EXPERT WITNESS: Autodom conundrum: Consumer-goods or national-defense industry?

By John F. Sase

with Gerard J. Senick

"Conundrum: A fun word to repeat over and over again when no one's listening; actual meaning is as puzzling as the need to chant the word."

- Richelle E. Goodrich, American author (goodreads.com/quotes/tag/conundrum; regoodrich.blogspot.com)

"Here's the thing.... I don't give a ten-penny f*** about your moral conundrum, you meat-headed s***-sack!"

- Daniel Day-Lewis as Bill the Butcher in Martin Scorsese's film Gangs of New York" (Miramax, 2002)

The Winter Holidays are over and Valentine's Day has passed. Le Nain Rouge (Detroit's Red Dwarf) does not make his appearance until next month. Second-year law students are back to their studies. While sitting around with their colleagues in study groups, a few of them might wrestle with the conundrum of who is hotter, billboard Joumana or bus-placard Joumana. However, we have another conundrum upon which legal minds may reflect.

In this month's column, we present an explanation of a little known facet of the auto industry that has a direct impact on attorneys in many fields of law. This facet involves the history of the industry through the present day. A conundrum has encircled the automotive industry for almost a century. This conundrum comes in the form of a pair of questions that have surfaced periodically in the relatively short history of the industry. I (Dr. Sase) first listened to the debates about this conundrum when I was a child growing up in Detroit during the 1950s.

The Conundrum

This conundrum poses two questions: "Is the automotive industry a consumer-goods industry that takes government defense contracts for military hardware production during periods of conflict?" and "Is the automotive industry a national-defense industry that uses its surplus capacity during peacetime to produce cars, trucks, buses, and other consumer-oriented products?"

To this two-legged conundrum, we can add a third leg to form a stool. I became acutely aware of another complementary view when I spent five years with folks who lived in small towns and on farms throughout Michigan. In essence, the point of view of this conundrum expresses the opinion that Michigan is a community of farmers. Therefore, this conundrum inquires "Does not the automotive industry exist to produce 'field' cars, trucks, tractors, and other auto-mobile tools to help to ensure ample production of agricultural products during war and peacetime?"

During the past two months, the U.S. government sold 200 million of its 500 million remaining shares of New GM stock to the General Motors Corporation. On 19 December 2012, the U.S. Treasury Department announced that it would sell its remaining 300 million shares "through various means in an orderly fashion within the next twelve to fifteen months, subject to market conditions" (http://money.cnn.com/2012/12/19/news/companies/treasury-gm-shares/index.html). Some writers, such as Paul A. Eisenstein of The Detroit Bureau (thedetroitbureau.com) have suggested that this episode has cost billions of dollars to the American taxpayer. If this is true, then the conundrum raises the issues as to whether taxpayers have paid to retain jobs in a consumer-goods company or have made an investment in preserving what had been coined as the Arsenal of Democracy during World War II. Furthermore, if the first statement is accurate in the context of autodom being a consumer-goods producer, then it makes little difference who acquires the controlling interest in stock. However, if the industry forms the core reserve of national defense-production, then any diffusion of stock quickly becomes problematic if foreign nationals or their governments acquire those significant holdings.

We hope that we will not experience another conflict of the scale of the First and Second World Wars. However, history reminds us that warfare has been rooted in human history since time immemorial. Given the aphorism that the best offense is a good defense, it follows that maintenance of defense-production capabilities provides a low-profile deterrent for avoiding future wars.

Ancient History

In tracing the history of this conundrum, let us look at the auto industry in the first decade of the Twentieth Century. Having emerged from incubator firms such as C.R. Wilson and other wagon-and-carriage companies, the industry, which then was composed of several hundred small firms, produced vehicles for high-income consumers in their major markets of America and Europe. However, the onset of the First World War marked the end of this first industrial wave. Failing European-export markets for consumer automobiles and U.S. exports in general drove many small firms out of business.

Other firms that possessed adequate economies of scale, the means to produce trucks and other heavy machinery, and the ability to convert civilian production in order to serve the military needs of America and its allies survived and continued onward after the war. An example of one of these firms is the Universal Motor Truck Company, which was founded by Albert Fisher after he sold his holdings in Fisher Body to his seven nephews.

The booming urban-consumer culture of the 1920s obscured the underlying defense nature of the industry. Furthermore, much of the younger population of rural America, who were armed with a plethora of skilled trades, headed for the city lights. Concurrently, agriculture turned to mechanization in order to farm large, consolidated tracts of land. However, the decade of depression that followed the collapse of Wall Street in 1929 severely impacted the economies of the United States and its trading partners around the world. This era produced a chain of events that became a textbook case for the complexities that arise under foreign ownership against the emergence of militarized aggression.

For this illustration, we turn to two complementary sources that address the example of General Motors Corporation and Adam Opel AG and their relationship with the nation of Germany during the 1920s, 1930s, and beyond. The first source comes from author Henry Ashby Turner Jr. His book "General Motors and the Nazis" (Yale University Press, 2005) is based upon documentation derived from a project that he directed twelve years ago under the sponsorship of General Motors. This project came in response to pending class-action suits on behalf of victims of forced labor against American corporations that held German subsidiaries during the period of the Third Reich. Turner wrote his volume after the project was completed, using the documentation that was donated to the Sterling Memorial Library at Yale University by GM.

The second source comes from a book written by Edwin Black, "Nazi Nexus: America's Corporate Connections to Hitler's Holocaust" (Dialog Press, 2009). It offers a markedly different perspective on the documented facts as noted by Henry Ashby Turner, Jr. In his Introduction, Black states, "This volume will shock, sadden, and shake many as they look at the monetized evil constructed by the intersection of American corporate force and German genocidal desire." For the purposes of this article, we referred to Black's fourth chapter, "GM and the Motorization of the Reich." In the following timeline, we used this discussion as a counter-balance to Turner's work:

Das Autogeist

Founded in 1908, the General Motors Company went through a "reformation" in 1916 to emerge as the General Motors Corporation after the bailout provided by DuPont interests. Alfred P. Sloan ascended to the corporate presidency in the mid-1920s. With Sloan at the helm, the firm sought a large-scale subsidiary to serve the European market directly. Near the end of this decade, the Weimer Republic had stabilized the German economy under Chancellor Paul von Hindenburg. However, this economy lagged in automobile ownership. In contrast to a 20% rate in the United States, the saturation of auto ownership in Britain, France, and Germany was less than 3%. Germany trailed with less than 1%.

Given the increasing tariffs imposed on imported parts and finished automobiles along with a European demand for smaller models, Sloan and others decided that the firm would need to produce vehicles in Europe. In 1928, the family-owned Opel firm stood as the largest manufacturer of cars and trucks outside of the United States. In addition, Opel, a major employer and exporter in Germany, had pioneered the manufacture of small cars. With the owners of Opel willing to sell, General Motors bought 80% percent of its stock in the spring of 1929 (a half-year before the Wall Street crash) and the remaining 20% two years later.

However, during this period of rising nationalism in Germany, General Motors sought to preserve the appearance of Opel as a German firm that was independent of American ownership. As such, Opel remained a wholly separate German corporation, though GM determined the composition of the Opel board, which included two sons of Adam Opel. Until the late 1930s, the majority of Opel executives were American citizens who lived and worked in the United States. By German corporate law, General Motors was able to vote 100% of the stock, to which flowed 100% of the dividends. GM maintained ultimate authority to appoint or dismiss board members. Though Opel existed as an independent corporation under German law, it functioned as a wholly owned subsidiary of General Motors.

Shortly thereafter, expansive plant modernization and construction commenced. In spite of planning, the investment in the German subsidiary slid downward before the Crash of October 1929. In the following year, Opel production sank by almost 25%. During the next two years, large numbers of employees were laid off by GM/Opel, which also shut down plants, reduced work weeks, and internalized the production of parts in order to reduce losses. Furthermore, General Motors drained company resources by heavy borrowing in order to prop up the failing Opel.

This economic dilemma set the stage for an ethical dilemma. Germany benefited from foreign currency that was derived from international trade as Opel sold almost two-thirds of the cars and trucks exported from that country. However, the benefit to Opel and its parent company came from its orders for trucks. The firm became the primary truck-and-car manufacturer for the German government throughout the remainder of the 1930s and through World War II. In respect to trucks, sales to the military brought a bonus in profit per vehicle to the firm at a rate 40% greater than sales to the civilian market.

At this point of our story, we will continue by iterating dry facts while avoiding the blame game. During the 1920s and 1930s, a significant global economy with many multinational firms flourished. However, the Second World War disrupted this trend. Nevertheless, the global economy, which was populated by multinationals, redeveloped and expanded to its present state during the postwar decades.

Throughout its history, Old General Motors remained a highly factionalized concern. Factions were drawn around family ethnicity and ownership as well as politics, religion, and other characteristics. The cultural dissonance existed in the hourly workforce, the supervisory level, and middle management. Furthermore, key players in the upper management of GM - including Alfred P. Sloan, William S. Knudson, and Charles E. Wilson - held overt political leanings that reflected their strength of conviction to the authority of the U.S. government. The players held their positions of authority at GM during the administrations of both FDR and Harry Truman.

Just the Facts Ma'am

The interests of the largest automotive firm never consolidated under one over-arching principle. Therefore, let us remain objective as we lay out the concepts of foreign-versus-domestic ownership and control in companies that have morphed between consumer-good and defense-good producers. The facts that constitute the story read as follows:

* As the 1930s progressed and the world began to emerge from the Great Depression, General Motors agreed to locate a new Opel factory at Brandenburg. In the following decade, this location proved to be less vulnerable to bombing by Allied forces than other locations.

* Between 1937 and 1938, Opel increased the sales of its popular Blitz truck from 17% to 29% (with a new annual total of 6,000 units) to the National Socialist German Workers Party (NSDAP) that controlled the German military.

* During the 1930s, GM-owned Opel doubled its employment, making it one of the leading employers in Germany. Meanwhile, Opel overtly embraced the political philosophy of NSDAP and grew more integral to the vision of the ruling party in that country.

* The NSDAP provided internal security throughout the Opel plants in order to maintain discipline and to ensure that the firm would meet production quotas.

* In 1935, private industry in the United States began to transfer technology to Germany for the production of tetraethyl lead (leaded gas). Using this additive gave a performance boost to Opel vehicles. However, the United States War Department remained apprehensive about the transfer of these proprietary chemical processes, which eventually gave Germany a strategic advantage during World War II.

* By late 1938, German armament officials increasingly directed the output of Opel and mandated that most vehicles would be produced for military use.

* On 1 September 1939, Germany launched its Blitzkrieg against Poland with many troops transported in Opel Blitz trucks. Following this event, the board of Opel was restructured. For the moment, the restructuring insured that the executives of General Motors maintained an invisible, though controlling, presence.

* At the start of World War II, the German government conscripted the Opel Brandenberg plant and converted it to an airplane-engine plant that supplied motors for Luftwaffe bombers.

* By mid-1940, the U.S. government "drafted" General Motors and its facilities to become major suppliers of military hardware for the Allied forces.

* In early 1941, the FBI conducted a probe of GM senior executives having links to the German rulers. The FBI found collusion with Germany, but no evidence of any disloyalty to America.

* Four days after the bombing of Pearl Harbor, German diplomats delivered their Declaration of War against the United States. At this juncture, General Motors severed all direct contact with its Opel subsidiary in Germany. However, they maintained communications through GM operations in Denmark.

* For the duration of the war, the German government placed Opel under appointed custodial control. The duty of the custodians was to continue the operation of the firm as efficiently and profitably as possible (given the circumstances) and to hold all assets and profits in escrow until settlement hearings that would occur after the conclusion of the war.

* During the war years, General Motors declared that it had "abandoned" Opel. The parent firm took a complete tax write-off under special legislation passed in October 1942.

* Meanwhile, Opel produced trucks, bomber engines, land mines, and other hardware for the Germany military. The custodians used some of the profits to acquire companies and other assets in Germany.

* When the war ended in 1945, settlement procedures commenced. In 1948, General Motors started to regain its control over operations and assets as well as the wartime dividends of Opel that had remained in escrow. In addition, its parent company collected "war reparations" for facilities damaged or destroyed by Allied bombing.

Reversal of Fortune

We hope that we have presented this example of the complications that have arisen with consumer/defense industries with equanimity. These industries have cross-national ownership issues at the times when military conflicts arise - a scenario that could and probably will arise again. We now ask our readers to consider the situation in reverse (though with some alternate players). We restate the opening conundrum: Is the American automotive industry a consumer-goods industry or a defense-goods industry? Perhaps it is both. However, if the U.S. automotive industry is a defense-goods industry even to a minor degree, it still constitutes a matter relevant to national-defense policy.

In our present decade, sizable blocks of equity in many companies are in play across international-investment markets. Therefore, we need to solve this conundrum clearly and firmly. Of the Big Three, Ford appears to be the most closely held by domestic interests while Old Chrysler has passed hands between foreign nationals more than once. The New General Motors exists somewhere in the middle, with large blocks of stock moving between the federal government and the private sector. Currently, GM has 1.57 billion shares outstanding (i.e. public shares minus repurchased shares). Does General Motors plan to hold its newly acquired shares indefinitely in the company treasury, to feed them to the market, or to retire them in order to increase the value of remaining shares? How does the U.S. Treasury plan to divest itself of its remaining 19.1% of outstanding shares? Also, if readers have the time and inclination to view filing SG 13G/A (Statement of Acquisition of Beneficial Ownership by Individuals) on the Electronic Data-Gathering, Analysis, and Retrieval system (EDGAR) at the Securities and Exchange Commission, they may want to dig down into the interesting detail for Motors Liquidation Company, Motors Liquidation Company GUC Trust, Wilmington Trust Corporation, Canada GEN Investment Corporation, Canada Development Investment Corporation, and the UAW Retiree Medical Benefits Trust. Finally, Berkshire Fund (Warren Buffet) increased its holdings to twenty-five million shares (1.6%) according to recent SEC filings.

What obfuscation may arise if shares of automotive stock fall into a new generation of Hedge Funds - Stock-Backed Securities? In order to take the conundrum beyond a purely philosophical debate, we need to consider the real probabilities that we will find international interests that are not currently, or may not remain, key trading partners or military allies of the United States. We conclude by asking this question: when might these interests gain ownership of assets (both physical and intellectual), operational control, and the rights to dividends?

Tail Lights

We share this conundrum with our readership of attorneys because the solution falls largely to numerous legal matters. For example, these may include disputes over the creation, ownership, and transfer of intellectual properties; labor representation and disputes under multiple sovereignties; and contract disputes on both the input and output sides of production. Therefore, attorneys could have a great deal of influence in solving the autodom conundrum, thus possibly avoiding the wrath and rancor of our opening spokesperson Bill the Butcher.

----------

A PDF copy of this article is posted at http://www.saseassociates.com/legalnewscolumn.html. We continue to post videos related to our monthly column on www.YouTube.com/SaseAssociates in the Legal News Features playlist.

----------

Dr. John F. Sase of SASE Associates, Economic Consulting and Research, earned his MBA at the University of Detroit and his Ph.D. in Economics at Wayne State University. He is a graduated of the University of Detroit Jesuit High School. Dr. Sase can be reached at (248) 569-5228 and by e-mail at drjohn@saseassociates.com.

Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for more than 20 years. Currently, he edits books for publication and gives seminars on writing. Mr. Senick can be reached at (313) 342-4048 and by e-mail at gary@senick-editing.com.

Published: Wed, Feb 20, 2013

Comments

  1. No comments
Sign in to post a comment »