HOW OBAMA WILL HANDLE DETROIT

President Bush leapt into action to prevent Detroit’s Big 3 from going belly up on his watch. The stipulations on the loan his lame duck administration provided to sustain the automakers through the inauguration are not inconsiderable but they are, like the money, temporary.

The Obama administration will want to shape future bailout monies and the stipulations that go with them. But what shape will that be?

The President-elect has been unequivocal. He sees opportunity in the automakers’ financial crisis, opportunity to become better.

Obama, in a recent radio address: “The auto companies must not squander this chance to reform bad management practices.”

This is much more than rhetoric. Obama described his ideas about the U.S. auto industry in a landmark May 2007 speech in Detroit. It was a speech that could turn out to be as historically important as the Lincoln speech at Cooper Union that is widely seen as having won a little-known Lincoln his party’s nomination.

In the Detroit speech, Obama told 2,000 auto industry executives their companies hadn’t done what they could to reduce U.S. dependence on foreign oil by improving vehicle fuel efficiency.

From the Obama 2007 speech to Detroit’s leaders: “The auto industry’s refusal to act for so long has left it mired in a predicament for which there is no easy way out…For years, while foreign competitors were investing in more fuel-efficient technology for their vehicles, American automakers were spending their time investing in bigger, faster cars. And whenever an attempt was made to raise our fuel efficiency standards, the auto companies would lobby furiously against it.”

These are easy declarations to make today but the President-elect had the courage and foresight to make them long before the financial crisis drove Detroit executives to humility and when he was at the same time asking for votes.

From the Obama 2007 speech to Detroit’s leaders: “I’m making this proposal here today because I don’t believe in making proposals in California and giving a different speech in Michigan…[He was making the proposals] not to destroy the industry, but to help bring it into the 21st century…”

The speech offered some hints of the kinds of agreements he is likely to want from Detroit in return for continuing the financial support initiated by the Bush administration. It mentioned ideas similar to those he had proposed in Senate legislation and included in his campaign, such as (1) A 4%/year increase in the Corporate Average Fuel Economy (CAFÉ) standards (~1 mile/gallon/year); (2) incentives provided only if fuel-efficient cars are developed and produced; and (3) funds provided specifically for factory retooling by the auto companies and their suppliers.

There is no doubt this is the future of personal transportation but oil prices have plunged since Obama gave the Detroit speech to standing ovations. U.S. consumers are once again buying gas-guzzlers. Obama recently said the fall in oil prices makes policy that will drive the needed change all the more important. Will he be able to sustain this commitment in the face of the new circumstances?

There is also the matter of the United Auto Workers (UAW). Many in Congress refuse to back Detroit because they believe it to be hamstrung by the burden of union obligations. These opponents, who claim the Obama administration is electorally-beholden to the union, may be in for a surprise.

While he has expressed a strong desire to protect jobs, the President-elect is on the record (in Audacity Of Hope) that the UAW must be prepared to make sacrifices as part of the rehabilitative process. Answering a recent question about the need for UAW concessions to bring the union’s wages and benefits to the level of nonunion workers, Obama repeated the sentiment.

President-elect Obama, on union wage/benefit provisions: “There are going to be some painful steps that have to be taken…”

Uproar over the choice of anti-gay marriage Pastor Rick Warren to give the inaugural invocation is a mere hint of the backlash the incoming administration will experience if the UAW turns on it. Can the new President bring the union along?

His record offers a good indication of where Obama leadership will likely lead. Specifics have simply not yet emerged. The Obama way is to seek wide-ranging input and process it. That is what he is said to be doing. His method famously leads him to what Aristotelians call the golden mean; in U.S. politics, it's called the center.

Daniel Becker, director, Safe Climate Campaign/Center for Auto Safety: “I don’t think they need to be afraid of Obama. He’s not going to say ‘by next Tuesday, everything has to be 40 miles per gallon’ … But in 10 years? Maybe.”

He's on the record. (click to enlarge)

Downturn Will Test Obama’s Vision for an Energy-Efficient Auto Industry
Micheline Maynard (w/Jackie Calmes), December 20, 2008 (NY Times)

WHO
President-elect Barack Obama; General Motors (GM); Chrysler; United Automobile Workers (UAW) union; Martin Nesbitt, Obama close friend, former GM financial planner

WHAT
The billions in the Bush administration bailout of Detroit offers the incoming President an opportunity to shape the direction of the Detroit auto industry. Can he?

Obama is said to favor the California standard. (click to enlarge)

WHEN
- The fireworks won’t start until after the January 20 inauguration – but it won’t wait too long after.
- The May 2007 Detroit speech and his autobiographical writings constitute a “thinking out loud about the future of the American automobile industry…”
- In 2006, then Senator Obama co-sponsored 2 bills, one to raise fuel economy standards and one to incentivize alternative fuels use.
- Obama wrote Audacity Of Hope in 2006.

WHERE
Detroit is in “a fragile financial state…”

WHY
- Obama may have to make serious compromises in his auto industry agenda.
- The UAW will demand a voice.
- The automakers have always been adamant about how long it takes and how expensive it is to make changes
- Sales of trucks and sport utility vehicles, which are picking up again, give more immediate profits and cash flow than the vehicles the nation needs for its future.
- Obama’s personal interest in the auto industry comes out of his interest in environmental issues.
- Obama secures insider information about the auto industry from Nesbitt, a close friend who was a GM financial planner.

The Obama campaign promised to put 1 million PHEVs on U.S. roads by 2015. (click to enlarge)

QUOTES
- Daniel Becker, director, Safe Climate Campaign/Center for Auto Safety: “I think he gets it…The speech at Econ Club was a brave one, but a thoughtful one.”
- Barack Obama, Audacity Of Hope: “…fuel-efficient cars and alternative fuels like E85, a fuel formulated with 85% ethanol, represent the future of the auto industry. It is a future American car companies can attain if we start making some tough choices now.”
- Barack Obama, Audacity Of Hope: “For years…U.S. automakers and the U.A.W. have resisted higher fuel-efficiency standards because retooling costs money, and Detroit is already struggling under huge retiree health-care costs and stiff competition.”