[Pages H4217-H4219]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

OUR AUTO INDUSTRY NEEDS HELP

The SPEAKER pro tempore. Under a previous order of the House, the
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
Ms. KAPTUR. Mr. Speaker, these are daunting times for communities in
the Great Lake States. Our region's communities have served as
production platforms for our Nation for generations--for the
generations when America built a solid middle class. Our region did not
simply trade wealth, as do Wall Street and other mega-banking centers.
We made it.
Our Nation's economy and, frankly, our defense industrial base depend
on production platforms such as the motor vehicle industry for jobs,
for industrial might, and for real wealth creation for the Republic.
One of every seven jobs in our country is tied to the motor vehicle
industry. Over half of semiconductors are used in auto production,
nearly half of the carpeting, as well as plastics, glass, metals,
electric wiring, machine tools, and the list goes on.
In my district and throughout the industrial Midwest, the Big Three
and their suppliers still form the bedrock of our economy. And although
elite opinion makers try to deny it, the reality remains that as the
motor vehicle and auto industry go, so goes the economy of the United
States. And that economy isn't looking too good these days.
President Obama is correct in saying that we cannot and must not and
will not let our auto industry vanish. Those of us in our Nation's
heartland have always known that. America cannot lead the global
economy unless it leads in the global auto and truck center. No modern
industrial power has ever survived without a thriving domestic motor
vehicle industry whose capabilities undergird its defense industrial
base. Japan understands that. China understands that. India understands
that. Germany understands that. Do we understand that?
Now, we can take a look at the severe challenges facing this industry
today. The most important reason that this industry is facing
difficulties at the moment is because of the credit crunch and the
inability of Wall Street to reach Main Street despite billions,
hundreds of billions of dollars put into the TARP that isn't working.
Any sales-dependent industry, like the automotive industry, must have
credit lines open to the dealerships and to consumers who want to buy
those cars.
So that TARP bailout overrides everything else happening. We need to
see it. Straightening out what is being done by the U.S. Treasury,
aided and abetted by the somnambulant Federal Deposit Insurance
Corporation and the Securities Exchange Commission, is essential to
righting our economic ship of state. And the failure of those agencies
to monitor, let alone regulate, has created today's financial wreckage.
Mark-to-market accounting is killing more value inside this economy
than the bailout can possibly replace. And as Treasury and Wall Street
still fiddle, Main Streets across this country implode, including those
where the automotive sector is predominant.
I am glad the President talked about the pain that is felt across our
auto industry. Let me just say, look at the hands and the faces and the
legs of autoworkers. They know their work is hard. The predicament
we're in isn't their fault. It is a crisis of leadership, as the
President has said, starting right here in this city.
Thomas Friedman, a writer, is wrong. He says the world is flat. Well,
it's not. It has mountains and has huge valleys, and our auto industry
has had to compete on a very unlevel playing field. Take this fact:
over half the vehicles sold in this country actually come from other
places in the world. In Japan's market, the second largest market in
the world, only 3 percent of their cars come from any place else in the
world.
Whose market is open? Whose market is closed?
Mr. Speaker, tax policy operates against this industry, and if we
look at the number of cars, including the new Buick LaCrosse that was
rated No. 1 by J.D. Power, we have an industry ready to compete. Let's
give it a chance.

Mom, Apple Pie, and Hyundai?

The auto industry has been a bulwark of the American middle class. If
Wall Street warrants a bailout, why not Detroit?

(By Pat Choate)

In those happy days of the 1950s, my friends and I
anxiously awaited the moment when the local auto dealers
began displaying their new car models. My uncle was a
Chrysler-Plymouth dealer, and we always began our tours
there. Then we would go from one showroom to another,
collecting the brochures, sitting behind the wheels of the
new Corvettes, Chrysler 300s, Plymouth Sport Furies, and
Thunderbirds, opening the hoods and admiring the powerful
engines. Rare was the teenager of that era who did not know
the specifications of virtually every model produced by
General Motors, Ford, and Chrysler.
``Car people'' such as Lee Iacocca, then at Ford, were in
charge of America's Big Three automakers. They loved their
cars as much as their customers did. The carmakers and their
suppliers produced an ever changing set of engines,
transmissions, accessories, and gadgets that made buying a
car a family treat unlike any other. So many different types
of hubcaps were produced that there were hubcap stores in all
the major cities. In Texas, stealing them was a state pastime
for teenaged boys.
The differentiated line of cars produced by General Motors
was also a measure of social and economic status. A Chevrolet
was for those starting out. A Cadillac was for those who had
arrived. Pontiacs, Oldsmobiles, and Buicks were stop-offs for
those on the way up or down. A jump from a Chevrolet to a
Buick was an event noticed and commented upon by neighbors as
a measure of success--or of someone acting above himself.
In that postwar period, Americans were on the go, and
though Charlie Wilson was ridiculed for commenting, ``What's
good for General Motors is good for America,'' he was right.
The Great Depression and World War II were memories, people
had well-paying jobs, credit was easy, and a new car could be
bought with a small downpayment. GM and the auto industry
were a major part of the economy and an important contributor
to that prosperity.
The Big Three autos, coupled with the construction of the
42,500 mile Interstate Highway System and the establisment of
a vast network of safe and inexpensive motels such as Holiday
Inns, opened the continent for inexpensive family vacations.
Dinah Shore's perky signature song captures the essence of
America's love affair with its cars: ``See the USA in your
Chevrolet. America is asking you to call. America is the
greatest land of all.''

[[Page H4218]]

But success bred complacency and hubris in the industry. By
the mid-1960s and early 1970s, management of the Big Three
had shifted from the car people to ``numbers guys,'' who were
more interested in squeezing every possible penny of profit
from the vehicles. To avoid costly worker strikes, Big Three
management made major concessions to labor on pensions,
healthcare, and vacations, costs it then passed on to
consumers. Meanwhile, quality slipped. Designs were
unimaginative. Buyers would ask whether a car was produced on
a Monday or Friday, fearing that either the workers were too
exhausted and hungover after the weekends to do a good job or
too anxious to leave on Friday to care.
By the late 1960s, the Big Three had become an easy target
for Japanese and European competitors. In 1980, Chrysler
faced bankruptcy, and General Motors' management seriously
considered exiting the auto business altogether. As part of
that strategy, GM bought Hughes Electronics and Ross Perot's
EDS.
Perot and the GM management quickly soured on each other.
He wanted to manufacture the best cars in the world, and they
wanted to enter into businesses in which they were
inexperienced. One of the more interesting business lectures
captured by the Harvard Business School in its case studies
is Perot's speech to the GM board on the day he concluded his
sale of stock back to the company. He ticked off what he
thought was wrong with GM and what it needed to do to assure
its prosperity in the auto industry. The essence of his
message was to treat workers well, be innovative, settle for
nothing less than making the best cars in the world, and sell
them at the lowest possible price. His advice was ignored, of
course, and GM continued to lose position in its domestic
market.
Eventually, GM, Ford, and Chrysler's plodding efforts to
build better vehicles began to pay off in the early and mid-
1990s. Quality improved, styling began to matter once again,
and the Big Three produced the kinds of vehicles Americans
wanted--big, comfortable, powerful, and safe. Easy credit and
cheap gas made owning the behemoths inexpensive, and Detroit
seized control of the market for full-size pickups, vans, and
SUVs.
A key moment for the Big Three and UAW came after their
signing of the 1996 labor contract. GM thought it had bought
three years of labor peace. But the union unexpectedly staged
a series of local strikes in facilities that produced
strategic parts, the shortage of which could stop all GM
production. These snap strikes closed GM for part of 1997 and
cost the company billions of dollars. For whatever advantage
the union may have gotten, its actions enraged GM management,
which accelerated its investment in duplicative plants in
other parts of the world, staffed with nonunion workers.
In 1999, GM spun Delphi, its parts division, into a new
corporation that entered Chapter 11 reorganization in 2005.
The UAW contract was broken, and the workers were left with
$14 per hour jobs, no healthcare, and no defined-benefit
pensions. President Lyndon Johnson was once asked if half a
loaf of bread was better than none. He replied, ``A slice is
better than none.'' The Delphi workers got a slice.
Over the past two decades, each of the Big Three has been
through extensive management changes, downsizing, and
layoffs. Chrysler even became part of the German company
Daimler, which could not make the acquisition profitable and
eventually sold 80 percent of its interest to Cerberus, a
private investment fund.
It is difficult to teach an elephant to waltz, but it can
be done. While the Big Three have been slow to change, they
have adapted well enough that they still hold half the U.S.
market share. It is an amazing turnaround.
Consider quality. In 2007, Ford won 102 quality awards,
including AutoPacific's Best in Class for three models and
Germany's largest auto magazine's Auto 1 of Europe Award for
its S-MAX. Forbes awarded the 2008 Chrysler 300 ``the
highest-quality car in the near-luxury category'' over the
Audi A4, BMW 3 Series, Lexus IS, and Mercedes-Benz C Class.
Of the 15 global finalists for the 2008 Motor Trend Car of
the Year Award, the Big Three manufactured nine, the Japanese
four, and the Europeans two. The 2008 winner was GM's
Cadillac CTS, which Motor Trend described as ``proof that
Detroit can still build a world-class sedan.''
As for innovation, General Motors, Ford, and Chrysler
invest almost $12 billion annually on R&D, making them a
major source of technology development. In 2007, the U.S.
Patent and Trademark Office granted these three corporations
1,030 patents.
James E. Malackowski, CEO of Ocean Tomo LLC, a merchant
bank that specializes in intellectual property products and
services, recently compared four of the green, clean, and
energy efficient patent portfolios held by the Top 15 global
automakers--emission control, catalytic converters, and
related chemistry; fuel cells; hybrid/electric vehicles,
mostly motor and battery innovation; and emerging related
technologies, including solar, wind, and other green
inventions.
GM has higher average quality and newer green technology
and patents than the other 14 auto manufacturers combined.
Together with Ford it holds approximately one-third of all
green-technology patents and the related value. Moreover, GM
has 70 percent of the patents in the emerging-technology
category. This domestic share increases to 85 percent if Ford
is added. Finally, Ford owns 30 percent of all patents with a
similar related-value measure in emission-control innovation.
These Big Three technologies have great potential for
stimulating overall U.S. economic and job growth and creating
a greener and more fuel-efficient world.
There is much of value to be saved in this vital industry,
but relief has been slow in coming. When Wall Street
recklessly gambled with borrowed monies and lost, federal aid
was characterized as a ``bailout.'' The present auto crisis
was created by powerful economic forces, many beyond
Detroit's control. Federal efforts to save the U.S. auto
industry would constitute a ``rescue.''
The primary causes of the current U.S. auto-industry crisis
are threefold: a financial freeze in which even well-
qualified borrowers are denied credit to buy vehicles;
fluctuating oil prices that have driven the price of gasoline
from less than $2 per gallon to more than $4 and then back to
$2, all in less than 10 months; and a consumer panic that has
cut retail sales to 15-year lows.
The failure of the U.S. Treasury Department and Securities
and Exchange Commission to monitor, let alone regulate, Wall
Street has created today's financial wreckage and the
resulting consumer panic. And despite the obvious need for a
far-sighted energy policy, the last four presidents and
Congress have done little but encourage more drilling.
The longer-term inability of America's auto industry to
export competitive products has its origins in U.S. trade
policies that accept closed foreign auto markets and the
payments of massive export rebates by other governments to
their automakers. How can U.S. automakers be expected to
compete in a world where German producers get a 19 percent
export subsidy on every vehicle sold in the United States,
China undervalues its currency by up to 50 percent, Japan
keeps its auto market tightly closed, and the U.S. government
allows South Korean automakers to sell more than 700,000
subsidized vehicles in this market annually, but tolerates
Korea's restriction of U.S. imports so tightly that fewer
than 7,000 American-made vehicles are sold there each year?
The Big Three and the UAW are not at fault for these
distortions of competition.
The three overarching questions that President-elect Obama
and the 111th Congress face are: what will happen if the Big
Three are not saved, how much will it cost, and what is the
best way to execute the rescue?
As to the first question, federal inaction would be costly
and destructive in ways America has not experienced since the
Great Depression. The Center for Automotive Research--
appropriately, CAR--projects that a 100 percent closedown of
the Big Three auto producers would result in the loss of
almost 3 million U.S. jobs in the first year. The majority of
those losses would be Main Street jobs distributed across the
country that depend on spending by the Big Three--steel,
glass, and rubber producers and the 20,000 dealers, who are
major purchasers of advertising in local newspapers, radio,
television, and other small business services provided by
lawyers, accountants, real estate contractors, and
landscapers.
A 50 percent reduction in the Big Three's operations would
be almost as costly. CAR estimates that 2.47 million jobs
would be lost in the first year, 1.5 would still be unfilled
in year two, and slightly more than 1 million in year three.
The lost revenues from either scenario would devastate
federal, state, and local budgets, creating further economic
upheavals. CAR estimates that a 100 percent shutdown would
cost $156 billion in lost tax receipts and increased transfer
payments. A 50 percent shutdown would cost $108 billion.
Job loss is only part of the risk. The U.S. defense
industrial base would be greatly weakened if the Big Three
failed. The collection of machine tools, robots, production
lines, and skilled workers of the auto industry gives the
United States the capacity to shift quickly from domestic
production to the manufacture of tanks, airplanes, and other
war materiel as happened in World Wars I and II. The foreign
auto transplants are not a substitute, for they are mostly
facilities for putting together kits manufactured abroad.
As for the cost of the auto rescue, it is impossible to
estimate the final number. Certainly, $38 billion for an
operational bridge loan is too little and will require
supplements. GM alone has a cash-burn rate of $2 billion per
month, and will use its portion of the first loans within
months. Yet the earliest that GM says that it can produce its
new line of vehicles is 2010. Inevitably, the automakers will
be back for more, much like the banks and insurance
companies.
As CAR has documented, however, the costs of inaction will
also be great. Its estimates of a collapse, moreover, do not
include the costs of shifting more than $100 billion of Big
Three pension liabilities to the Pension Benefit Guaranty
Corporation, which is currently operating with a $10 billion
deficit. Only about a quarter to a third of the Obama
administration's proposed stimulus of massive investment
infrastructure expenditures will be felt in 2009, half in
2010, and the remainder thereafter. As presently defined, it
will have little effect on the Big Three.
They need more sales now. The fastest and surest way to
stimulate such activity is for the federal government to give
a massive one-to-three-year tax deduction for sales of U.S.
vehicles with a high U.S. or North American content, such as
70 percent. This

[[Page H4219]]

would help clear the dealer backlog and immediately put
people to work. It also would allow taxpayers to get great
bargains on new vehicles.
Some have suggested that Chapter 11 is the only viable
option for the Big Three. But it would create an economic
avalanche in which dozens, if not hundreds, of suppliers and
dealers would be forced into bankruptcy. No institution other
than the federal government is now able to provide the
billions of dollars necessary for the industry to operate
during reorganization. And at the very moment that these auto
giants need to act quickly and be flexible, they would be
constrained by a federal judge and trustees to get approval
for even the most basic decisions. Those who advocate
bankruptcy need only look at the cumbersome and costly Delphi
experience, which is now in its fourth year.
But rescuing the American auto industry will require more
than vast sums of public monies. Basic policy changes in
trade and tax laws are essential. One of the most difficult,
but unavoidable, challenges will be to end the Value Added
Tax discrimination faced by the Big Three in both their
domestic and foreign markets. Soon after World War II ended,
U.S. trade negotiators agreed to allow the rebate of Value
Added Taxes on their exports and the imposition of VAT
equivalents on their imports of U.S. goods and services.
Europe was rebuilt decades ago, but 153 nations now have a
VAT, and its average rate is 15.5 percent. Japan has a 5
percent VAT, China's is 17 percent, Germany's is 19
percent, and France imposes 19.6 percent. The economic
consequences to the Big Three and other U.S.-based
manufacturers have been devastating.
When a German automaker exports a vehicle into the U.S.
that costs $50,000, for instance, it receives from the German
government a 19 percent VAT export rebate, worth about
$9,500. But when one of the Big Three exports a $50,000
vehicle to Germany, it must pay the German government a 19
percent, $9,500 VAT-equivalent tax at the dock. Thus the Big
Three products are price disadvantaged in both markets.
Moreover, these discriminatory VAT rules provide a powerful
incentive to outsource production from the United States. In
the Tokyo, Uruguay, and Doha trade negotiations, the U.S.
Congress instructed American trade negotiators to eliminate
this tax disadvantage, but other governments refused to
discuss the issue.
In addition to pressing for the adoption of new global
trade rules to end VAT discrimination against U.S.
manufacturers, the incoming administration should focus on
eliminating the many protectionist national tariff and non-
tariff trade barriers crippling the Big Three. India, for
example, imposes a 100 percent tariff on imported U.S.
vehicles. China's tariff rate is 25 percent. Korea has long-
run national anti-import campaigns that include targeting for
tax audits anyone who buys a foreign car. Unless foreign
economic protectionism is confronted immediately and at the
highest levels of the U.S. government, the American auto
industry cannot survive.
Three other principles are essential to the rescue. First,
taxpayers should receive substantial equity in these
ventures, plus long-term warrants, whose purchase price is
set at today's stock values. After all, we are taking the
risk. When any public loans are repaid, the terms and
conditions should require a sale of those stocks, hopefully
at a substantial public profit. Taxpayers made almost a 30
percent profit on the Chrysler loans three decades ago.
Second, demands for a reduction in worker pay should be
eschewed. The UAW and its members have already made massive
wage and benefit concessions in recent negotiations. Delphi
is only one example. Almost a century ago, Henry Ford paid
his workers a then unheard of $5 per day so they could buy
the products they were making, and the auto industry led the
way in creating an American middle class. This rescue should
not undermine broader efforts to provide secure jobs and
benefits, nor should it allow the pitting of well-paid
American workers against the penny-wage labor of other
countries.
Without question, the UAW has often been smug, arrogant,
and inflexible. But rather than punishing it by requiring
reduction in its members' pay, we should expect the union to
contribute to the rescue. It should enter into a no-strike
agreement until the federal loans are paid and invest its $1
billion ``rainy day'' reserve, commonly called its ``strike
fund,'' in the preferred stock of the Big Three until the
loans are satisfied. The rainy day has come, and if taxpayers
are putting up money to save UAW jobs, so should the union.
While U.S. antitrust laws allowed the UAW to target one
company at a time, those same laws prevented the Big Three
from negotiating together on an industry-wide contract. Any
rescue should permit the Big Three and UAW to negotiate an
industry wage and benefit package.
Third, executive pay at the Big Three should be capped at
some simple multiple of the average annual pay of Big Three
workers, such as 10 or 15 to 1, with any bonuses being
provided in corporate stock, at least until any federal loans
are paid off. Also, the Big Three executive pension funds
should be required to have at least a majority of its capital
invested in Big Three stock. The goal, of course, is to
create a common incentive for labor and management to work
together.
As of mid-November 2008, the U.S. Treasury and the Federal
Reserve had advanced $2 trillion to salvage the financial
wreck created by Wall Street. In late November, the FDIC
announced that it was ready to loan another $1.4 trillion to
stabilize the banks. The Bush administration and Congress
seem to have no limits to their concern about Wall Street.
The Big Three automakers, their suppliers, and dealers are
on Main Street. They employ millions of workers and provide
essential goods for American consumers. If the Big Three
fail, an economic tsunami will quickly roll across the United
States, destroying jobs, incomes, and national confidence at
historic levels. The challenges faced by the new
administration at that point would be similar not to those
faced by Franklin Roosevelt, but to those that confronted
Herbert Hoover in the first years of the Great Depression.
In this instance, what is good for General Motors is good
for America.

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