How the Auto Bailout Is Punishing Ford

Ford Motor Co.’s latest earnings report doesn’t mention General Motors or Chrysler, its crosstown rivals. But those competitors have a lot to do with Ford’s surprising $1 billion profit in the third quarter.

Ford attributes its better-than-expected performance—its first quarterly profit since 2005—to aggressive cost-cutting, popular new products like the Taurus sedan and Fusion hybrid, a cash-for-clunkers bump, and improvements at its financing arm. But Ford also is a clear beneficiary of the woes at GM and Chrysler, both trying to recover after bankruptcy filings earlier this year. Ford cited a market share gain of 2.2 percentage points compared with 2008, which helped offset a shrinking market. For a mature industry like the car business, that’s a huge gain in a short period of time. And there’s little doubt that many of Ford’s new customers bailed on the other two domestic automakers as they shambled toward bankruptcy and wolfed down billions in taxpayers bailouts.

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But the GM and Chrysler bailouts also are holding Ford back, which prompts some capitalistic what-if questions. For years, there was too much capacity in the U.S. auto industry, with a reckoning on the horizon: Too many manufacturers built more cars than Americans really wanted, forcing deep price cuts to move the metal. That caused the most pain for the weakest automakers, which turned out to be GM and Chrysler. As the recession hit in 2008, free-market forces intensified, forcing the two domestics to hemorrhage cash. Ford wasn’t far behind, and some analysts expected Ford to line up for a bailout too. But by either luck or foresight, Ford had done some financial maneuvering in prior years that allowed it to survive the bloodletting without government aid.

If the government had let GM and Chrysler fail, about 30 percent of the U.S. auto market would have been up for grabs. Ford's 2.2 percentage-point gain in market share could easily have been 5 or 10 points, with other automakers picking up sizeable share as well. The outcome, however, would have been chaotic, because GM in particular is so big that its demise would have sunk suppliers that the whole industry needs to survive, and the collateral damage would have hit every automaker. That made it indefensible to let two of the nation’s three automakers collapse in the midst of an economic meltdown.

But letting Chrysler fail alone was more plausible. Chrysler was in even worse shape than GM, with few compelling products, little in the pipeline, and a poor reputation for quality. It was also smaller, with about 9 percent of the U.S. car market, less than half GM’s share. Steve Rattner, who ran President Obama’s automotive task force, wrote recently that the Obama administration was split nearly 50-50 on whether to save Chrysler. A last-minute study showing that a Chrysler liquidation could lead to 300,000 lost jobs tipped the balance in favor of a bailout.

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But those 300,000 jobs remain attached to a company that’s still extremely weak and has an uncertain future. Chrysler could still fail if its forced marriage with Fiat doesn't produce fresh cars Americans want to buy, and soon. Government-aided bankruptcy, meanwhile, has helped GM and Chrysler shed debt and lower costs—putting Ford at a disadvantage. Ford says it needs additional concessions from its unions, such as a no-strike clause, in order to match the concessions GM and Chrysler were able to get through bankruptcy reorganization. But the unions seem likely to resist now that Ford is making a few bucks.

So the one domestic automaker that has paid its own freight could end up penalized for its success, while the government indefinitely subsidizes competitors that would have died without government aid. Without the GM and Chrysler bailouts, there would be a vast surplus of unemployed autoworkers. But since the government saved thousands of jobs, the unions have more bargaining power, which they seem poised to use against a company that has stayed off the federal dole.

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Don't expect to hear Ford complain about this, since company executives know that if the timing had been different, they could be the ones with Chapter 11 on their résumés. And Ford needs to right-size its operations, not execute a hasty surge in capacity that could undo years of cost-cutting.

But the domestic auto industry is still a mess, and the huge subsidies at Chrysler and GM could inhibit an overall return to profitability rather than accelerate it. The same dynamics are at play in the banking industry, where bailed-out giants like Citigroup, GMAC, and Bank of America are sitting on billions in reserves that healthier banks would be able to lend, stimulating a recovery. In the investment banking business, by contrast, the demise of Bear Stearns and Lehman Brothers has left survivors like JPMorgan Chase and Goldman Sachs nicely profitable, which—like it or not—has to happen if the overall economy is going to get healthy again. It's awful to watch companies fail and jobs disappear. But the alternative, we seem to be learning, is to watch them fail in slow motion, while contaminating those with the best chance to succeed.