The federal and Ontario governments are playing a high-stakes, high-risk game in providing massive loans to General Motors Corp.GM-N as the company faces tremendous hurdles in returning to profitability and repaying taxpayer money.
Driven by a desperate fear of losing the bulk of Ontario's auto manufacturing sector,
Prime Minister Stephen Harper and Premier Dalton McGuinty have insisted they have little option but to help in the restructurings of GM and Chrysler LLC.
Without Canadian government involvement, the U.S. government would insist the companies relocate assembly operations south of the border in order to prevent American taxpayers from subsidizing Canadian jobs, they argue.
As GM prepares to file for bankruptcy protection today - and to announce U.S. and Canadian government loans totalling more than $50-billion (U.S.) - there has been little political debate about the wisdom of the bailouts.
Prominent auto analyst Dennis DesRosiers warns this is only the beginning - that GM and Chrysler will require more taxpayer money to survive.
And it will be hard for governments to refuse future requests, having risked an estimated $66-billion in restructuring loans, including Canada's contribution expected to reach some $14.5-billion (Canadian).
While polls in both the United States and Canada suggest the public is highly skeptical, Mr. Harper and Mr. McGuinty have faced little political opposition to the bailouts.
Opposition parties in Ottawa and Ontario have slammed the companies and the respective governments for failing to have devised more successful strategies prior to the crisis. And they have demanded there be transparency in the decision-making.
Still, the auto bailout could stand as a stark precedent, providing fodder for every industry and province that wants help to avoid disaster.
British Columbia Premier Gordon Campbell has talked about the need for "comparable support" for the hard-hit forestry sector, while Saskatchewan Premier Brad Wall cited federal support for the auto industry in pressing his case for a better deal on employment insurance for his province.
Still, with governments battling the global economic meltdown through huge bailouts of ailing banks and by racking up vast deficits, the spectre of government-financed auto company restructurings has not provoked the kind of outrage that would have occurred even a year ago.
Piling more debt - albeit government debt - into shrinking corporations is billed as a reasonable solution, given that the alternative was collapse and mass layoffs in a vital sector at a time when the North American economy was already on its knees.
Mr. DesRosiers warns that the rescue effort may be doomed without further infusions of public money as the companies' promised return to profitability fizzles.
The analyst notes that GM will be more indebted than ever after the rescue plan - unless the government loans are to be written off, something the politicians insist will not happen.
Through a U.S.-government brokered deal and with the eventual approval of a bankruptcy judge, GM would shed $27-billion (U.S.), but would be saddled with more than $50-billion in government debt.
With Chrysler, Italy's Fiat SpA vows to succeed where a succession of owners, including Germany's Daimler AG and Connecticut hedge fund Cerberus, have failed.
But like GM, Chrysler discarded bondholder debt - $4-billion in its case - while taking on $16-billion in government debt.
Canadian Auto Workers president Ken Lewenza defends the decision by Ottawa and Ontario to participate in the bailout, noting every government that has a major presence in the auto industry is doing likewise. If Canada is going to have a manufacturing sector to provide middle-class jobs, he argues, it has to match the interventions of other governments.
While there is no certainty, certainly the efforts of GM and Chrysler to slash costs will help on the path to success. GM has reduced labour costs enough that it is now promising to make a subcompact vehicle in the U.S., even though no manufacturer, foreign or domestic, has profitably produced the low-margin small cars in North America.
But GM's market share has plummeted in recent years, and its restructuring plan - eliminating brands, slashing its dealer network by 40 per cent, and cutting marketing and promotion budgets - could drive its share of the market even lower.
"Losing market share in a declining market results in billion-dollar losses for these companies and that is exactly what is highly likely to happen over the next few years," Mr. DesRosiers said.
"So these upcoming losses mean two things. These so-called loans will not be paid back and more so-called loans will be needed in a year or two to sustain these companies into the future. As they say: 'In for a penny, in for a pound.' "
