Auto aftermath
Five years later: Revisiting the legacy of Canada’s ‘horrible, ugly’ $13.7B auto bailout.
In late March of 2009, Ken Lewenza, then president of the Canadian Auto Workers union, got a call he’ll never forget — Chrysler wasn’t going to be able to pay its workers the following week unless it got an emergency government loan.
“The after-effects of that call, the negotiations, the multiple ratification meetings, the stresses on our members … you always remember the anxieties. But boy, when somebody tells you an employer as significant as Chrysler can’t meet payroll, it sticks with you for a long, long time. In fact, I still think about it every day,” Mr. Lewenza said, reflecting on the near-death experience of Chrysler during the financial crisis.
It’s been five years since General Motors Co. and Chrysler received billions of dollars in government bailouts and were forced into bankruptcy court to undergo massive restructuring. Based on a series of interviews with several of the principal players, the memories are still fresh.
While it was always assumed that GM wouldn’t be left to die, it was a different story at its crosstown rival.
“There’s no way to sugarcoat that period. It was a horrible, ugly, stressful process,” said Reid Bigland, chief executive of Chrysler Canada, adding that Chrysler’s chances of survival “were quite slim” even after it received government aid.
Dwight Duncan, then Ontario’s finance minister, remembers being called into a meeting with Mr. Bigland at the beginning of November 2008.
“We have a cup of coffee, and he casually says to me, ‘ We won’t be able to make payroll for the first week of December,’” said Mr. Duncan, who came to the Ontario legislature from the auto-manufacturing hub of Windsor, Ont.
“It was one of those moments where your jaw hits the floor. Coming from Windsor, the significance for our local economy, not to mention the impact on the Canadian economy — I was shell-shocked.”
It was a moment in history when the auto industry world seemed to be collapsing on all sides. There was a new energy crisis, as oil prices hit US$150 a barrel in the summer of 2008, just as the U.S. financial system was beginning to spiral out of control. Credit markets froze up, which left countless customers unable to finance new vehicle purchases. The Big Three Detroit automakers — GM, Chrysler and Ford Motor Co. — were left with lots full of gas-guzzling SUVs and pickup trucks that they couldn’t sell.
“There was no cash available. The industry self-imploded,” said former Chrysler CEO Tom LaSorda.
The three automakers’ balance sheets had already been chipped away at for years by the rising costs of unionized labour and slipping market share, both areas where they were losing to more competitive foreign manufacturers. The only reason Ford was able to avoid the bankruptcy and bailout faced by its peers is because it mortgaged its assets in 2006, raising about US$25-billion.
Five years later, the key players are much healthier thanks to a core group of people who toiled long hours to make sure the icons of American auto manufacturing didn’t collapse.
The estimates vary on just how bad the liquidation of GM and Chrysler would have been for the U.S. and Canadian economies, but supporters insist that it would have been devastating.
“We were in the middle of fighting a forest fire, so I can’t tell you we spent a huge amount of time trying to come up with Harvard-quality projections of what might happen. We simply knew it was going to be a disaster,” said Steve Rattner, who was named the lead adviser to Barack Obama’s Presidential Task Force on the Auto Industry in February 2009 and quickly became known as the “Car Czar.”
In total, the Canadian and Ontario governments spent US$13.7-billion to bail out GM and Chrysler. Chrysler’s portion of that was entirely in loans, while GM’s was a combination of loans, preferred shares and equity.
According to an analysis by Mark Milke, of the free-market minded Fraser Institute, Canadian and Ontario taxpayers lost about US$2.3-billion on the deal, based on the current value of GM shares, a portion of which are still held by both governments.
An official from the finance department said the federal government “remains committed to exiting from ownership of GM as quickly as possible, while maximizing the return for Canadian taxpayers.” So was it worth it? “It was always a bad idea. It cost the taxpayers billions of dollars and it played favourites in a way that doesn’t always happen in other industries,” Mr. Milke said.
Those who were saved by the bailout, naturally, beg to differ.
“There is no doubt that Canadian taxpayers, not to mention the Canadian economy, are better off thanks to the rescue than under the alternative scenario,” said Jim Stanford, chief economist for the Unifor union, which was created in 2013 after a merger of the Canadian Auto Workers and the Communications, Energy and Paperworkers Union of Canada.
A 2012 study by the Institute for Research on Public Policy concluded that 100,000 jobs would have been lost immediately if GM and Chrysler had closed their Canadian operations, cutting $23-billion from the national GDP and $16-billion from Ontario’s. The federal government estimates the bailout saved 52,000 jobs in total — which puts the price per saved job, in loans and bailouts, at more than $250,000.
A similar study by the Center for Automotive Research in Michigan found that up to three-million American jobs would have been lost if the Detroit Three’s production capacity contracted by 50% to 100%, creating a “Depression era” economy in much of the upper Midwest.
“What we were really worried about was a very serious recession turning into a depression in Canada and especially in Central Canada,” said Paul Boothe, who was the federal government’s lead negotiator on the auto bailout.
Once the U.S. government decided it would bail out GM and Chrysler, the Canadian government had little alternative but to follow suit or risk watching the companies pestered by a populist U.S. government to pull their operations out of Canada altogether.
“You would have been under a lot of political pressure in the United States to say, ‘ Nobody else helped you but us, so why aren’t you moving production here?’” Mr. LaSorda said.
In the U.S., where the government spent a whopping US$82-billion on the bailout, all but US$12-billion of that has been recouped, according to Mr. Rattner.
“I think there’s no question that the auto rescue was the most productive use of government money of probably any of the rescue programs,” he said.
Since the depths of 2009, the industry has bounced back to a remarkable degree. U.S. auto sales are at their highest level since mid-2006 and Canadian sales are on track for a second consecutive record year.
The restructuring was, nevertheless, a tough one: GM, Chrysler and Ford closed more than two-dozen plants, shedding thousands of jobs in both Canada and the U.S. According to Statistics Canada, the number of Canadian automotive jobs in 2012 was 33% below its 2000 peak.
And Canada has fallen to 16th place in the world for car production, down from eighth in 1999, according to the International Organization of Motor Vehicle Manufacturers.
The Canadian industry’s future is by no means assured. As part of the bailout package, GM promised to keep 16% of its North American production in Canada until the end of 2016 — but after that, it is free to rearrange its operations however it likes.
“We should all be worried,” said Mr. Duncan. “We are very competitive on a number of fronts, but there is no doubt it’s a global industry and production will move to where overall costs are the lowest.”
Canada faces a number of challenges when it comes to attracting manufacturing investment. The strong Canadian dollar, relatively high labour costs and weak productivity growth have combined to make Canada unattractive compared to Mexico or the southern U.S., where costs tend to be much lower.
How to offset that challenge has been the subject of debate among policymakers for years. For now, the government tends to employ an ad-hoc strategy of subsidies and loans, but that’s not the most sustainable model, especially in a subsidy race with larger, wealthier rivals like the U.S., Japan and South Korea.
The autoworkers of Unifor have called for a national auto policy, manufacturing commitments from the major automakers and consistent government investment, among other things.
“Other countries are soliciting automotive investment and they’re going after our jobs in a strategic and direct way,” said Mr. Lewenza.
“Without a combined strategy between provincial and federal governments, I think we are vulnerable, no question.”