they do not really need it.