Auto Industry Death Watch 2020: Are We Heading for Another Bailout?

With the novel coronavirus forcing the economy to grind to a halt, just about every industry on Earth is affected, almost all negatively. The auto industry is no exception.

Production is halting around the world, and it seems likely that car dealers will be closing, either voluntarily or via government order, at some point soon – at least on the sales side (vehicle service is arguably essential).

People are being ordered to stay home, people are losing their jobs, and with a few exceptions – say a first-responder who absolutely needs a car right now – there will be almost no vehicle sales, new or used, for the next two months or longer.

Even as bad as things got in 2007-2009, sales never ground to a halt.

So will the automakers join the airlines in asking Washington for money? Just over a decade after two of the Detroit Three went to Capitol Hill, hats in hand?

Note: I am not arguing if they should. That’s an argument for another day. I was pro-bailout in 2008 for a variety for reasons, although I am not someone who believes in bailouts as a matter of philosophy. I believe bailouts should only be provided under certain circumstances. Circumstances outside an industry or company’s control? Okay, sure. Would collapse and liquidation cause great harm to the general economy, especially during a time of recession? Go for it. Is reorganization via bankruptcy not an option? Fine. Is the company or industry providing a public good? Alright, I get it.

That said, I do believe bailouts should be loans, not handouts.

All the above reasons are why I was pro-bailout in 2008. The automakers suffered a double-whammy on the credit crunch (couldn’t get credit from the banks, consumers didn’t have credit to buy cars), liquidation was more likely than reorganization via bankruptcy if the government didn’t step in (obviously, the government managed the bankruptcies when all was said and done), and liquidation of one of the Detroit Three would’ve been catastrophic at a time when the overall economy was tanking.

I also argued for the bailouts because automakers needed loans to get new product to market to address the rising fuel prices – and thanks to factors unique to the auto industry (read: Long product development times that can’t be shortened, in part because of regulations) and banks that weren’t lending, the automakers just needed money to stay afloat until new product could reach the market.

You can even argue that vehicles are a public good, and while other companies would’ve remained to produce them, costs would’ve gone up as the remaining OEMs dealt with fewer suppliers and fewer shared platforms, making it hard for some people to afford vehicles they’d need to get to work.

Sure, there are strong counter-arguments against bailouts. Some say that government should never get involved, and if an industry or company fails because of factors it can’t control, too bad, them’s the breaks. Some argue that bailouts actually hurt the economy in the long run, even if they keep companies afloat. And specific to the auto industry, some argue that if automakers couldn’t foresee or prepare for a downturn, and/or because the Detroit Three was too slow to produce fuel-efficient cars that were competitive, they should’ve faced the consequences.

To that, I say, poppycock: Few saw the economic collapse coming, and the Detroit automakers were already working on offering better small cars – they just needed to get them to market. Remember, it takes three to five years to develop a new vehicle, or to give an existing model a full redesign.

I did experience discomfort with how involved the government got with GM, and Cash for Clunkers had some problems, but overall, I think the bailouts were a net positive. Jobs were saved (if not enough), the loans were mostly paid back, and the automakers bounced back stronger. The dealer network was also trimmed (full disclosure – I am related to a dealer principal who lost his franchise as Ford cut down on stores).

To be fair, government investments in GM and FCA that were separate from the loans didn’t do so well, and ProPublica lists the taxpayer investment in the automakers as a “loss”, though I think it’s a bit unfair to combine loans that were repaid with equity investments that resulted in a loss. The two things are separate, and the government could’ve loaned the money without taking stakes in the companies. And even if you chalk it up as lost taxpayer money overall, it’s still, in my view, worth it, thanks to the jobs that were saved.

But, again, I’m not here to relitigate 2008 – I just wanted to provide context. The question, again, is will the automakers need to ask Washington for help as a result of the coronavirus shutdown?

Right now, I don’t think so. For one, it appears the Detroit Three have much more cash on hand as a reserve than they did during the Great Recession. Just look at China is any indicator, the automakers might not have too much to worry about – although that country saw huge sales drops during the peak of the coronavirus crisis, production appears to be rebounding.

It also obviously depends on how long automobile production is shut down, and just how long consumers are stuck at home. If the world is back to normal in a month or two, the automakers and most dealers will likely be just fine. A six-month timetable looks much dicier, however.

The bigger picture is also vastly different. In 2008, it was mostly banks and automakers asking for money. Now, the airlines are ailing, and just about every industry is borked. The entire economy is basically shut down. Hell, the Trump administration is talking about simply sending money directly to consumers.

So automakers, conscious of how divisive the last bailout was, might be a bit more careful about approaching the government for cash, unless it’s absolutely necessary.

There are other factors at play, too. For one, the coronavirus may scare people away from public transit for a while. That could result in a sales boost once the world restarts. Automakers are also likely to cut deals to incentivize buyers – we’ve highly profitable crossovers and SUVs are even more popular than they were in 2008, and they are more fuel-efficient. So with low fuel prices, consumers have no real reason to switch back to sedans, and even if fuel prices do spike, crossovers pass more gas pumps than they used to.

This means automakers might not have to scramble for cash in order to switch product plans on short notice, or need to worry about getting loans to usher already-planned product through the development process.

I don’t foresee us running death watches just yet, but like everything else with this virus, nothing is certain. The future is cloudier than ever.

[Image: Peace Tree Studios/Shutterstock]