Thursday, February 26, 2009

Should We Save the Car Industry?

A while back a wrote an article about bailing out General Motors. Basically General Motors is a company that has been losing money for many years. The global recession has merely heightened its problems leading to requests for huge bailouts. In that article I outlined the dangers of trying to keep afloat an inefficient firm that has been struggling with over capacity for many years.

But, what about other car firms who are very efficient but just struggling under the sharpest downturn in global demand for cars for many years.

One good example, is the Mini Car factory in Cowley Oxford. It is one mile from where I live and I cycle past the factory every day. In the past 10 years I have proudly seen the factory emerge from being the most inefficient car factory in Europe to one of the most efficient and successful car factories. The new mini has been very successful being exported around the world. Only 12 months ago, the factory was taking on extra staff to cope with the unprecedented demand. The bus companies were complaining that the BMW factory was employing so many it was pushing up wages.

But, just last week, BMW announced many job losses and the prospect of shutting down the factory as demand for new cars shrinks.

Should Government Save Car Industry?

If it is an issue of deserving subsidies, the BMW plant makes a compelling case. Proof that in the UK we can still manufacturer efficiently (even if it is owned and managed by the Germans) Certainly compared to reckless bankers in the city, workers could claim they deserve saving.

Unfortunately deserving subsidies doesn't mean the government should do it. Banks don't deserve subsidy but a banking collapse would have too catastrophic impact on the wider economy.

How can government choose which car firms to bailout. I can make an assumption that BMW Mini is efficient and more deserving of subsidy than GM. But, in practise it would be difficult for government to decide the 'best car firms' to subsidise and save. There is also an issue of if we subsidise car firms does that mean we have to subsidise any firm facing bankruptcy in the recession. What is special about the car industry?

Rather than trying to work out the most efficient firm to subsidise the government would be better off using any money it can afford to increase general demand and allow consumers to decide where to spend it.

Cost. The cost of keeping car firms afloat is potentially very high. With government borrowing already very high they can ill afford further subsidies. Furthermore, no one knows how long the car slump will last, it could be short term, but, if the global recession persists it could be a few years. If this is the case the cost to the government could be prohibitively high.

Over supply. One of the problems is that the global car industry is suffering from over supply. For the governments to subsides an industry that is over stretching itself, would merely delay the problems of restructuring.


Lawrence Low said...

Personally I think that the government should behave like one IMF or World Bank entity. Extend loan to all those strategic industries regardless whether it's car or bank as long as it has strong impact on employment. Of course do consider those related industries like raw materials supplier, spare part suppliers etc. The multiplier effect could be very great

But of course loan with strict CONDITIONS. Under IMF, they introduce SAPs (Structural Adjustment Policies) to ensure recipient countries have strong ability to repay. Here perhaps govt could impose conditions like enforcing cost savings, produce more fuel efficient cars etc.

Nevertheless US govt should have followed UK's step in very much of its labour policy. I'm a very strong believer of freer labour market. Thanks to Margaret Thatcher UK enjoys the flexibility it has today in its labour market!

Anonymous said...

Get ride of all the old cars that do not meet todays standards, about 10% The 25 million unloved vehicles,