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Canada's Business

A surprising recovery

After collapsing two years ago, car makers in North America have made a surprising recovery. In 2009 the outlook was dismal, and many despaired of an eventual comeback. "Experts" warned that capacity was far in excess of foreseeable demand and costs were prohibitively high. Also, the industry was a model of poor management, with quality products and productivity far below that of foreign competitors. Then too, much to the consternation of the public, the hitherto invincible General Motors went into bankruptcy.

The federal government in the United States and its counterpart here in Canada decided to bail out the companies in this sector. They loaned that group billions of dollars in return for a thorough reorganization. Often those steps proved to be failures, but this time, much to the amazement of even the keenest pundits in the field, things worked out almost miraculously.

First of all, the companies had overhanging debt, so the burden of interest charges and scheduled repayments were so onerous that a recovery was impossible without changes.

General Motors went through bankruptcy, thus eliminating much of the debt problem, and Chrysler was able to re-negotiate its loans. Ford alone, by mortgaging its plants, managed to wiggle out of much of its financial obligations. Those steps gave the industry virtually a clean slate, without the need to meet pressing payment problems. Many factories then were closed and the product line cut back drastically.

The United Automobile Workers and the Canadian Auto Workers seemed to be intransigent about cutting wage rates. However, the threats of an industry breakdown led to a more conciliatory approach with wages now falling in line with non-union shops. Guarantees of lifetime employment and sky-high wages became things of the past.

The sector turnaround started with the U. S. program of "cash for clunkers", offering buyers substantial rewards for replacing their old cars. Banks too eased on tight demands for loans, and, of course, general interest rates went down. Some companies offered interest-free loans for 60 months. Finally, the automobile companies tackled their reputation for poor quality and lack of style, so that car makers now are on an equal footing with the best, foreign-made vehicles.

Given the above and with greatly improved car sales, is the industry's recovery on track and will it continue? There remain major hazards swirling around the industry, worth considering before singing "Happy Days Are Here Again". The North American companies already here face fierce competition from among manufacturers getting established here like Volkswagen. China now is producing cars and has a very low wage structure, and Japanese and South Korean companies present new, serious challenges. Heavy marketing expenses and huge price discounts remain major hurdles. Finally, high gasoline prices and the sluggish economy will discourage car sales, hence, it is too early to assume that the industry is being given anything more than a reprieve.