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Reason Foundation

The Wall Street Journal

Detroit Bets Its Future on Washington

Carmakers seek to please Congress instead of customers

Shikha Dalmia and Henry Payne
January 24, 2009

The curtain comes down this week on the 2009 Detroit International Auto Show -- and with it likely on the American auto industry as we know it. This might turn out to be a watershed year when some of the industry's big players permanently shift gears from serving ordinary car buyers to serving the grand designs of central planners. The only other time that the industry subordinated its customers to the government was World War II. Then it had no choice. This time the industry, particularly General Motors, is desperately "retooling" itself to make Washington's environmental and industrial policy priorities a vital part of its business revival plan.

By accepting government welfare, GM rejected the chance to transform itself into a worthy competitor to foreign manufacturers. That would have required making too many hard decisions, such as confronting unions, cutting legacy costs, and slashing dealerships under a Chapter 11 filing.

Parading green technologies has been something of a ritual at the auto show, even before Leonardo DiCaprio made the Toyota Prius a status symbol. Prius might be a money loser (despite selling a million cars, analysts still believe Toyota sells each one at a loss) -- but the prevailing industry wisdom is that the halo effect hybrids produce is important for other reasons, including gaining a foothold in an elite market segment. Whatever the plausibility of this line of thinking previously, one would think that after being forced to rattle their tin cup in Washington, they would be slashing their extravagant PR schemes and rededicating resources toward products with a proven market.

Instead, auto makers did the opposite at this show -- downplaying displays of bread-and-butter cars to make room for the largest display of experimental green vehicles ever, particularly cash-guzzling electric vehicles. Ford announced it would bring an electric car to the market by 2011. Chrysler, bleeding so much red ink that it gave away 35% of its equity stake to Fiat for free last week, unveiled three new electrics. And GM -- the clear winner of the electric horse-race -- rolled out its latest Chevrolet Volt, while also announcing that marketing this $40,000 plug-in with its "extended" driving range of 40 miles by next year is a top priority. The company is planning to build a $30 million battery factory in Michigan -- instead of outsourcing production to Asian makers.

Yet until recently, GM was protesting Washington's green mandates. Vice Chairman Bob Lutz called global warming a "total crock" and declared that hybrids made "no economic sense." This week, asked by a reporter how a cash-strapped company could afford to build a battery factory, Mr. Lutz responded: "We can't, but we're doing it anyway. It's one of the pieces of our future that we absolutely have to do."

Why? A study last week by the Boston Consulting Group found that extended-range, all-electric vehicles like the Volt will account for no more than 5% of the North American market by 2020 (assuming last year's peak oil prices and $7,500 in tax credits for electric car buyers). Hybrids, around for almost a decade, today command less than 2% of the market. But GM is not counting on market success for its comeback. It has neither the cash reserves nor the brilliant product line needed for that in a down economy, when sales are expected to be 40% lower than two years ago (the lowest volume since the 1973 Arab oil embargo).

GM is counting on the government to stay alive. It could potentially recover all of its investment in the new battery facility from a $335 million state program to bring green jobs to Michigan. This will allow it to impress Pelosi and Co. and perhaps extract more federal taxpayer money. For example, the $825 billion bag of goodies -- otherwise known as the stimulus package -- that Congress is working on contains $11 billion for electricity infrastructure needed for the wide-scale adoption of electric cars, as well as $2 billion in loans to build "advanced vehicles and battery systems."

But the biggest payoff could come in March, when GM's newfound green priorities might set the stage for another round of multibillion-dollar bailouts.

No one believes that simply putting cars like the Volt on the market will induce consumers to trade in their SUVs, especially with gas under $2. Not even GM. "With fuel prices declining, government mandates that auto makers build highly fuel-efficient cars will be no more effective than combating obesity by forcing clothing manufacturers to make only small sizes," Mr. Lutz quipped last week. "It puts us in the industry in the position where we are at war with the customer."

Instead, once the Volt and its sister electrics pile up in showrooms, the government will face this choice: Admit failure and abandon its investments in electrics -- or blame the failure on insufficient intervention and redouble efforts to push electric cars. GM is betting that with Democrats in control of both the White House and Congress, Washington will move toward more assistance for auto makers and mandates, such as gas taxes, on consumers.

Republicans, too, are jumping on the fuel-economy bandwagon in the name of energy independence. Sen. Bob Corker of Tennessee -- who led the effort to torpedo the auto bailout last year -- is a big believer in this cause and was excited by the fuel-efficient cars he saw at the auto show. He said in an interview that some kind of a regime to lower carbon emissions will be imposed in the next 12 to 18 months. "That will go a long way toward aligning the choices of car buyers with national energy priorities," he said.

The Volt is calculated to position GM as the chief partner in Washington's emerging green industrial policy. This might keep it in business -- but the price will be paid by taxpayers and the car-buying public.


Shikha Dalmia is Senior Analyst


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