Driven Into the Ground.(International Edition; WORLD AFFAIRS)(automobile industry bailout)

Byline: Stefan Theil

Auto manufacturers around the world are all looking for government handouts. But that does nothing to address their real problems.

If you thought that the more than $6 trillion governments around the world have pledged this year to shore up their teetering banks was going to be the end of it, think again. As the financial crisis continues to spill over into the "real" economy and push more and more countries into recession, a growing number of industries are lining up for their share of the aid. Last week it was the car companies' turn, with the U.S. Congress debating (and for now, at least, rejecting) an immediate $25 billion cash infusion for Detroit's Big Three. European automakers called for a $50 billion aid package of their own; Australia passed a $2.3 billion aid package; and even Chinese carmakers, shocked by shrinking exports and domestic sales growth just as massive new capacity comes online, begged Beijing for help. This could come on top of the more than $70 billion governments have either promised or are considering giving to carmakers to help them "retool" for more energy-efficient cars.

But unlike the bank bailouts, which were necessary to avert a global financial-sector meltdown, auto aid is fast turning into an old-fashioned subsidy race. The aid will lessen the pain--a case easily made given the size of the industry, its wide-reaching supply chains and the rapidly worsening state of the economy--but at the expense of cementing many of the industry's problems that long predate the crisis, and have now been magnified and laid bare by the economic turmoil. The triple hit of high fuel costs, the credit crunch and now recession has produced the sharpest demand contraction in decades. In October, auto sales plunged by 32 percent in the United States and 15 percent in Europe compared with the same month in 2007.

As banks cut back on loans to rebuild their balance sheets, companies and their suppliers are struggling to find financing and credit insurance to fund their operations. With all these problems, few lawmakers believed General Motors CEO Rick Wagoner last Tuesday when he told Congress that he needs only a "bridge loan" to tide GM over a temporary dip in demand. J.D. Power predicts an "outright collapse" of global car sales in 2009, with some analysts expecting U.S. sales to drop as much as 30 percent next year--that's on top of this year's decline. Since loose credit to subprime borrowers fueled almost as big a bubble in car loans as in mortgages (and not just in the United States), few analysts expect sales in the United States and Europe to revert to precrisis levels any time soon, even as new car plants still under construction worsen the capacity glut. The result: globalasurplus capacity is predicted to hit 30 percent, or 29 million vehicles, in 2009.

In that kind of environment, European and Asian manufacturers fear they will have an even tougher time competing with government-favored carmakers. In Germany, GM subsidiary Opel was in negotiations with the German government last week for a $1.3 billion bailout, ostensibly to maintain its cash flow in case its teetering parent falters. In Italy, Fiat chief executive Sergio Marchionne warned that singling out American carmakers and their European affiliates for subsidies would be unfair and distort competition. "That is something Fiat cannot accept," he told a meeting of Italian industrialists in Turin last week. In Brussels, EU Commission president Jose Barroso has threatened to take the United States to the World Trade Organization if it props up Detroit with aid.

In Europe and Asia, as in Detroit, the question is not just whether to help carmakers, but what strings to attach to any bailout so that it doesn't just prop up zombie companies, theirasubsidized products depressing market prices--as was the case, for example, ...