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Panel III of a Hearing of the House Financial Services Committee - Stabilizing the Financial Condition of the American Automobile Industry

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Location: Washington, DC

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REP. PETER ROSKAM (R-IL): Thank you.

First, I was wondering if you could give us some estimate of what you consider the aggregate overcapacity of the automobile industry -- and, just in normal economic times right now, in terms of the product --

REP. FRANK: (Off mike.)

REP. ROSKAM: -- the aggregate overcapacity.

REP. FRANK: (Off mike.)

REP. ROSKAM: I think there's a general consensus that even if things maintain, you know, relatively normal economic conditions, there was an overcapacity in terms of the number of vehicles built per year, the number of dealerships, the number of brands supported by the manufacturers, and so on. And you could -- you could talk about those in optimistic scenarios in which things returned to normal, or pessimistic ones in which they continue. And I was wondering if you have any numbers on that?

MR. SACHS: Let me say, first of all, at a global scale this is an expanding industry, and a pretty rapidly expanding industry, actually, because the car penetration in places like China and India remain very low. But, that's not inconsequential for American built automobiles, because if we have open markets we can also export from here. So, I would not discount that possibility. Of course, we have to break through trade barriers, but in terms of capacity -- as you asked, Congressman, it's a growing global industry.

Now, domestically, I think it's quite interesting. We have 240 million vehicles, more or less, on the road right now in the U.S. And if you just look at the replacement rates at a 15-year cycle for those vehicles, you're already up to 15 (million) to 16 million units a year, at least, not even taking into account further growth.

So, I don't view this as an industry in significant decline, where we're trying to break the decline. I don't view it that way. I view it as an industry in significant technological change, because we can't go on with the kinds of cars that we had before. The physical environment and our energy security won't permit it anymore.

So we're in a transformation, but I don't think we're in a terrible downward consolidation. That's my own --

REP. ROSKAM: Are any of The Big Three net exporters or importers? Are they all net importers?

MR. SACHS: Well, some models they're exporting, other models they're importing.

REP. ROSKAM: But, net?

MR. SACHS: Net, I don't know the most recent data.

REP. ROSKAM: Do you know, Professor?

MR. SLAUGHTER: Two things, just to build on what Professor Sachs said. One is, it's very hard to answer that question, and particular in the North American region. You've had integration between the automobile markets in Canada, the United States and Mexico dating back to the Auto Pact of 1965, and it was extended further with the North American Free Trade Agreement.

But that speaks to a -- one of the fine points Dr. Sachs made, which is, it's hard -- the other factor in trying to answer your question is, the productivity gains that The Big Three, like the foreign auto producers in the U.S., have made -- that the CEOs discussed earlier, part of what that means is, how much overcapacity there is.

It's really a moving target, relative to the productivity gains that they're making, and what seems to be happening with demand, not just in the U.S. but a lot of these foreign markets as well.

REP. ROSKAM: Okay.

And then the issue of dealerships -- what you've just seen mentioned in the press is the disparity in the dealerships per car sold for the Detroit Three versus the imports. And I was wondering if you -- if there are any numbers worth talking about on that?

MS. SYKORA: (Off mike) -- because I talk a little slow -- I'm from Texas -- and I didn't get to some of that point in my oral testimony, but in the '50s we had 50,000 dealerships. And there's been an orderly decline in the number of dealerships due to market conditions. But, it's always come at a cost. It comes at a cost of convenience to the consumer and competition to keep the prices low for consumers.

But, I think what's real important to realize here is that dealers aren't a cost problem to the manufacturer. We bear the external costs of providing the distribution network, something that they don't have the resources to do; and that our dealer network actually does increase convenience and competition.

REP. ROSKAM: Okay.

And, I guess, Professor Slaughter, there's, sort of, four work- outs that people talk about: There's the direct loan to avoid a bankruptcy, which I take it you're not a fan of; then there are work- outs that are comparable to Chapter 11, but actually have no bankruptcy filings -- it's, sort of, I guess, similar to what happened to Chrysler; then there's a Chapter 11, but with the government-backed debtor-in-possession financing to ensure that no liquidation takes place; and then, finally, a full Chapter 11 with no guarantee of not liquidating.

And I was wondering if you see that the medium -- the middle two things, the government's, sort of, a government-supervised guarantee of the -- to make sure no liquidation takes place, but a bankruptcy filing; or some government organized -- something that's a virtual Chapter 11, where you'd get everyone in the room and say, okay, everyone, you know, all the concerned parties do the same sort of negotiation as a Chapter 11, but not actually having that for all the market reasons that people are talking about?

MR. SLAUGHTER: I'd briefly respond by saying I think both those scenarios you lay out are possible. I could imagine another scenario, which is a firm being in Chapter 11 and the government guaranteeing some of the debt that someone might just have to provide, in the same way that Treasury, and to some extent our Federal Reserve, has been putting guarantees on certain debt instruments in recent times.

REP. ROSKAM: Yeah, Jim.

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