A Look Back at U.S. Auto Downturn, Can We Avoid Another Bailout?

When I was a kid, there were four things you could always count on: Baseball, hot dogs, apple pie and Chevrolet. After ballplayers started taking steroids, hot dogs and apple pie were labeled as serious health risks due to fat and sugar content, and Chevrolet had to borrow $52 billion to stave off bankruptcy, the American Way was looking like a dead end road. After two years, GM was able to pay back the $8.1 billion that the U.S. and Canadian governments considered loans, and all seemed well in Detroit again. The overall economy is once again on shaky ground, and the other $44 billion that was 'gifted' to GM was forgotten about, but most people would agree that the auto industry has effectively recovered.

What happened anyway?

No one has really considered that the problems affecting the American auto industry were fundamental in nature. Internationally, automakers are estimated to produce approximately 50 million vehicles every year. The large production runs on assembly lines is a way to get the cost down, so if all of the vehicles sell then everyone who is integrated into the market will make plenty of money. Since the automakers rely heavily on past performance to figure out how much they should borrow, invest, and how many cars they should make, a change in the economy can cause major problems. In 2009 when domestic auto sales fell to 10.4 million, the large investments made to make sure the current business cycle flourished didn't pay off.

Who came out on top?

While all the automakers were hit pretty hard in 2009, Ford motor company managed to make it through without borrowing additional money from the government. Ford CEO Alan Mulally had borrowed more than $20 billion before the credit crunch, but during a congressional hearing he said they may have to borrow more if the economy worsened. Ford had already gotten away from gas guzzling SUVs, they had begun work on a plant in Mexico, and their projected lineup were all becoming more fuel efficient by comparison. My brother, along with thousands of other Ford employees were bought out of their contracts, and several production plants were shut down. Mulally had in effect bet the farm on the restructuring he administered before the downturn, which isn't surprising considering his history at Boeing. It all worked out for Ford, and GM regained stable footing after paying off its loans early.

Have they learned their lesson?

Now that the auto industry has recovered, Ford is currently at a sweet spot in its production cycle. GM on the other hand was behind on fuel efficient vehicles, and its one standout the Chevy Volt was a failure. GM has taken the stance that they don't want mountains of debt, while Ford has taken on more debt with open arms. If the current economic downturn causes people to stop buying cars again, Ford could be in the same shape it was in two years ago.

I think a combination of foresight and sound money management could be an answer to the volatile nature of the American automotive industry. The problem is Ford hasn't changed their "operate on debt" mentality, and Chevrolet is just now catching up with present auto trends. Since the auto industry as a whole employs around 8 million workers it is not only good for Detroit, but good for America. The bailout was probably a worthwhile investment, but if the automakers cannot learn from past mistakes, they do not deserve another one.