Obama and the Auto Industry

by Jonathan Michaels

Every presidential election presents the country with a unique opportunity to fundamentally alter the course of history. The decision we make this November will lay the foundation for economic, environmental and foreign policies for the next four years, or possibly the next eight, and in many respects, for generations to come.

To put the gravity of the decision into perspective, consider the impact that Franklin D. Roosevelt had on our society with his creation of Social Security, the Securities and Exchange Commission and federally insured banks. Or think about the fateful decision made by Harry S. Truman to drop an atomic bomb on Japan, killing a quarter of a million Japanese civilians. No one can know what challenges will confront the winner of this election; we can only hope that he will have the fortitude, wisdom and courage to make good decisions in the face of adversity.

In his quest to win over voters and glide to a second term, President Barack Obama has made several sweeping statements about his first term accomplishments. To be fair, both candidates have stretched the truth about as far as the imagination can travel. Gov. Mitt Romney would just about have us believe that his accomplishments include ending world hunger, freeing the human spirit, and turning water into wine - if he was allowed to drink the stuff.

But there is one claim that President Obama has made that has many pundits brewing: ''Obama saved the auto industry." The claim has been central to his candidacy, and for good reason. Not only does it show that his efforts prevented a financial calamity for the nation, but it is a particularly important topic for the swing states of Ohio and Wisconsin, which surround Michigan and are acutely impacted by the automotive industry. And it is not lost on the president that no Republican has ever been elected to office without winning Ohio.

To be sure, had Chrysler and General Motors ceased as a going concern, the fallout would have been tremendous. But what is less certain is whether the concern would have materialized absent billions in government handouts. It cannot be ignored that Ford, who had similarly seen its market share erode over the years, did not take the free money, and it remains viable. And there is little to suggest that market forces could not have adequately handled the situation.

But there was a bailout, and the Obama campaign has ridden the high horse into our living rooms with claims of salvation. But are those claims true? Like most things in politics, the answer depends on how you spin the statistics.

In Bill Clinton's opening remarks at the Democratic National Convention, he stated, "Now there are 250,000 more people working in the auto industry than the day the companies were restructured. Gov. Romney opposed the plan to save GM and Chrysler. So here's another jobs score: Obama, 250,000; Romney, zero." Is there truth to the statement?

The Bureau of Labor Statistics shows that in June 2009, when GM and Chrysler filed bankruptcy, auto manufacturers and dealers located in the U.S. employed 1,634,100 workers; today that number is 1,870,700 -a net gain of 236,600 (Clinton's 250,000). But here's the catch: The number represents jobs for the entire auto industry, both domestic and foreign-owned. So Obama is taking credit, for instance, for the increase of jobs at the BMW plant in South Carolina and the Nissan plant in Tennessee.

The numbers for GM and Chrysler, the actual benefactors of Obama's efforts, are much different. According to GM's annual report, in June 2009 GM North America employed 70,000 workers in the U.S. Today that number stands at 74,500, a net gain of 4,500 jobs. The increase in jobs at the smaller Chrysler (which is private and does not publish its numbers) is unknown, but industry analysts opine that it is likely in line with GM’s. And then there is a deeper, untold story that weighs heavily in the analysis.

As part of the $61 billion given to GM and Chrysler, President Obama required the manufacturers to come up with an aggressive plan to thin the ranks of their dealer networks. When the automakers proposed a gradual closure of hundreds of dealerships over a five-year span, the administration rejected the plan as too shallow and too slow.

The Treasury Auto Team that had been established by President Obama theorized that GM and Chrysler needed to follow the "Toyota model,” which suggested that a smaller dealership network would reduce competition and increase sales for the remaining dealerships. This, in turn, would enable the dealerships to invest more in their facilities, thus improving brand equity.

For the thousands of dealers who lost their family businesses, many of which had been owned for generations, it certainly does not feel as though President Obama "saved" the auto industry.

GM and Chrysler returned with a new plan for drastic cuts in their dealer base: GM proposed to terminate 1,454 dealers within 16 months, and Chrysler suggested cutting 789 dealers in just 22 days. The plan was approved, and through the power of a pre-packaged bankruptcy proceeding, scores of family- owned businesses died in an instant.

With the average dealership employing 52 Americans, the total job loss from the 2,243 dealership closures was expected to be 116,636. Public outrage resulted in Congress passing the Consolidated Appropriations Act of 2010, which allowed targeted dealers to challenge the termination. But for many who went dark after being told they were terminated, the congressional act could not revive the business that had been allowed to go cold.

The president's actions also lead to a formal investigation by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). In its July 2010 report, SIGTARP found that the Treasury Auto Team, which advised the president on the viability of the GM and Chrysler plans, consisted of 17 individuals - none of whom had any experience or expertise in the auto industry. The report also found that, while the purpose of the TARP program was to ''preserve and promote jobs of American workers,” job loss was not a significant factor in the Auto Team's review of the manufacturers' plans.

The SIGTARP investigation also found that since the terminated dealerships were privately owned, it was debatable whether their closure would result in any significant cost savings for the manufacturers. But even if savings were to be had, this was not a significant factor for the Auto Team in determining the need for dealership closures. Instead, SIGTARP found that the Auto Team was driven by the "theory" that GM and Chrysler should emulate the Toyota model of fewer dealerships.

The report concluded, that a time when the country was experiencing the worst economic downturn in generations and the Government was asking its taxpayers to support a $787 billion stimulus package designed primarily to preserve jobs, [the] Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small business and thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls - all based on a theory and without the sufficient consideration of the decisions “broader economic impact."

For the thousands of dealers who lost their family businesses, many of which had been owned for generations, it certainly does not feel as though President Obama "saved" the auto industry. Consider that even as of today, some three years later, many of these dealers are still paying back the millions in debt their business incurred, without the benefit of a business, income or future hope. For these dealers, who are left to weather the harsh consequences of this life-altering decision, the permanency of their situation can only be relieved by the hope that after this November, they will never again have to hear that President Obama "saved" the auto industry.

Jonathan Michaels is the founding member of Michaels Law Group, which specializes in representing clients in automotive industry. He can be reached at jmichaels@michaelslawgroup.com or (949) 581-6900