More than three years after the US government’s rescue of General Motors and Chrysler, the auto bail-out is back in the political spotlight even as analysts and executives have largely judged it a success.

American carmakers are resurgent in 2012, with production rebounding and sales growing at a steady clip. The comeback of the motor industry is part of a wider revival in US manufacturing, with the Federal Reserve’s industrial production numbers released on Wednesday showing that output rose 4.5 per cent in the year to January. Production of cars and trucks rose to a seasonally adjusted annual rate of 10.17m, up 21 per cent from the first quarter of 2011.

Last year, Chrysler’s first profit since emerging from bankruptcy helped lift parent company Fiat’s full-year results by €1bn, and analysts expect GM to report record annual profits on Thursday. That would be “a far cry from three years ago when it was facing possible extinction,” said Michelle Krebs, senior analyst at

But the controversial federal support extended to GM, Chrysler and their financing arms in the wake of the financial crisis remains politically contentious, with Republican presidential candidate Mitt Romney attacking the bail-out this week as “crony capitalism on a grand scale”.

Writing in the Detroit News – the home town paper of the Big Three US carmakers in the biggest city in Michigan, site of the next Republican primary on February 28 – Mr Romney criticised “a sweetheart deal disguised as a rescue plan” that benefited “unions and the union bosses who contributed millions to Barack Obama’s election campaign”.

Mr Romney was attempting a difficult balance in trying to win support in Michigan, the state where he was born and where his father served as president of American Motors and three-time governor, while standing by his 2008 call to “let Detroit go bankrupt”.

He said he was in support of managed bankruptcy for the troubled companies – the route that was ultimately taken – but opposed the government backing that many observers say was needed to finance that step.


Mr Romney’s doubling down on opposition to the bail-out stood in contrast to former president George W. Bush’s statement last week that he would “make the same decision again” to extend loans to GM and Chrysler in December 2008 and January 2009. “I didn’t want there to be 21 per cent unemployment,” he told a meeting of the National Automobile Dealers Association in Las Vegas.

While the United Auto Workers union, which historically has supported the Democratic Party, shot back at Mr Romney for “turn[ing] his back on the industry, their workers and the people of Michigan and in other places where Americans depend on the auto industry”, others in the automotive world have put their financial backing behind Mr Romney.

Executives at GM, including North American president Mark Reuss, and Ford have donated the maximum $2,500 per person to Mr Romney’s campaign, while several owners of large dealership chains in California, Michigan and Florida have contributed to Restore Our Future, the super-Pac backing Mr Romney.

Supporters of the bail-out say it has not just raised the fortunes of the car companies, parts suppliers and dealers who survived the industry’s restructuring, but also helped the state of Michigan.

As US manufacturing bounces back, the northern “rust belt” states have been some of the biggest beneficiaries and Michigan most of all. In the past two years, the US added 346,000 factory jobs, of which 45,300, 13 per cent of the total, were in Michigan. The state’s unemployment rate, which peaked at 14.1 per cent in 2009 – the highest in the US – was by December only the 11th-highest at 9.3 per cent, within a percentage point of the national rate of 8.5 per cent that month.

Much of this revival may have occurred even without the bail-out. The manufacturing renaissance is being driven by productivity gains, subdued wage growth, and the decline in the dollar over the past decade, which have not had much connection to government policy. If GM and Chrysler had been allowed to disappear – which looked a real possibility at the end of 2008 and in early 2009 – eventually Ford and foreign-owned companies would have expanded to fill the space they left.

However, Sean McAlinden, chief economist of the Michigan-based Center for Automotive Research, argued that the effects of loss of dealerships and suppliers would still be felt today without the government’s action. The costs, including lost income and tax revenues, might have been only temporary, but they would still have been very significant. “The bail-out was perhaps the most successful peacetime government intervention in US history,” he said.

Rebecca Lindland at IHS Automotive agreed that the bail-out, first launched in the last few weeks of Mr Bush’s presidency, was a success because it avoided a potentially prolonged and uncertain bankruptcy.

It also helped all three companies force through difficult and painful cost cuts that they needed to be able to compete. Plant closures, restructuring of dealer networks, and the shift to a “two-tier” workforce, in which new workers are paid less than pre-bail-out employees, accompanied the rescue, and were accepted by the UAW.

“The move to a two-tier workforce was huge,” Ms Lindland said. “GM, Chrysler and Ford all had workforces and cost structures that were far larger than their present market shares justified. Because the workforce is so unionised, they did not have the flexibility of non-union companies and had not been able to restructure.”

GM announced a further move in that direction on Wednesday when it said it would end traditional defined benefit pension plans for 19,000 salaried workers in the US. The company said its pension obligations were underfunded by $10.6bn as of the middle of last year. White-collar workers will also receive no pay rises this year, and 2011 bonuses will be pared back, GM said.

The European industry, which has not been through such painful restructuring, is now in a much weaker position, she added.

Mark Perry, an economics professor at the University of Michigan and a visiting scholar at the free-market American Enterprise Institute, said it is impossible to know for sure how the industry would have responded if the bail-out had not happened and warned that it could set a bad precedent for government support for other failing companies. “But when you look at the signs of the rebound in the industry and in Michigan’s economy, in that sense you would say it’s a success,” he said.

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