Indiana University faculty experts share views on auto industry bailout
Congressional leaders and the White House are attempting to work out details and gain approval for $15 billion in emergency loans to U.S. automakers. Indiana University faculty experts share their views on the bailout.
Low gas prices, safety concerns complicate bailout prospects. Tying a bailout to making Detroit invest in "green technology" would ignore the fundamental reality of the global collapse of the price of oil, says John D. Graham, dean of the IU School of Public and Environmental Affairs, whose research interests include the future of the automobile. "If Congress insists on a policy of green vehicles as a condition of bailout, there is a good chance that the Big Three will end up in bankruptcy or be back to Congress seeking additional funds," he says. Studies show that car buyers won't pay more for fuel economy unless gas prices are so high that they can recoup their investment in three years. With the economy in a recession, that won't be the case soon, and "the fate of the U.S. industry will be determined by what happens from model years 2010 to 2015, not 2030."
There is also a risk the companies would increase gas mileage by making vehicles smaller, thus compromising safety. "If you downsize across the board, you will increase traffic fatalities significantly," says Graham, who has published extensively on automotive safety. If Congress does push green technology as part of a bailout, he says, one promising approach would be a "feebate" system: tax rebates for consumers who buy green vehicles but higher taxes on gas guzzlers. But such a system should be adjusted to vehicle size and weight classes to avoid promoting safety risks and to allow for the fact that some consumers need larger vehicles. With that approach, a big pickup that gets good gas mileage -- for example, because of a clean diesel engine -- might qualify for a rebate.
Before coming to IU in August 2008, Graham was dean of the Frederick Pardee RAND Graduate School. From 2001 to 2006, he served as administrator of the Office of Information and Regulatory Affairs at the White House Office of Management and Budget. He can be reached at email@example.com or through Steve Hinnefeld at University Communications, 812-856-3488 or firstname.lastname@example.org.
The problems that led to the current mess were a long time developing. "Now it's easy to look back and see they were there all along, but at the time it wasn't as obvious," said Gil Frisbie, a clinical associate professor of marketing in IU's Kelley School of Business. Frisbie has consulted for both General Motors and Chrysler throughout his career.
One example, Frisbie said, was a short-term orientation at the expense of long-term solutions, such as failing to create highly differentiated models among the GM stable of brands. Another example of short-term orientation: for a long time, America auto manufacturers found trucks, SUVs and larger cars to be more profitable. This is changing, but without the bailout, the manufacturers will not be able to change direction.
"If there's no bailout at all, the consequences would be dire for the entire economy," Frisbie said. "We can't take the risk to find out if I'm wrong. If all three automakers went under, it would be devastating to the supplier network, which extends all across the country, including lots of jobs in Indiana.
"If there is a bailout, clearly the car manufacturers will be given significant benchmarks, such as the proposed oversight from the car czar. This is a way of providing oversight that people now seem to feel was missing from the bank bailout," he added. "Most people seem to be more supportive of the auto bailout, and now are more critical of the bank bailout. The nature and details of the automaker bailout seem to be affected by some of the mistakes made in dispersing the money made available in the bank bailout. Congress is pushing for more specifics and more accountability for the auto bailout money."
He believes that health care reform could help the auto industry. "It's a huge cost for manufacturers and automakers in other countries often have a national health care policy that cuts some of their labor costs.
"Foreign car manufacturers based in the U.S. have several advantages over the Big Three. They have been able to reduce labor costs by locating plants in southern states, which have less organized labor. They also have newer plants, allowing them to change manufacturing processes and change models more quickly."
In addition to his work as a marketing professor, Frisbie has served as managing director of Strategic Research and Consulting, Inc., a division of Opinion Research Corporation International. He was particularly active in the start-up and development of the Saturn brand, the reposition of both Pontiac and Cadillac at critical periods in their history, and in the efforts to reposition Oldsmobile. He has worked with product teams and designers to introduce several new product entries and also played an important role in developing a segmentation scheme used for strategy formulation at General Motors. Additionally, he was involved in the development and introduction of the first mini-van as well as the current generation of Dodge trucks.
Frisbie can be reached at 812-855-1259 or email@example.com.