2009: The Year of the Pig

Commentary, Taxation, Frontier Centre

According to the Chinese calendar, 2009 is the year of the Ox. North Americans might be mistaken for thinking it’s actually the year of the pig, and not because of the swine flu; the four-legged pink animal is a more appropriate mascot given how many companies and sectors have wiggled up to governments to ask for aid in this year alone.

The list is almost endless and range from the brazen—the U.S. porn industry when represented by Larry Flynt who was at least half-joking, to the reckless—see major players in the U.S. financial sector, to the predictable—the automotive sector, which has sought taxpayer money in good times and bad.

On the automotive industry, it’s worth recalling the public dollars already sent to automotive companies before the financial meltdown, precisely because their time at the public trough is not a recent phenomenon.

Between 2004 and 2008 alone, over $750 million was sent to Canada’s automotive sector from the federal and Ontario governments in the form of grants or “repayable” contributions, the latter often being anything but. Chrysler received $123 million; Toyota—profitable though it was until this year, received $125 million; General Motors took home $200 million, while Ford garnered $280 million with the rest spread among more minor players.

Now in a recession, two of the Detroit Three have asked for and received billions from both the U.S. and Canadian governments. Thus, Chrysler (with $3 billion from our own Canadian government this past week for a two per cent stake in the company) and General Motors serve as useful but expensive case studies in the folly of intervention by either Washington D.C. or Ottawa.

Dennis Desrosiers, an auto industry consultant who tracks the numbers, points out that automobile sales in March in Canada were down by 15 per cent from the same month in 2008. The declines ranged from a mild three per cent drop in Quebec, to a dramatic 31.3 per cent drop in both British Columbia and Alberta.

The March figures understate the magnitude of the decline. In the first quarter of 2009, automobile sales in Canada were down to 284,000 from 364,000 in the same quarter last year; that’s almost a 22 per cent decline in year-to-date sales relative to 2008.

Who has suffered the most—not only in Canadian sales declines but from similar U.S. drops? The former big three. Total North American automobile sales reached a peak of 20.3 million in 2000 and declined to just over 16.1 million last year. Forecasts for 2009 are at 12.7 million unit sales with a slight recovery next year with 19.6 million in new automobiles sales in 2013.

The four-year-out numbers are probably optimistic. What’s interesting is that the Detroit/Ontario Three are losing market share even faster than the general decline. This becomes evident from looking at the share of union-produced vehicles.

Desrosiers’ calculations reveal that in 1995, 79 per cent of all new vehicle sales came from a factory with either the United Auto Workers (the U.S. automotive union) present or the Canadian Autoworkers Union (CAW) on the factory floor.

By last year, the UAW/CAW share was 49.9 per cent. The forecast is for just under 46 per cent by 2013, again, perhaps rosy given the economic tsunami that hit the Detroit Three along with long-term declining consumer preferences for their products. Chrysler declared bankruptcy this week to give it room to reorganize; General Motors will soon follow.

Given that reality and falling sales, the Conservative government’s decision to write a $3 billion cheque to Chrysler was even more pathetic.

The folly of subsidizing GM and Chrysler and taking shares is multiple. The “saved” jobs at those two companies come at the expense of employment at Ford, Toyota, and Hyundai; they are all after the same shrinking pie. And now the governments have an interest in those latter companies not beating Chrysler and GM into the dust.

Just as bad, the bailouts come at a great expense to consumers who thought they bought models from the latter group only to now find their taxes support automobile brands they don’t want (or they would have bought them). But that’s what happens when governments try to save automotive behemoths in the year of the pig.