Morici Opinion Articles
Smith Professor Peter Morici
Testifies on State of U.S. Auto Industry
H. Smith School of Business professor Peter Morici testified Nov. 18, 2008, at a
U.S. Senate Committee on Banking, Housing and Urban Affairs hearing examining
the challenges facing the automotive industry. Morici joined a panel that
included Sen. Debbie Stabenow, D-Mich., and the major players in the U.S. auto
industry: Alan Mulally, president and CEO of Ford Motor Company; Robert Nardelli,
chairman and CEO of Chrysler LLC; and G. Richard Wagoner Jr., chairman and CEO
of General Motors; and Ron Gettelfinger, president of the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America.
The “big three” domestic automaker execs were on Capitol Hill appealing for a
share of the $700 billion federal economic bailout funds to help bolster their
industry. Morici’s testimony offered an opposing view, calling for the federal
government to refrain from pumping the industry with aid money, but rather to
consider offering public policy incentives. Morici said a federal cash injection
will only delay the automakers from filing for Chap. 11, not eliminate it. He
argued that the entire industry will fair better if the companies were to
reorganize, reduce debts, streamline and emerge from bankruptcy stronger.
Here’s Morici’s written statement that he delivered to the committee. Video
of the hearing is also available on C-SPAN’s Web site:
Senate Banking, Housing and Urban Affairs Committee
“Examining the Domestic Automobile Industry”
Professor, Robert H. Smith School of Business
University of Maryland, College Park MD 20742
My name is Peter Morici, economist and professor at the University of
Maryland School of Business. Thank you for inviting me to provide testimony
The domestic automobile industry has two major components—the Detroit Three
and the Japanese, Asian and European transplants that also assemble and source
components in the United States and Canada. Both contribute importantly to the
vitality of our national economy. Ensuring these companies have the means to
compete globally is vitally important.
The gradual erosion of the market shares of the Detroit Three over the last
several decades stems from higher labor costs—having origins in wages, benefits
and work rules--poor management decisions, and less than fully supportive
government policies. Although the U.S. government has been sympathetic to the
needs of the industry, the industry has fallen victim to currency manipulation
and other forms of protectionism in Japan, Korea, India, and China.
The Detroit Three are rapidly running out of cash and face filing for Chapter
11 reorganization. It would be better to let them go through that process and
reemerge with new labor agreements, reduced debt and strengthened management
that would permit these companies to produce cars at costs comparable to those
enjoyed by their Japanese and other foreign competitors assembling vehicles in
the United States.
Circumstances are dramatically different today than in 1979 when Chrysler
received assistance from the federal government. In those days, the challenge at
Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear
plan to achieve that objective and succeeded. Today, the Detroit Three, though
improved in productivity and with lower labor costs thanks to concessions from
the United Auto Workers, are still not as competitive as the Japanese
Margins in automobile manufacturing are thin and there is no such thing as
being competitive enough. Either a company is competitive or it is not—either it
accomplishes the cost structure enjoyed by Toyota and Honda, operating in the
United States, or it will continually cede market share and run into financial
By assisting the Detroit Three, Congress can delay one or all of them going
through Chapter 11 reorganization but sooner or later one or all will face
reorganization. The communities and suppliers dependent on these companies would
be better off going through that process now than by delaying it with assistance
from the federal government.
Without a new labor agreement that brings wages, benefits and work rules in
line with those at the most competitive transplant factories, and without
reduced debt and other liabilities, the Detroit Three will continue to lag in
product innovation and field too few attractive new vehicles, because their
higher costs, debt and other liabilities require them to spend less on new
productive development than they should. Also, they are inclined to field
products with less desirable content to compensate for higher costs. As
consumers find vehicles made by Japanese and other transplants more attractive,
like those imported from Korea and eventually from China, the Detroit Three will
cede market share of one or a few percentage points each year.
If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge
from a bankruptcy reorganization process will be smaller and support fewer jobs
than if these companies endure this difficult transition in 2009.
More jobs can be saved among GM, Ford and Chrysler and their suppliers if
bankruptcy reorganization is endured now than in the future.
When Americans buy automobiles from the Detroit Three, more is contributed to
the vitality of the U.S. economy than when Americans buy vehicles assembled here
by transplants or imports. These vehicles have more U.S. content in terms of
jobs, engineering and profits than do foreign nameplate vehicles.
The Congress could take steps to improve the attractiveness of making cars
and parts in the United States by improving the public policy environment. This
would include finally addressing, directly and forthrightly, undervalued
currencies in Asia—currencies kept cheap by intervention by foreign monetary
authorities in China and elsewhere. In addition, assertive efforts to develop
fuel efficient vehicles could strengthen the industry and create export
For example, Congress could offer an incentive for car buyers to trade in
their gas guzzlers—the newer and the bigger the clunker, the more the car buyer
would receive under the condition the vehicle is destroyed. This would raise the
price carmakers receive from selling smaller vehicles.
Congress could provide substantial product development assistance to
U.S.-based automakers and suppliers. The latter includes Toyota, Nissan and
Honda, as well as the Detroit Three, battery makers and other suppliers to
accelerate the production of innovative, high-mileage cars.
The condition for assistance would be that beneficiaries do their R&D and
first large production runs in the United States, and share their patents at
reasonable costs with other companies manufacturing in the United States. The
huge U.S. market would help attract producers from around the world and
rejuvenate the U.S. auto supply chain.
Peter Morici is a professor at the University of Maryland Robert H. Smith
School of Business and former Chief Economist at the U.S. International Trade