Thursday, November 20, 2008

25 BUSD to car makers that have been making the wrong cars?

Let’s see if I get this right. The U.S. government wants to give 25 BUSD to car manufacturers that have been making the wrong cars. It is to “address the recession caused by the financial meltdown”. Mhm... But since the beginning of the year GM shares have fallen over 90 percent and Ford is also down 80 percent. That was long before the meltdown.

Let’s take a step back for a moment.

The problem: too few want to buy U.S. brand cars, right. This means the car makers are not competitive enough. Will a 25 BUSD in government-backed loan fix the problem? Will the car manufacturers be more competitive? Will the consumers buy more U.S. cars? Probably not. The car makers will continue do business as usual. The loans would be like subsidies to secure the jobs.

Compare with Sweden. There are no Swedish car manufacturers left. GM and Ford own Swedish Saab and Volvo Cars. The production in the Swedish facilities has been focused on the American market. When the economy collapsed the sales of Saab and Volvo followed their parent companies with lay-offs.

But instead of giving government-backed grants, the Swedish government provides large-scale support for vehicle research, using the environment as the foremost reason for supporting this research. The Swedish government nowadays focuses on making the Swedish car industry and automotive research competitive. That is the only efficient way to get sustainable growth, they claim.

The Swedish automotive industry today has never been as large and successful as it is today. The Swedish automotive industry instead is doing what it’s good at: specialised in components developed in cooperation with Swedish universities, such as intelligent control systems, catalytic converters and car and road safety systems. The whole Swedish automotive industry now employs more people than it did 10 years ago, due to the successful specialisation. The Swedish companies in the automotive industry Autoliv and Haldex are good examples.

Why not let GM and Chrysler simply go bankrupt to revitalize the car industry? A bankruptcy would clean out the executives and replace the 30-year veterans at the top with people who live in the present and not in the past.

Well, many jobs are at stake and if the automotive industry goes bust it will harm millions of retirees. 2.5 million jobs in U.S., Canada and Mexico are tied directly to these companies. Is 25 BUSD enough to save GM, with a burn rate of over 9 BUSD a year? In Europe the car industry did go bankrupt: DAF and British Leyland to name a few. Out of the ashes rose a much more vital European automotive industry.

But – and here’s a big but – the condition for that arrangement to work is a universal social welfare system that can handle the lay-offs. Swedish trade unions are aware that they are part of the “system”, together with industry, universities, public authorities etc. It’s in their own interest to have sustainable competitive industries. The management in the Swedish companies also understand this and cooperate with the unions, universities and others. And the Swedish government and Governmental agencies support this.

Automotive research is a strategically important area that is prioritized in the long term to ensure future development. Companies that fail to understand the value of a strong link between research, product development and production risk suffering the same fate as the shipyards.


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