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04/24/2009

Introducing the New Ford Squeeze

The most fascinating thing to me about the coverage of the fate of Chrysler and General Motors is the extent to which the language has changed since earlier this year and late last year. In 2008, the automakers were all hanging together, and aid was cast as critical for the continued functioning of the economy -- without it, bankruptcy would result, leading to the collapse of suppliers and the loss of millions of jobs. The government played along, extending loans to Chrysler and GM and a line of credit to Ford.

But the tune now being played is a little different. Chrysler will almost certainly file for bankruptcy, whether or not it reaches an agreement with creditors or Fiat, and in fact, liquidation is not out of the question. GM's position on bankruptcy has also changed significantly; the company acknowledges that it may be unavoidable, though it seems certain that the government would take the necessary steps to ensure that restructuring, rather than liquidation, would be the order of the day for GM.

What explains the shift? To begin with, Detroit's woes are now placed in a new context. The loss of all of Chrysler's 66,000 American jobs would be painful, but it no longer seems apocalyptic given the employment picture everywhere in the economy. The weak economy has also meant that employment losses are assured in any case; downsizing will continue for GM and Chrysler whether they manage to avoid bankruptcy or not.

But one can't ignore Ford as a significant factor influencing the policy environment. The firm has proven itself to be stronger than the competition at every turn in the process turning down government loans citing its stronger cash position, and now indicating that it sees a profitable way forward. In the first quarter of 2009, Ford reported a smaller loss than expected and reduced the rate of cash burn (which it said would continue to decline through the year). It also announced production increases to come, even as GM said it would be idling many of its plants this year.

This is hugely important. It means that no matter what happens to GM and Chrysler, there will still be an American car industry. It means that supply chains are less threatened by the complete collapse of the domestic producers. And it means that GM and Chrysler can rely less on broader conditions as the scapegoat for their troubles, as opposed to internal problems.

It also means that Ford is actively undermining its rivals. It has clearly decided that now is the time to eat up market share and prepare for a post-recession world. Given widespread agreement that the global car market is oversupplied and in need of serious consolidation and contraction, a production increase can't be interpreted as anything but Ford sucking up the oxygen in the room. This, of course, is exactly how an economy is supposed to function -- the weak go down, and the strong take their place in the market. Ford has provided everyone with the chance to feel like a good capitalist again. It has also give the administration an argument against the inevitable complaint that will arise when Chrysler, and potentially GM, enter bankruptcy -- that failure is for blue collar workers, but not white collar workers. At this point, a strong defense of GM and Chrysler would clearly undermine the progress made by the one actually successful (ish) American car company.

But just because the administration has a counterargument, doesn't mean the complaint won't be made. More interesting yet, some American banks seem to be leaning toward a Ford approach -- leaving the solidarity of bank-brothers-in-failure behind. The move is trickier in the financial sphere; unlike Ford, every financial institution is heavily reliant on government guarantees, explicit and implicit, to survive in the current climate. As the relative health and needs of the banks continues to become clearer, however, expect more noise to be made about the government impairing the success of the strong by propping up the weak. The question is -- will that provide the government with an avenue to seriously address the questionable status of the Citigroups out there?Related Links
Jump-Starting a Bailout
Quantity Is Job 1
Detroit Gets a Bridge



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