knowledge.wharton.upenn.edu Open in urlscan Pro
2620:12a:8001::4 Public Scan

Back to summary

URL:
https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/auto-bailout-ten-years-later-right-call/
Submission: On March 16 via manual (March 16th 2023, 6:01:48 pm UTC) from US — Scanned from DE

Form analysis
1 forms found in the DOM

POST https://www.createsend.com/t/subscribeerror?description=

<form class="js-cm-form" id="subForm" action="https://www.createsend.com/t/subscribeerror?description=" method="post"
  data-id="A61C50BEC994754B1D79C5819EC1255CBAE08CFE5E0E6FBFA04AED4B6416B91861C5E3A77BC397EE9EAE7A2A6F38B0624B7335B9623DEC877455CEB51D8AED9D">
  <div>
    <div><label class="visually-hidden">Name </label><input aria-label="Name" id="fieldName" maxlength="200" name="cm-name" type="text" placeholder="Enter your name..." data-gaconnector-tracked="true"> </div>
    <div><label class="visually-hidden">Email </label><input autocomplete="Email" aria-label="Email" class="js-cm-email-input qa-input-email" id="fieldEmail" maxlength="200" name="cm-tleuth-tleuth" required="" type="email"
        placeholder="Enter your email..." data-gaconnector-tracked="true"></div>
    <fieldset class="checkbox-group required"><label>How often would you like to receive newsletters? </label>
      <div><input id="6836382" name="cm-fo-iuetyd" type="checkbox" value="6836382" data-gaconnector-tracked="true"><label for="6836382">Get the latest from Knowledge at Wharton every week</label></div>
      <div><input id="6825401" name="cm-fo-iuetyd" type="checkbox" value="6825401" data-gaconnector-tracked="true"><label for="6825401">Get a monthly roundup of the best content from Knowledge at Wharton once a month</label></div>
    </fieldset>
  </div><button type="submit">Subscribe</button>
</form>

Text Content

Knowledge at Wharton logoKnowledge at Wharton logoWharton Business Daily logoThe
Wharton School logo
Skip to content Skip to main menu

A business journal from the Wharton School of the University of Pennsylvania

Mobile menu toggle
Subscribe
Menu
Go to site search Mobile menu toggle
* TopicsToggle submenu
* View All Topics »
* Analytics
* Entrepreneurship
* ESG
* Finance & Accounting
* Innovation
* Leadership
* Management
* Marketing
* Markets & The Economy
* Public Policy
* Technology
* Diversity, Equity, & Inclusion
* COVID-19
* Fintech
* Inflation
* Opinion

* SeriesToggle submenu
* View All Series »
* Beyond Business Series
* Dollars and Change Series
* Great Question Series
* Leading Diversity at Work Series
* Meet the Authors Series
* Nano Tools for Leaders Series

* Articles
* Podcasts
* Videos
* Faculty
* Bookstore

Skip NavigationMenu
* Topics
* * View All Topics »

* * Analytics
* Entrepreneurship
* ESG
* Finance & Accounting
* * Innovation
* Leadership
* Management
* Marketing
* * Markets & The Economy
* Public Policy
* Technology

* * What's Trending
* Diversity, Equity, & Inclusion
* COVID-19
* Fintech
* Inflation
* Opinion
* Series
* View All Series »

* * Beyond Business Series

* How Analytics Can Boost Competitiveness in SportsJanuary 31, 2023
* How Data Analytics Can Help Deliver Social GoodDecember 20, 2022
* How Analytics Is Changing FinanceNovember 29, 2022
* Beyond Business: Humanizing ESGDecember 13, 2021

* Dollars and Change Series

* Why Employee-owned Companies Are Better at Building Worker
WealthNovember 11, 2022
* Investing in Refugee Entrepreneurs in East AfricaAugust 8, 2022
* How Companies and Capital Can Be Forces for GoodJune 21, 2022
* Making the Business Case for ESGMay 3, 2022

* Great Question Series

* Great Question: Witold Henisz on ESG InitiativesNovember 17, 2021
* Great Question: Wendy De La Rosa on Personal FinanceOctober 15, 2021
* Great Question: Dean Erika James on Crisis ManagementAugust 16, 2021
* Great Question: Kevin Werbach on Cryptocurrency and FintechJuly 21,
2021

* Leading Diversity at Work Series

* How National Politics Are Impacting DEI in the WorkplaceFebruary 7,
2023
* Navigating Microaggressions at WorkNovember 1, 2022
* Action, not Words: Creating Gender and Racial Equity at WorkJuly 11,
2022
* How Data Analytics Can Help Advance DEIJanuary 18, 2022

* Meet the Authors Series

* The Innovation Tournament Handbook: A Conversation with Christian
Terwiesch and Karl UlrichMarch 14, 2023
* Meet the Authors: Erika James and Lynn Perry Wooten on The Prepared
LeaderOctober 3, 2022
* Meet the Authors: Wharton’s Peter Cappelli on The Future of the
OfficeNovember 4, 2021
* Meet the Authors: Mauro Guillén on How Businesses Succeed in a Global
MarketplaceJune 21, 2021

* Nano Tools for Leaders Series

* Choosing a New Board Leader: Eight QuestionsMarch 7, 2023
* Crisis Leadership: Harness the Experience of OthersFebruary 14, 2023
* How to Use Neuroscience to Build Team ChemistryJanuary 23, 2023
* A Key to Better Leadership: Confident HumilityDecember 6, 2022

* Articles
* Podcasts
* Videos
* Faculty
* Bookstore

Go to site search

KNOWLEDGE AT WHARTON PODCAST

THE AUTO BAILOUT 10 YEARS LATER: WAS IT THE RIGHT CALL?

SEPTEMBER 12, 2018 • 27 MIN LISTEN

There was a big debate about whether to grant GM and Chrysler a bailout. Even
those leaning in favor were not sure it would work. Wharton and other experts
explain why it was the right decision.

*
*
*
*

* Public Policy

FEATURED FACULTY

John Paul MacDuffie

Kent Smetters

Morris Cohen

WRITTEN BY

Knowledge at Wharton Staff

Audio Player
https://sphinx.acast.com/p/open/s/621d3ea487eba30014f27133/e/6228986e7f63e9001285de4a/media.mp3

00:00
00:00
00:00

Use Up/Down Arrow keys to increase or decrease volume.

Wharton's John Paul MacDuffie and The Detroit Bureau's Paul Eisenstein discuss
how the auto bailout looks 10 years later.

The auto industry has occupied an almost mythical place in the American mind.
From the time Henry Ford created the first Model T in 1908 and the first moving
assembly line, cars were suddenly affordable for the middle class. That
transformed not just transportation but the urban — and suburban — landscape.

And like no other industry except housing, at least until recently, carmakers
were a perennial key driver of the U.S. economy. In what has become almost a
cliché, Charles Wilson, the former CEO of General Motors and U.S. Defense
Secretary just after World War II, was asked how he might handle a decision
involving a conflict between U.S. and GM interests. He could not imagine a
conflict: “For years I thought what was good for our country was good for
General Motors, and vice versa.”

By 2009, in the depths of the financial crisis, that bond had disintegrated. As
sales cratered and losses piled up, serious questions were being raised about
whether GM and Chrysler would — or even should — survive as access to credit
markets froze up. Public and official attitudes had hardened in the wake of the
collapse of the financial industry. There was a real question about whether the
two carmakers deserved the $80 billion needed to bail them out. Despite a 40%
nosedive in sales and some 3 million jobs at risk, officials were balking after
they had approved unparalleled bailouts of top financial firms.

The ‘Free Market’

Many objections to domestic carmaker bailouts centered on economic philosophy.
Critics asked: In the “free” market, shouldn’t companies stand or fail on their
own?

Like the banks, the domestic auto industry was widely viewed as having brought a
lot of the catastrophe upon itself. The Big Three still had poor reputations for
quality and had long been pushing sales of high-gasoline-consuming SUVs and
pickup trucks. As such, they were unprepared with smaller, more fuel-efficient
models when gas prices spiked in the 2000s and demand for their products —
versus those of foreign manufacturers — fell.

“In the run-up to the 2009 bailout, the Big Three manufacturers recorded some of
the worst corporate performances in American history,” wrote Austan D. Goolsbee
and Alan B. Krueger in 2015. Both were top Obama-administration officials
involved in the auto-bailout decision — Goolsbee had been a member of the
Council of Economic Advisors and Krueger was chief economist at the Treasury
Department. GM lost $40 billion in 2007 and another $31 billion in 2008, they
pointed out. What’s more, the Big Three’s market share had shrunk from 71% in
1998 to 47% in 2008.

> “You can only ask ‘Where are we now?’ The auto factories are still working.
> We’re producing products.” –Morris A. Cohen

In the end, the officials decided the nation could not afford another big
economic hit, and that if measures were imposed to change leadership, business
models and labor costs, then the costs would be worth it. Still, Goolsbee and
Krueger noted that most of the bailout decision-makers “did not know if it would
work.” They wrote that “… we are both thrilled and relieved with the result: The
automakers got back on their feet, which helped the recovery of the U.S.
economy. Indeed, the auto industry’s outsized contribution to the economic
recovery has been one of the unexpected consequences of the government
intervention.”

There may be endless debate about how much bailout measures led to the strong
industry recovery versus how much came simply from the general recovery of the
economy. But 10 years later, it is worth revisiting what the bailout has meant
to the industry, and where it is heading.

For Wharton management professor John Paul MacDuffie, the idea of letting GM and
Chrysler wither on the vine made no sense. “It could have been a domino-effect
collapse of the domestic auto industry.” He adds that the bailout decision made
sense partly to avoid a much deeper crisis, but also to make GM and Chrysler
more competitive in the future. It was true that U.S. auto companies were “badly
managed for a long time. GM lost market share for 30 years. There were these
energy crises and there were no fuel-efficient vehicles being made by the Big
Three, over and over again.” (MacDuffie, who is also director of the Program on
Vehicle and Mobility Innovation at Wharton’s Mack Institute for Innovation
Management, recently spoke about the bailout on the Knowledge at Wharton radio
show on SiriusXM. Listen to the podcast at the top of this page.)

The 40% Hit

Yet, that poor record had largely been reversed by the time the crisis hit. When
it came to manufacturing capability, product development and supply chain
management, the U.S. automakers were close to the levels of “any global
manufacturer” in most areas by 2009. They were already in the middle of a large
and successful improvement process when the financial crisis hit and they were
among the victims, MacDuffie adds. The auto companies were not involved in
causing the financial crisis. But then, he asks, what business dealing in
expensive, capital-intensive durable goods takes a hit of 40% and isn’t in a
crisis?

Put another way, despite public perceptions, the Big Three were finally getting
it right by the time the downturn arrived, but they were saddled with debt when
they, their dealers and consumers were all cut off from credit overnight. That
was potentially a death knell. MacDuffie thinks of the government action not so
much as a bailout of an uncompetitive industry that was behaving badly, but more
of an investment in a “super-important” part of the economy already on an
“impressive improvement trajectory.”

Noting that the auto industry has “so many multiplier effects, there are so many
jobs related to it,” he adds that many also believed it was simply “important
for a country to have its own car companies.” Losing so much of the domestic
auto industry would have reduced competition and taken away a lot of
manufacturing capability.

Paul Eisenstein, publisher of online trade publication The Detroit Bureau, notes
that some “people were screaming about bailouts for Detroit and yet they seemed
to accept as just inevitable that we should be bailing out the banks and Wall
Street.”

MacDuffie also points out that a lot of political anger was in fact directed at
first at the financial institutions “that did contribute a lot” to the financial
crisis and “took little penalty.” The backlash bled over to autos, where it
focused more on “the parts of the country that were left behind in boom times.”
Imagine, he suggests, how bad the negative fallout would have been in some
regions “if those who said, ‘let GM and Chrysler go bankrupt’ had gotten their
way.” There would have been a deep sense of abandonment while “the coastal
elites, the big banks” were getting bailed out more quickly.

Moral Hazard

Government bailouts often create a moral hazard problem. Big companies can take
bigger risks if they assume that a bailout will be available if needed, notes
Kent Smetters, Wharton professor of business economics and public policy, and
faculty director of the Penn Wharton Budget Model. When the Big Three continue
to produce high-margin trucks, making them “more vulnerable” to recessions and
oil-price spikes even though smaller, fuel-efficient cars are in demand, it’s
possible they are factoring in an “implicit government backstop” if things turn
south, he says.

> “Some people were screaming about bailouts for Detroit and yet they seemed to
> accept as just inevitable that we should be bailing out the banks and Wall
> Street.” –Paul Eisenstein

Though GM and Chrysler eventually did get a bailout — Ford did not need help
because it had fortuitously secured a large amount of financing shortly before
the crisis — it was not all sweetness and light. GM shareholders were forced to
take a big hit, and CEO Rick Wagoner had to resign as a condition for government
help, Smetters explains.

If government aid is accompanied by “punitive effects on existing shareholders
and executives, I am a bit less concerned about moral hazard. Going forward,
however, I would make sure that creditors of too-big-to-fail firms take a larger
hit. It would send a signal that counter-parties need to monitor risk as well
and remove the credit-rate advantage of too-big-to-fail firms,” Smetters adds.

Morris A. Cohen, Wharton professor of operations, information and decisions, and
co-director of the Fishman-Davidson Center for Service and Operations
Management, thinks ultimately it’s impossible to know if the auto bailout was
the correct decision. “We don’t know what would have happened if they had made
the other choice.”

Some argue that limiting competition is bad — it’s better to let the market
decide. Yet governments intervene all the time in their national economies,
Cohen notes, producing winners and losers even though the distribution can be
uneven. The bailout means some jobs were saved, but maybe consumers all pay more
for our cars as a result. “It doesn’t affect my life if I have to pay another
$100 for a car.” But without a bailout “if I lost my job and I’m 45 years old,
that could be devastating. So the cost at the individual level … is much
greater.”

Cohen suggests there are two ways to look at the question — from a company and a
country point of view. Countries, ideally, try to maximize the welfare of their
citizens. They do all sorts of things to accomplish that, he notes. They impose
tariffs and quotas. They have restrictions on content and repatriation of
profits, and various other tax policies. Companies, on the other hand, have to
“optimize their global supply chain subject to the constraints and incentives
imposed upon them by governments.”

The Bottom Line

But the bottom line, in his view, is that every country is trying to maximize
benefits for their citizens, even if sometimes that involves helping companies.
“You could argue that we are in a period of economic warfare — countries
fighting against each other.” On balance, Cohen thinks it was the right decision
for the U.S. government to save GM and Chrysler. “Countries feel threatened,
especially high-wage countries.”

> “Vehicles like the Chevy Bolt got a jump start from the policy changes that
> accompanied the bankruptcy.” –John Paul MacDuffie

Noting he has visited factories in Germany and Japan, Cohen asks, “How could a
company survive in Germany with the highest labor costs in the world, producing
a very expensive product? And they do, they thrive.” A lot of it has to do with
culture, he adds, but “a lot has to do with government incentives. They do
whatever needs to be done, and it is the same thing in Japan. They are fighting
back. They want to preserve their economy. They want to preserve these
activities for their citizens.” Both Germany and Japan have been more effective
at it than the U.S. “because we have all of these debates,” such as the one over
bailouts suggesting that “maybe we should do nothing?”

So while it’s impossible to know whether the bailout was the best alternative,
Cohen says “you can only ask ‘where are we now?’ The auto factories are still
working. We’re producing products.”

A sometimes overlooked potential consequence of taking no action was how hard
that might have hit survivors — Ford and foreign firms operating in the U.S.
While they may have sold more cars — although just how many is questionable if
we had slipped into a real Depression — many of their suppliers would have been
wiped out, potentially causing untold challenges with supply chains and
competition for resources.

Faux Americana

For those less worried about what might happen to foreign carmakers in the U.S.,
it’s a complicated world out there. Many of those “foreign” cars made in the
U.S. actually have more domestically produced parts than those made by the Big
Three, according to the Chicago Tribune.

The Tribune article references a report from Cars.com noting that four of the
top 10 “most American-made vehicles of 2018 are made by Japanese brand Honda.” A
fifth brand in the top 10 was also Japanese. The article goes on to note that
the Honda Odyssey is built in Lincoln, Ala. with 75% domestic parts. But the
Buick Envision crossover is made in China, with only 2% of the parts being
American. Meantime, the largest exporter of U.S.-made cars is not a U.S.
company. It’s BMW of Germany, which exported nearly three-quarters of the
371,000 sport utility vehicles it made in the U.S. in 2017.

Here is another little understood notion: The preservation of GM and Chrysler
has helped sustain Detroit (and nearby parts of Canada) as a highly significant
center of innovation. As a source of patents and other innovations, that region
now greatly exceeds many other parts of the country, even in areas of high tech,
MacDuffie points out. The patents are either within that region, or they are
“co-authored patents with other auto hubs in Stuttgart or Tokyo, or other parts
of the world,” he says.

And while not long ago there was black humor about the last person in Detroit
turning out the lights, a quiet but dramatic reversal has been underway. Detroit
is now “a home for the global auto industry,” says MacDuffie. It has the
headquarters of some kind from almost every big automaker and big supplier all
over the world. “And there’s a tremendous amount of the next phase of
technological advance that’s being propelled both from there, and of course from
Silicon Valley.”

Adds Eisenstein: Even Chinese companies that may never set up shop in Detroit
“have some form of operation here because of the technology.” True, they also
have technology design studios in the Los Angeles or San Francisco areas. But
it’s flipping around. Some Silicon Valley operations are partnering with the
Detroit manufacturers and others, and setting up high-tech ventures there as
self-driving cars and electric cars advance. Toyota, for example, “operates some
of its biggest R&D facilities” and a huge test track in the region.

So are today’s domestic auto companies more prepared for having received the
bailouts? According to MacDuffie, yes. One straw in the wind: The old guard,
notably former CEO Rick Wagoner who was fired during the bailout, had been
continuing the long-standing GM strategy of emphasizing market share and
“pushing production at all costs, even if it meant a lot of cars put into rental
fleets.” Current CEO and chairwoman Mary Barra has brought key changes that
should help GM in the next recession. “She allowed GM to get smaller,” MacDuffie
says. Barra is more focused on profitability and “not just volume,” and she has
led the company to a lot of product innovation.

> “Automakers will see more disruption in the next 10 years than in the last 50
> years” –McKinsey

The future for automakers is anything but a straight line. There are
unprecedented new competitive challenges to the Big Three from upstarts like
Tesla and high-tech companies dedicated to becoming self-driving car leaders.
There are also structural and lifestyle challenges. Car share programs and
disruptors, like Uber and Lyft, are allowing more city dwellers and others to
avoid car ownership altogether, or to have one-car households versus two cars.
And while 91% of adults with full or part-time jobs used their car for work or
commuted to work with someone back in 2007, 10 years later the number had
dropped to 83%. Working at home, mass transit use, walking and biking seemed to
be taking up most of the difference.

According to a recent report by McKinsey, automakers will see more disruption in
the next 10 years than in the last 50 years, driven by four factors: autonomous
cars, connectivity, electrification and ridesharing. “Connectivity and
autonomous-driving functionalities are creating a multitude of new business
models and monetization opportunities, especially as consumers prioritize
driving-related applications, such as connected navigation and networked
parking, above those unrelated to driving, such as email and music streaming,”
notes another McKinsey report.

Endless Disruption

So if there is one constant for the auto industry’s future, it is likely to be
continual disruption. Who would have predicted, for instance, that Ford would
announce in April that it would stop making most of its car models to
concentrate solely on SUVs, including so-called crossovers, and also pickup
trucks. It is scrapping almost all of its sedans — the Fiesta, Focus, Fusion and
Taurus. Only the Mustang will survive. Ford CEO Jim Hackett announced the
company “will not invest in next generations of traditional Ford sedans for
North America,” all part of a $22.5 billion cost-cutting plan.

That brings back the question of whether the bailout recipients are better
prepared for the future now. MacDuffie believes that some of the steps forward
are impressive. “Vehicles like the Chevy Bolt out of GM — which really is a cut
above pretty much any of the electric vehicles that have come out of companies
other than Tesla — I think got a jump start from the policy changes … that
accompanied the bankruptcy.” So part of the result of the bailout was getting
out of a crisis, he adds, but there was a piece “seen as opportunity to nudge
these companies towards some new kinds of behavior.”

SUBSCRIBE NOW

Apple Podcasts
Google Podcasts
Acast
RSS

RELATED PODCASTS

Public Policy

WHAT WILL BIDEN’S INCOME-DRIVEN REPAYMENT PLAN COST?

February 13, 2023 • 12 min listen
Marketing

‘BEST COUNTRIES’ 2022: WHO’S NUMBER ONE?

October 11, 2022 • 11 min listen

knowledge.wharton.upenn.edu Open in urlscan Pro 2620:12a:8001::4 Public Scan

Form analysis 1 forms found in the DOM

POST https://www.createsend.com/t/subscribeerror?description=

Text Content

knowledge.wharton.upenn.edu Open in urlscan Pro
2620:12a:8001::4 Public Scan

Form analysis
1 forms found in the DOM