The US auto bailouts were worth the billions

Don't listen to the naysayers, says David Booth; it looks like the financial assistance to the auto companies is starting to pay off.

Profits are up at GM following the government bailout, which helped keep plants, such as the Flint GM Assembly in Michigan,open.

Deep in mainstream, southern USA, Republicans, Tea Partiers and their various extremist acolytes continue spouting all manner of doomsday prognostications. Like dogmatic conspiracy theorists, they cling to the interventionist v creative destructionist argument, lamenting President Obama's bailout as a multi-trillion dollar boondoggle. More specifically, the bankrolling of the domestic auto industry is repeatedly cited as a particularly egregious example of the economic extravagance that plagues the ruling Democrats. And, truth be told, instinct, honed by years of parental tough love, would normally have me join the ranks of the "sink or swim" crowd.

Unfortunately (or, more accurately, fortunately) my instinct would appear to be very wrong. One need only read the headlines to know that the domestic auto industry there is firing on most of its cylinders. Profits at General Motors and Ford are up, the latter is enjoying phenomenal market share and both companies also boast an increasingly impressive product portfolio. And despite the right-wing media's scepticism, customers have noticed the improvements. Yes, fleet sales are creeping back up, but incentives are down, dealers are more profitable and Kelley Blue Book recently reported that Ford is the most considered marque for Americans. According to its Brand Watch study, 29 per cent of consumers shop Ford versus only 22 per cent for the perennial market leader Toyota.

As well, for the first time in history, Ford and GM lead the American Customer Satisfaction Index (ACSI). Lincoln-Mercury tops the industry with an overall score of 89 (out of 100) with Buick following closely at 88. Nor is this an isolated trend. Though the overall satisfaction in the auto industry is down (largely as a result of the discontinuation of the "Cash for Clunkers" programme, says ACSI), US car makers showed the smallest decline while satisfaction with the Japanese and Korean marques dropped the most.

General Motors has, of course, also announced a much-ballyhooed IPO. Again, despite the scepticism in the financial press - initial reports that the stock offering would ring up as much as US$70 billion, the largest in American history, have been tempered with more recent news that the stock offering may only amount to (a still huge) $16 billion - it is important to remember that a) the American and Canadian governments will begin to recoup some of the huge loans they made to GM. And b) that said IPO and loan repayments are far ahead of schedule.

This last is no trivial matter. Analysts are noting that if, through this IPO and a subsequent offering said already to be in the planning stages, GM's market capitalisation exceeds $69.4 billion ($139/share), the US government can recoup all of the remaining $43.3 billion it has invested in "Government Motors" (GM has already repaid $6.7 billion of the original $50 billion bailout). Of course, such enthusiasm must be tempered with the reality that an IPO amidst the worst economy since the Great Depression (and predicted to get worse) may not raise the expected monies. Or that GM's European operations continue to operate in the red and its market share at home has dwindled to just 19.2 per cent.

But, other news, like The General's much-publicised recent CEO shuffle (its third in 18 months, note the IPO pessimists) may have a silver lining. Though Ed Whitacre's departure was more than a tad abrupt and may not be the ideal method of announcing an initial product offering, GM's board of directors wanted a long-term leader confirmed prior to officially submitting plans for the aforementioned stock sale. The timing may have been spotty, but it reveals a GM board far more powerful and activist than the somnolent directors of the past.

Still, there are those that would continue bashing The General. In recent weeks, the target du jour has been Chevrolet's Volt or, more accurately, its pricing, the $41,000 (Dh150,600) GM has set for the US deemed too expensive for significant market penetration. The lament then follows that the bailout monies were wasted on a product that will have limited appeal. The problem with the argument is that, had GM priced the Volt more competitively, these same naysayers would have complained that the stimulus money was wasted because GM was still selling cars at a loss.

This "damned if you do; damned if you don't" brand of journalism may serve the anti-bailout constituency, but it doesn't change the fact that GM deserves to be lauded as a - if not the - leader in electrical propulsion and that both choices for the Volt - pricing for profit or for market share - have limitations. The anti-bailout crowd also trumpets Ford's recent successes as proof that the laissez-faire theory of tough-love economics forces companies to adapt for the better. What that reductivist argument misses is that Ford simply faced insolvency much earlier than GM. In 2006, when Ford reached it lowest point, money was still being given away for free and the company mortgaged its future for a $23 billion stay of execution. Indeed, had the company been healthier then and not needed cash quite so quickly, it probably would have faced the same bankruptcy prospects as General Motors and Chrysler.

If the Tea Partiers want a more viable target, they should focus on Chrysler. The Daimler rejectee is still losing money, market share continues to decline and, despite the successful introduction of a new Grand Cherokee (see the road test on mo3), there's not much new product in its pipeline. Yes, the CEO Sergio Marchionne is an Obama-like charismatic and claims to have a plan for the money-losing car maker. But part of that plan has Chrysler manufacturing cars for Alfa Romeo and Lancia for sale in Europe. Chrysler may have a long and storied history, but in my 25 years of autojournalism, it has never produced a sporty AND sophisticated car that would meet European standards.

Nonetheless, as the once unlikely resurrections of both Ford and General Motors attest, perhaps we should all have a little more faith.