Stuck in reverse: a long-term solution to a broken-down automobile industry*
By Peter Wooders and Oshani Perera

The dramatic decline in the demand for cars has been a signature effect of the global economic crisis. Faced with a massive drop in sales - for example, 29 percent in the case of Toyota and 49 percent across the General Motors brands - the United States, France, Germany, Italy, Spain, and more recently, South Korea, Brazil, Japan and China have concluded that government bail-outs are both justifiable and necessary for the health of their auto sectors. However, at a time when government should be looking at the opportunity costs of all their economic stimulus plans, we wonder if rescuing the automobile industry - whose product emits a significant share of the world’s GHG emissions and whose primary fuel causes much of the world’s concern for security of energy supply - is a just and equitable allocation of tax payers’ money.

A snapshot of car bailouts under negotiation	US$ billion
USA	17.4
Sweden	3.4
France	7.8
Italy	2
Germany	7
Spain	1.6
Brazil	1.7
India	1.5
Russia	2
China	2
UK	3.3

At face value, it is not difficult to appreciate the logic behind these handouts. The automobile industry provides jobs, nurtures design and technology skills and provides systemic incentives for industrial development. Uppermost on the minds of policy makers is that the sector has a supply chain so long and diverse that, in automobile-producing economies, 1 job in every 11 depends on it. If one considers the third and fourth tier suppliers and the number of functions that are outsourced and off-shored, this number grows even higher.

We also cannot ignore the fact that the automobile industry was a pioneer of mass-production techniques and has made a phenomenal contribution to the rise of the industrialised world. We also recognise that global societies continue to maintain their dependence on cars as a symbol of personal freedom, expression and affluence. And finally, as the focus on growing new ‘green jobs’ gains momentum, developing domestic expertise on low-carbon innovation becomes particularly important.

But are these facts sufficient to justify such large handouts? It must be borne in mind that the automobile industry has some fundamental shortcomings: rates of return on capital are not high over the economic cycle; it has for the most part not invested in the future markets for low-carbon products and services; many companies had made significant losses even before the crisis hit; and the industry is plagued with inefficient processes and over capacity.

The automobile industries’ failure to respond to the low-carbon agenda is a particularly important case in point. When governments have attempted to impose emission targets, as the EU did in 2007, the industry has lobbied hard, claiming prohibitively high R&D costs and the supposedly “small” contribution of vehicles to global carbon emissions.

However, even putting aside the question of whether the car industry should be held responsible for the environmental performance of its products (public demand for small, efficient cars and government regulations mandating their use have also been largely conspicuous by their absence), it is still right to question whether it should receive publicly financed support and, if so, what conditions should be attached.

Stimulus packages should increase demand for domestic industries and those which have a profitable future. The automobile industry is anything but this. For one, it has become so globally integrated that it is not feasible for governments to help the entities and subsidiaries within its national boarders without having a massive knock-on effect around the world. It is difficult to foresee how government support can be ring-fenced into feeding into the national economy alone. Indeed, maintaining jobs at domestic plants is a condition of all the bailouts, but sympathy in this regard is with the automobile industry, which will face even higher inefficiencies in complying, for the fundamental laws of economics dictates that as capital and knowledge become more mobile, jobs will move to where they can be performed most cost-effectively.

Second, we should not believe that the latest round of government bailouts will be the last. In addition to the US$17.4 billion awarded to Chrysler and GM in December 2008 (which dwarfs all bailouts elsewhere), the two firms recently submitted a renewed appeal to the USA Treasury: GM asked for an additional US$16.6 billion (and a further US$13.4 billion from other governments to prop up its overseas operations) while Chrysler requested an additional US$5 billion. This news was greeted by hasty comments from the finance ministers of France and Germany suggesting it would be ‘fatal’ not to support European firms while their competitors across the Atlantic were getting billions.

Sustainable development requires an industry which is not subsidised by periodic bail-outs and which delivers fuel-efficiency far in excess of the current average. Little can be achieved in the near term: what is needed is policy and regulation which does not allow the current situation to repeat. A wide set of measures are required:

• address an appropriate level of market concentration. Indeed, some financial gurus are suggesting that one of the lessons from the downfall of the banking sector is that oligopolies should be broken up in favour of more manageable and more efficient structures;

• work out the value of supporting domestic production as against moving it overseas to lower-wage locations. Indeed, the French bail-out packages contains such express provisions on maintaining jobs in France that both the EU and the WTO have seen it fit to warn against protectionism and market distortion;

• introduce progressive environmental regulation across the whole vehicle fleet. Moreover, governments should concentrate first on improving the fuel efficiency of the oil-fuelled vehicles that dominate the market now rather than relying on the electric or hydrogen vehicles which may come to dominate the market in the future;

• encourage governments to be more transparent on the subsidies they provide to the industry, and provide full accounts of what support has been provided and appropriate metrics for judging their cost-effectiveness;

• avoid subsidising investments that would have taken place even in the absence of incentives.
What governments do now will dictate what position they find themselves in during the next downturn: will they again be bailing out an industry whose finances and products remain unsustainable or will the actions taken now give rise to a proactive and competitive sector that will be the hallmark of a sustainable future?

Peter Wooders pwooders@iisd.org
Peter Wooders is IISD’s Senior Economist for Climate Change, Energy and Trade. Based in Geneva, he has 20 years’ experience across the energy sector, with a particular specialisation in electricity generation. Peter’s skills include the ability to analyze complex problems: he has developed a range of computer models including a suite of carbon market simulations covering both the EU and Kyoto systems. Peter currently contributes to various IISD’s programmes, including Trade & Climate Change, notably Border Carbon Adjustment and the GHG impacts of possible Environmental Goods & Services agreements; Global Subsidies Initiative (fossil fuels and bio-fuels); Post-2012 Architecture of GHG Agreements; Carbon Markets and Climate Change Adaptation.

Oshani Perera operera@iisd.org
Oshani’s portfolio includes sustainable public procurement, the globalisation of services, international performance standards and emerging issues that impact transparency and accountability across global markets. Before working with IISD, Oshani spent several years at the McKinsey Global Institute, KMPG and also as a free lance sustainability specialist. Her work covered sustainability reporting, social impact assessments, ISO 14001 and SA 8000 implementation and verification, the design and facilitation of stakeholder consultation initiatives and research on corporate responsibility within the wider policy debate on sustainable globalisation. Oshani also spent 2 years at the UNEP Division of Technology, Industry and Economics and was a Partner of the Green Workshop (an environment communications company) based in Paris.