More Auto Bailout Thoughts

I don't think I have ever gotten as much mail from as many different readers as I have received on the auto bailout.  Readers seem fairly unified in their outrage and horror at the prospect.

Via insty:

Nancy Pelosi calls the deal a barber shop, where everybody will take a haircut.

There is already an available process for operating companies that cannot meet their obligations where all the parties take a haircut:  Its called chapter 11.  We have about a zillion man-years of experience with it, in companies great and small.  And it does not take idiotic Senators flashing billions of our tax money to mediate it.

The auto industry is tremendously magnetic for wannabee technocrats in Congress, in large part because in perhaps no other industry is there a bigger gap between what the average American wants to buy and what the country's intelligentsia things they should buy.

But US automakers are failing because they have not been very responsive to customers; they have grown fat and complacent, feeling protected by their monopoly power position; they have consistently failed over decades-long periods to make tough decisions vis-a-vis labor and costs; and they have refused to make real prioritization decisions (GM brand strategy is a good example).  It is therefore hilarious that Congress thinks it can do better, because wouldn't these same traits be high on the list of failings of the Federal Government itself?

And this is funny, if you have not seen it yet.

  • k

    No big mystery about the automakers. They expected this would happen about five months from now. In September sales were going at a rate that would allow them to operate well into 2009. That was plenty of time to get Obama in office and the new Democrats into Congress. A deal could have been made in February or March w/o a fuss after the compliant media softened up the public mood.

    But sales totally collapsed in September and GM realized they would be broke by February. So they had to go to Washington immediately, publicly, and without much preparation.

    UAW costs are a big part of the problem. They are not all of the problem. The UAW has good workers but they cost too much v. competitors. GM also needs a better product line, but they could fix that if time permitted. It doesn't.

    The Democrats don't want to let GM go into bankruptcy because it would hurt their reliable union votes. But the Democrats can't simply hand money to GM without conditions either. So they posture about firing executives and straightening out management. That won't bring profits back. This will just become a perpetual drain on taxpayers to support UAW workers.

    Chrysler and Ford are also going broke. They seem to have a little more time and GM is making most of the news.

    Chapter 11 with reorganization is designed to handle these failures. Putting the White House or Congress in charge of the car makers is idiotic.

  • gary shanks

    if the big three cant compete in the real world is it not time for them to move over and let the competion come through? who is going to come through and build a car the blue coller worker can afford to own and drive? the big three cannot do this, why because the labor cost now out weighs the cost of the matriels to build the car combined with the execs bonos and company paid vacations. i have this question if it was a church or a school or even one of us that needed help would they be johnny on the spot with the money, not no but hell no we would not have the power to give them what they want the next election, more money to line their pockets! the people in public office look out for themselves and not the people who put them there ask the big three what they gave to canidates this year before they went to ask for money to bail them out of their on mess. when i was in school and you got in trouble you paid for your mistake, no one was there to bail you out. go figure big three get over it!

  • Brian

    A couple nights ago on NPR they had some bankruptcy lawyer talking about the proposed "car czar" position, saying it sounds more like a "mediator" when what we really need is for the government to create a position that has power more like a bankruptcy judge who can renegotiate contracts and things like that. I don't think this guy ever really explained why we need to create a new national government position with the power to operate "like a bankruptcy judge" when we've already got thousands of people that operate like bankruptcy judges. Ironically, we call them bankruptcy judges.

  • agesilaus

    GM is paying $73/hr per worker on average(salary and benefits including retirement costs). Toyota US is paying $48/hr. That is the difference between making a profit per unit vehicle and taking a loss. GM loses money on each unit it sells. Toyota makes $2500/unit. UAW needs to match the Toyota costs and then the government could, tho I wish it wouldn't, consider doing a loan.

    Management needs to hit the road too.

    BK

  • John Dewey

    I don't understand Ford's strategy in all this. If GM and Chrysler fail, Ford wins. Ford has admitted it can survive this downturn without government loans. So why were Ford executives up in Washington alongside their near-bankrupt competitors? They should have been running ads showing how an American auto company can compete without government loans.

  • Jeff

    My family owns a GM dealership, in a major market, so we have a vested interest in GM's survival. My dad has 40 years experience running auto dealerships, foreign and domestic, and we talked about GM a lot over Thanksgiving. Even he says Chapter 11 is the only way to resolve GM's issues.

    The argument that no one will buy a car from a manufacturer in bankruptcy is laughable, no one is buying their cars now.

    The idea that Congress can appoint a "Car Tzar" that will fix is issue is beyond belief. Who would take that position? Knowing you would have to report to multiple congressional committees? And without the power to renegotiate union contracts and retirement packages.

    It's a job designed to fail, publicly, with the added humiliation of broadcast congressional hearings. What fool wants any part of that?

  • Jeff

    John,

    Ford's strategy is to keep their suppliers alive. All of the big three rely on the same suppliers for parts and components, if any of the automakers fail, key suppliers will fail. Ford would have delays and shortages that would put it into bankruptcy as well.

    Jeff

  • Bobby L

    Jeff,

    I've heard that arguement over and over again, and while yes, the collapse of even one major auto manufacturer would upset the market for a bit, the whole thing WOULD NOT come crashing down.

    For instance, don't those same suppliers also make parts for Toyota and Nissan and Subaru plants in the US? And even if they didn't, I'm sure they'd retool quite rapidly. Or they'd have to make the same tough decisions that EVERY OTHER INDUSTRY HAS TO MAKE RIGHT NOW AND DROP PRICES AND FIRE EMPLOYEES. It sucks, but that is the only way for a company to truly survive this - get lean and mean and kick through this recession.

    Bobby L

  • HS

    I am torn. Part of the problem is too much government intervention in the markets and in the automotive industry which lead to this mess. Another part of this problem is the complacancy of our automotive industry.

    But taking a bigger picture, I think this is the exact same thing the U.S. government is facing. I think the country is exhibiting the exact same thing GM is exhibiting. If GM needs a bankruptcy to fix itself, does the US need a bankruptcy to fix itself?

    Then you get into even larger issues like this http://www.popularmechanics.com/technology/military_law/3319656.html and this http://geoff82.wordpress.com/2008/07/28/chinese-military-technology-becoming-self-sufficient/.

    I agree with this, "technology is developed where the it is domiciled".

    I think people do not see that GM, Ford, and Chrysler have been building cars people want. People wanted SUV's, big trucks and gas guzzlers but the market has changed too fast. In my experience, any company that grows or shrinks by 10% is under great strain. Friends that have sold businesses have said if they could go back, they would not have grown as fast as they did.

    GM needs change from the outside but this could be going too far IMO.

  • http://www.matthewjudebrown.com/ Matthew Brown

    Ford wants in on the bailout because it doesn't want to see its domestic competitors being rewarded for failure while Ford gets to suffer for doing better.

  • HS

    Ford mortgaged everything in 2006. They are in the same boat. They did a smart move though by saying they can whether this storm because it 1) increases revenue (solution to the problem and the same argument used to avoid bankruptcy), 2) set-ups a life line just in case something happens, and 3) avoids the government's other "help".

  • http://www.theartdeptchronicles.blogspot.com aaron4unitruth

    There are many reasons why the bailout of Wall street and the auto industry is wrong but most importantly because the federal government is far more powerful than it was ever meant to be. Now the government can be a stockholder? Sounds too much like socialism.

    http://www.theartdeptchronicles.blogspot.com

  • KBK

    "Who would buy a car from a bankrupt company?" I don't know how much validity the argument has.

    Generally, parts are available and were manufactured in the year the car was made. Warranty insurance would be a good thing - if no dealer is available to honor it, the insurance would pay for third-party warranty service. That would be a good and relatively inexpensive thing for Washington to arrange.