Avoidable Contact #21: Oppose the “bailout”? You’re a moron.
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Photography by Dave Everest
SMACK! My right fist banged off the arm of my pumpkin-colored Natuzzi recliner as the swelling bloodthirsty tide of righteous f***ing indignation crested in my feverishly twisting heart. In the space of a moment I’d redone all the tendon and ligament damage so patiently healed over the course of the past month, an injury suffered in a last-ditch but ultimately successful attempt to keep my completely sideways Neon race car off the man-killing concrete wall in Putnam Park’s final turn by dialing in steering corrections faster than my hands could accomplish without literally ripping the sinew from the bone. The pure adrenaline which had then twisted the wheel into a blur of spokes now bulged my eyes from their sockets. I was going to find this guy and beat him until he couldn’t stand. I would pull him up by his neck, flick out my titanium-gold-nitrided Kershaw assisted-opening knife, and cut his eyeballs out, one at a time, taking care to pop each optic nerve off with a delicate finishing flourish. And then I’d really get angry. Death would be too good for this guy.
It was a single typed sentence that gave spur to my murderous rage. A single sentence that neatly encapsulates the sullen stupidity at the heart of so many so-called “automotive enthusiasts”. A single sentence that any thinking man would be ashamed to utter. It was, paraphrased a bit to protect the guilty:
lol american cars suck the last one im glad the last one i ever drove was a 1980 buick skylark that totally sucked
Putting aside the bloody infernal cheek of insulting the premium X-body compact, the friendly-looking, velour-lined small Buick known in contemporary advertising as “The little limousine”, can you see why I was angry enough to contemplate booking a last-minute flight to California (of course that kind of idiocy finds its expression in California) for the sole purpose of committing a bit of the old ultra-violence? This drooling moron wants the “Big Three” to sink into the abyss of history… because he didn’t like the 1980 Skylark? He’s deriving his perspective on perhaps the most dangerous moment in the entire history of the American middle class from a drive in a twenty-eight-year-old car? It’s too ridiculous to seriously contemplate – except for the fact that, judging by what I’ve seen and read of the Detroit “bailout” hearings, the elected officials of our government aren’t much smarter than Mr. Skylark.
It’s time to cut the crap, and that’s why this will be the shortest Avoidable Contact you’ll ever read. The “bailout” must happen. Without it, we’re all going to suffer serious consequences, and by “we” I mean you, me, the guy down the street, Mr. Skylark, and everybody who has ever spent more than five minutes of their life away from “World of Warcraft”. I don’t care if you love American cars or despise them; without the bailout, you’re in trouble, pal. You can take my word for it, or you can keep reading to find out why even the most testosterone-challenged, America-hating, hemp-wearing, Prius-pedaling tree-hugger needs Detroit to keep cranking out the American Iron.
To begin with, this “bailout” is hardly a bailout by modern standards. The recent round of banking-industry bailouts were simple propositions: Through greed, stupidity, and simple failure to understand the interconnected nature of some rather complex financial instruments, this country’s august financial institutions found themselves holding about a trillion dollars in “stuff” that might not be worth anything to anybody. It’s kind of like that day back in 1994 when I spent my entire paycheck on a Colt “King Cobra” revolver, not realizing that the King Cobra, as a general rule, sucked and didn’t shoot worth a damn. So the banks have a trillion dollars’ worth of King Cobras, and the government’s agreed to buy ‘em, just like the guy at the gun shop later agreed to buy my King Cobra back at a discounted rate. It’s a nifty way of shifting risk from billionaire traders to the American taxpayer, and the fact that it was pretty much totally necessary in order to prevent the return of the Depression-era bread line, not to mention the proverbial rioting in the proverbial streets, doesn’t help that pill go down any easier. Note, also, that at no point have the banks involved gone so far as to suggest that it perhaps might be vaguely acceptable to stop paying twenty-five-year-old brokers $200 million a year. Here’s what’s gonna happen: The folks in New York are going to get richer, and your taxes will pay to back their bad bets. Simple as that.
The auto-industry “bailout” stands in stark contrast to this calliope of government-backed greed. They’re asking for loans, or in Ford’s case, the mere possibility of loans. Salaries will be cut. Thousands of people have been let go already, with more to come. The UAW’s at the table to hammer out compensation. The maximum amount under consideration is perhaps a fortieth of the funding being directed at the banks. Looked at another way, we’re talking about fifteen days’ worth of Iraq-war money.
Why do the automakers need it? It’s simple: they can’t get the credit they need (see: banking douchebags above) and they can’t reconfigure their production quickly enough with current labor costs and economic conditions. In other words, GM can’t turn all the Silverado plants into Cobalt plants next week for free while still paying the health-care bills of the people who retired in 1980, back when that popular-opinion-influencing Skylark was rolling off the lines.
Why can’t they just go bankrupt? Well, they can… but in the modern supplier-centric era, going bankrupt is tough. Sixty years ago, Ford could have gone bankrupt and reorganized without any difficulty, as long as the raw steel kept rolling in. Today, Ford needs to pay hundreds of suppliers on a near-daily basis for the just-in-time delivery of complex, unique parts and assemblies. Bankruptcy law can’t cope with this stuff. It’s like trying to regulate the Internet using the Code of Hammurabi.
Now for the big question, the one dripping off the lips of complete morons everywhere: Who cares if one, or more of the Big Three go in the toilet? Do we really need more Sebrings LOLZ? I’m glad you asked. Here’s the real deal: The United States market sucks up more than sixteen million cars and trucks a year. Even in 2008, with the utter financial apocalypse facing every man, woman, and child in this country, chances are we’ll see way more than thirteen million cars sold. Of course, you’re way too sophisticated to ever buy some piece-of-crap Detroit car, right? You’d throw up in your mouth a little if you had to look at the interior of a Cadillac CTS; you own a Nissan Altima. You’d never put up with the sucky fuel economy of the Focus; you have a Toyota Tundra. You’re so knowledgeable about quality that you would never consider owning a Dodge Caravan; you’re a Hyundai Entourage driver.
Unfortunately, you’re also too fuggin’ stupid to remember what happened the last time we had more buyers for Japanese cars than there were Japanese cars to go around. It was called the Era of the Voluntary Restraint Agreement, and it was famous for the “ADP sticker”. Now listen up, dingbat: If we take a market that eats 14 million cars a year and destroy half the production capacity, people won’t stop wanting new cars, but there will only be half as many new cars to go around. Guess how much your awesome little Prius will cost when there are two buyers bidding for every car. Want to take a shot at estimating the ADP sticker on a 2010 Accord when there are no Malibus, Fusions, or (gasp) Avengers for sale?
Honda can’t double their production tomorrow, and neither can Toyota, and neither can Aston Martin. If we let the American automakers fail, we are looking at a shortage of quality new vehicles greater than anything seen since 1942… and it might be permanent, because nobody’s going to be the first one to expand capacity with an unprecedented Depression right around the corner.
Did I hear myself say “Depression”? Hell yes. About one in every seven Americans works in the automotive industry in some capacity, from the fellow who puts the “GM chiclet” on the side of Corvettes to the young lady who soaks her T-shirt with water and scrubs your Corvette at that super-cool downtown car wash about which your wife has not been completely informed. Let’s put half of them out of work. Poof! Instant 15% unemployment in this country. That is a Depression with a capital “D”, and it’s cumulative, because other people depend on those people for their income. It could literally unhinge the country and send it to its knees for a decade or more. It would then take a “New Deal” type of socialism to put those people back to work, and that will cost trillions and take years. Oh yeah. Don’t look for Honda to introduce another NSX during that time to stimulate your inveterate America-hating rice-boy fantasies, because in times of Depression expensive cars, and their makers, tend to hit the ground at max velocity. Ask the Dusenberg brothers, if you don’t believe me.
”Ah,” you say, “surely new companies would be formed to make cars if there was a shortage of new cars in this country.” Really? Who’s gonna lend them the money? When the guy who founded PayPal has his hand out to Congress for his car company, what do you think the banks will say? Who would be stupid enough in this day and time to get into a business where the government is regulating you to death, the courts are suing you to death, and foreign governments are busy bankrolling your competition?
Oh, that’s right, you know. If you think for a moment that the Japanese and South Korean governments don’t work hand-in-glove with their manufacturers to prevent economic collapse in times of trouble, you’ve never looked at Isuzu’s sales numbers or Hyundai’s warranty costs for the first-generation Excel. This is war by other means, folks – and there’s nothing wrong with that. It’s fine with me if the Japanese government wants to help Mitsubishi out a bit. Let’s imitate them and extend a helping hand to Chrysler.
Oh, but maybe Chrysler doesn’t deserve help. Why? It might come as a surprise for those of you who actually confine your automotive experiences to the 1980 Skylark, but Chrysler, Ford, and GM are turning out dynamite product nowadays. There are domestic cars fighting for the title of “Best in Class” in pretty much every category out there. Is there a faster affordable sports car than the Corvette? Is there a better truck in the world than the F-150? Is there a better minivan in history than the current Town and Country? We’re no longer living in 1980. Japanese-branded cars no longer have an appreciable quality edge over the domestic competition, and the products from other countries’ car makers lag behind companies like Buick and Lincoln when it comes to critical quality metrics. Believe me: I’ve spent hundreds of thousands of dollars on German cars in the past decade, and I’ve yet to own one that could stay out of the shop for more than a year at a time. Not all of the Big Three’s products are perfect, but the same’s true for other manufacturers from other countries. Does the name Ridgeline ring a bell? How about Maxima? Yeah, the American companies bet pretty heavily on SUVs and big trucks, but when I think of a company with an SUV-heavy lineup, I think of the company that sells the RAV4, the Highlander, the 4Runner, the Sequoia, the Land Cruiser, the RX350, the GX450, and the LX450. Can anybody name a Big Three entry with seven distinct and mostly unrelated SUV platforms? Does anybody think that selling the Prius makes those seven platforms and eight nameplates stop sucking fuel and using resources?
The facts are simple. Detroit is making good cars and trucks. They’ve made mistakes, but the almost unimaginable harm to the American economy from their potential collapse outweighs any other considerations. It’s time to help them out. Call your Congressman, write your Senator, send President-elect Obama a Facebook chat message. It’s time to help them out, for their good, and our own.
So, what part of the bailout is going to address the demand side of the equation?
The same banks that won’t lend to Detroit won’t lend to consumers, either. The economy’s going in the crapper whether Detroit gets bailed out or not, meaning a lot of people are going to hang on to their cars or buy used.
I’m not opposed to a bailout (wouldn’t want you to injure yourself again), but I’m afraid whatever gets passed won’t prevent the inevitable.
Long term, I’d say Ford is in good shape; GM needs to be 20% smaller; and Chrysler has Jeep, the LX cars (and upcoming/stalled LY), and the Ram to offer a potential new corporate master. Much beyond that is pretty wishful thinking.
Good read, as usual, but why is it that you always manage to stuff Japanese-car bashing in your articles?
Regarding the demand side of the equation… The model mix is going to have to change, there’s no doubt about that, but that change can’t happen without a short-term boost in funding.
As for why the Japanese occasionally come in for criticism in my articles, it’s simple: the popular press believes Japan and its automakers are infallible. It’s not true, and somebody has to discuss the fact that the emperor, while not exactly naked, isn’t wearing a full Kiton suit. Also, I still resent Honda’s decision to permit dealers to install aftermarket tape decks in the 1983 Civic 1500S. It led to me having to listen to my mother’s incessant playing of “Soundtrack from ‘The Big Chill’” for three solid years before a Cadillac brushed the little Civic at a stoplight and completely totaled it.
Thank you kindly for being brave enough to put these ideas into words, Jack. For enthusiasts that truly “get it”, the past few weeks have been overwhelming. One mere man cannot change the minds of the willfully ignorant, but pieces like this let me know I’m not fighting for truth alone.
We should package General Quarters, Shove Your Notes Up Your Errata, and Avoidable Contact #21 as a DVD trilogy.
We could make… uh… well, nothing really.
Spending time debunking the most ignorant viewpoints only lends them legitimacy and lowers yourself to their level. Think about the likely reader of your whole article, they’re already going to know that the Japanese aren’t necessarily ahead in the product game. We’re also used to hearing equally ignorant pro-American fanboyism, which while I know you don’t subscribe to, you come dangerously close to.
Similarly, it’s proving true that there was too little oversight built into the $700B financial sector bailout, and that those guys didn’t “deserve” it. Pointing out that Detroit’s undergoing more scrutiny for less money doesn’t mean it’s not good to try and do it right this time.
You’ve made an excellent case as to why dismissing the Big 3 for their past sins is an idiotic viewpoint. We know they’re big enough to tear a mortal wound from our economy should they go down. (I will point out that the aforementioned carwash girl will still be doing just fine washing slightly older cars, though).
The irony of me using too many words arguing the obvious point of telling you not to use too many words to argue the obvious point is not lost on me.
I would like the terms of any loan to force Detroit to come clean on some realistic plans. Representative Science (i, California) asks: “So, what’s the deal with Mercury?”
“When are you shutting down Hummer?”
“Cerberus: when are you soliciting buyers?”
“All of you: how are you going to close the perception gap on your successfully executed products”
1) Whether or not the terms of the financial bailout are to your liking has nothing to do with whether the auto bailout is a good idea. Discussing that here is smoke and mirrors.
2) Establish through more than simple assertion that GM et al are somehow resistant to bankruptcy. Somehow our entire bankruptcy code breaks down because they’re modern companies?
3) Capital doesn’t vanish. The most likely alternative to the bailout would be wholesale acquisition of plants, designs, talent, etc by competitors. If the Corvette is a viable vehicle, somebody will pick up all the property that goes into producing it and make a killing.
4) Despite the above point demonstrating that your assertion that some millions of automotive capacity will immediately and irreversible disappear, this wouldn’t be nearly the crisis you make it out to be. Yes, reducing supply by some amount (as would surely happen) will raise prices in the short run. But then you assume away the ability of the market to adjust, which I dispute strongly. Those high prices will in turn increass the incentive to increase production. I would expect production to return to pre-bankruptcy levels within 5 years.
5) ‘In the automotive industry in some capacity” is such a broad category as to be completely useless as a tool of analysis. For example, it would be absurd to count workers at car washes; new cars aren’t the only ones getting washed. I have no idea what this datum actually is, but your approach is certainly exaggerating it.
6) None of this really gets at the main issue. If half of the people employed by these companies would immediately be fired if they were to go bankrupt, this would be the direct result of the fact that those people never should have been employed by those companies in the first place; they were bigger than was justified by their actual profitability.
I have a great deal of respect for you as a writer, otherwise I would not be wasting my time arguing on the interwebs. This is one forum where I do not expect to be wtfpwnt.
I would encourage you to go read some Josef Schumpeter before getting too attached to one equilibrium of infinitely many possible ones.
Hey Jack, you forgot some golden little nuggets, like the fact that the top 2 selling vehicles of 2008(yes, this year) were 1) the Ford F-series, and 2) the Chevrolet Silverado with the Ram coming in 6th(im pretty sure). Yes, 3 big ol’ V8 powered gas sucking pickup trucks in the top 10 vehilces sold in the United States of America, in the financially challenged year of 2008, with 2 out selling the Accord, Camry, Civic, Altima, Corolla, and any other ugly 80MPG Japanese car you can think of.
Also, Reuters reports that AIG has recieved atleast $150B from good ol’ Uncle Sam’s pocket, no questions asked, no specifc forms of transportation demanded(you really think they flew commercial or drove to Uncle Sam’s house to pick up the check?). But God forbid Ford Motor Company, one of the largest employers in the nation, as well as one of the largest spenders into our great countries economy, get $9B of ‘just-in-case’ money if car sales were to not pick up.
@NoneMoreBlack: Have you given the auto industry any research on this issue? Have you read any articles speculating that a bankruptcy may not be feasible, or the possible negative implications that may hit our economy if the automakers were to fail? Or how the failing of one may bring down the other two, as well as possibly severly hurting the industry as a whole? I’m talking about articles written by economists and the like. If your going to suggest that someone educate them self on your side of the issue(with an open mind i would imagine), then you better be willing to do the same. Josef Schumpeter may paint a pretty picture of the worst case scenario(assumption on my part, i have yet to read his stuff), but it doesn’t mean he is correct. I would think it would be best that we prepare for the worst than assume the best anyways, but maybe thats just me.
Part of the difficulty of discussing something as enormous as the Big Three’s impact on the American economy in just 2,000 words is that one has to dial some of the detail out of the discussion.
It’s certainly true that one out of two carwash girls won’t go jobless the moment GM goes under, but there are other jobs we didn’t discuss — like the cashier at the Burger King across the street from the local supplier’s dashboard assembly plant — so it’s likely to turn out even worse than I thought.
Here’s another way to look at it: Many of us implicitly accept the idea of a “tipping point” in climatology, right? The day would come when a single atom of CO2 from an Expedition EL L King Ranch causes the rainforest to disappear? Well, the loss of a major American manufacturer would very likely be the “tipping point” that causes the economy to spiral into the ground.
I know that many of our readers have a very negative view of Detroit and the Big Three’s products. I’m asking them to put aside the fact that they may personally prefer the Avalon to the Lucerne and consider the effect on *all* of us.
NoneMoreBlack, you bring up the idea of equilibrium and make the point that some jobs will have to be lost to reach that equilibrium, but neither you or I can say when we’d actually reach that point.
The impact of a Big 3 collapse will likely be exaggerated by its swiftness. There will be no time to re-train the workforce, no opportunity to give workers advanced notice, no sustainability plans for their familes — no “safety” net, if you will. They will simply be dropped, violently. A bail-out allows for a graduated restructuring that takes place over a longer period of time, allowing the manufacturers to reduce their workforce incrementally and soften the overall blow.
If you honestly believe that every job that will be lost in a Detroit collapse is superfluous, then I think you need to focus less on a hypothetical equilibrium and take a good, long look at the arc of the pendulum before it finally reaches that point.
In fact, think of it like a wrecking ball.
Mismanagement at the Big Three
December 9, 2008 11:42 AM by Ralph Reiland | Other posts by Ralph Reiland | Comments (16)
It was a dead heat. General Motors sold 9.37 million vehicles worldwide in 2007 and lost $38.7 billion. Toyota sold 9.37 million vehicles in 2007 and made $17.1 billion.
That was the second best sales total in GM’s 100-year history and the biggest loss ever for any automaker in the world.
For Toyota, that was roughly $1,800 in profit for every vehicle sold. For GM, it was an average loss of $4,100 for every vehicle sold.
Collectively, Detroit’s Big Three automakers are currently losing about $5 billion per month, with Ford, General Motors and Chrysler, respectively, burning through $2 billion, $2 billion and $1 billion in cash every 30 days.
Tin cups in hand again during their recent testimony in Congress, leaving their corporate jets at home this time and promising to cut their paychecks to $1 per year, the CEOs from the Big Three came to Washington in even worse shape than during their Congressional appearance in November, upping their money appeal by $9 billion, from $25 billion to $34 billion. That’s on top of the $25 billion in already authorized money to retool their plants.
General Motors and Chrysler added a “rush” to their latest bailout request, telling D.C.’s lawmakers that they need, respectively, an immediate $4 billion and $7 billion to ensure minimum liquidity levels, paid prior to the end of December. GM, as well, asked for an additional $4 billion for January and a third handout of $2 billion in the February/March time frame to forestall a financial calamity, plus a $6 billion line of credit from the federal government to ensure ample liquidity.
All told, GM says it needs an $18 billion taxpayer bailout, some 50 percent more than it said it needed just three weeks ago to turn things around.
With its hourly workforce already down 52 percent since 2000, from 133,000 to 64,000, and its executive ranks and salaried employees down, respectively, by 45 percent and 32 percent in the same period, General Motors now says it can get back on its feet by getting rid of its Saturn, Hummer and Saab lines and putting Pontiac on an endangered-brand list.
Also in GM’s proposal for survival, and for paying back the money by 2011, is the elimination of 1,750 dealerships, the closing of four of its 47 plants, an additional 31,500 job cuts, and a new age of “full labor competitiveness” with foreign manufacturers in the U.S. within the next three years.
Currently, UAW workers at Ford, GM and Chrysler earn an average of $28 per hour, plus benefits. At the Toyota and Honda non-union plants in the United States, the hourly rate, excluding benefits, is $26 and $24, respectively.
Add the cost of benefits for the current workforce and the cost of pensions and health care for retirees (benefit-collecting retirees outnumber current workers by three-to-one at GM, Ford and Chrysler) and the difference in labor cost between a Toyota plant in the US. and the plants of Detroit’s automakers jumps to $29 per hour.
More specifically, the hourly compensation cost for labor, including benefits and retirees’ costs, at the Big Three is $73 per hour, compared with $44 per hour at a Toyota factory with American workers in the U.S.
Further, it takes fewer hours of labor to produce a car in Toyota’s U.S. plants than at the plants of Detroit’s automakers.
With more flexible work rules, GM says it could save hundreds of dollars per vehicle. The company maintains, for instance, that a company-wide use on non-union janitors, earning $12 per hour, would cut costs and increase competitiveness by up to $500 million a year.
Similarly, health care costs at GM for active workers and retirees account for more than a quarter of total labor compensation, adding approximately $1,000 in cost to every GM vehicle, compared to $215 in health care costs in each Toyota produced in U.S. plants.
Under UAW contracts, additionally, laid off workers are transferred to a jobs bank and receive 95 percent of their full pay and benefits to not work. This year, the cost to the Big Three will be an estimated $478 million, about $70 million less than Honda spent to build a brand new factory in Indiana.
Somewhere along the line, both management and labor in Detroit forgot the good economic advice of UAW head Walter Reuter: “Getting more and more pay for less and less work is a dead end street.”
Byron:
So why does any company ever fail, if we are so concerned about the human cost of labor flows across sectors?
That is a compelling argument for stronger unemployment benefits and retraining programs. It isn’t specifically related to the auto bailout so far as I can see.
Companies fail for any number of reasons, but very rarely in history has the potential failure of a single company (any one of the Big 3) brought with it the threat of such significant repercussions. We’re talking about a domino effect. The only reason why Ford has even come to the bargaining table is because they’re terrified by the prospect of a GM meltdown. This is straight out of the plan they presented to the Hill last week:
Ford is supporting the request for help from the Federal government
• To be part of the national debate
• Because of the threat to Ford from a significant event involving one of
our competitors
• In the hopes of hastening approval of our ILC application
• Because frozen credit markets might threaten liquidity under certain
scenarios.
And the automotive industry is not the only one shrinking. Even if we as a nation could afford to pay unemployment benefits and retrain all of those employees in short order, there still aren’t any jobs out there. Besides, who’s to say that level of care wouldn’t cost more than the potential loss to consumers if the Big 3 default on bridge loans?
I simply won’t accept that 2.X million more people simply deserve to live in poverty because the worldwide economy took a dump at an inconvenient time for the auto industry.
Any conjecture about what exactly will/would happen if GM files for bankruptcy is speculation, so I suppose we shouldn’t spend too much time on that. But quickly, as I argue in my first post, bankruptcy does not mean the company simply is blasted off the face of the earth, employees, capital, IP, and all. So I have no idea what the magnitude of the unemployment will be, but it is certainly less, I would think quite a bit less, than 100% of those employed.
Again, your arguments aren’t anything specific to the auto industry. If you believe we should prevent people from becoming unemployed here, why not always? What is the first-principle from which you can make the argument that this here company XYZ isn’t big enough for us to care that mismanagement has caused their liabilities to exceed their assets, but GM is so large it must be completely different? If unemployment is a problem to which we have a solution (which I would dispute) then more unemployment is worse than less unemployment, then you should make that argument, not that GM is too big to fail.
The vibrancy and dynamism of our economy depends on two things: the innovation of companies working to outdo their competitors, and the annihilation of those that fail to do so. Without one, the other is useless.
Then flip it around. Why were the banks worthy? Was it not their complete integration into the foundation of our economy (and eventually the world economy) that made it a no-brainer? I’m not implying that you necessarily supported the bank bailout, but has the precedent not been set?
There is no discernable line that is crossed, there’s no black-and-white to this. Situations like this, in no small part due to their scope, have to be handled on a case-by-case basis. There’s no need for my argument to be specific to the auto industry, but it just so happens that the auto industry is one of few components — if not the only component — of our economy that has such a broad reach. If circumstances were different — if the economic climate of our country were different, things would be wildly different, but we are where we are.
For better or worse, true, honest-to-goodness economic darwinism is long past its prime. A protectionism-riddled “global” economy has seen to that. To paraphrase Jack paraphrasing Mark, do we really want to end up as the world’s retirement home?
I’ll split the difference on this one…
NoMoreBlack: The problem is, there is a threshold of size, over which failure can have a large multiplier effect.
e.g. the consequences of, 10,000 people losing their jobs on the same day in the same town is different than 10,000 people losing jobs nationwide over the course of a week. Losing 1 million jobs in a quarter will definitely have a more profound effect than losing 1 million jobs over a year.
Recognizing that a bailout is necessary is different from believing the bailout will work. The next question is whether you’re for a barely successful bailout that slows the inevitable.
I recognize that Detroit has some good products today, and some in the pipe for tomorrow. What I’m not so sure about is whether this shot of adrenalin that could keep them alive in a crisis will fix the problems that got them here in the first place. I’m not confident that they’ll make the sweeping, real, cultural changes necessary to send Toyota crying for bailouts in 2015.
I’ll just attempt to restate my points so we can end this on a handshake.
It would appear that GM especially, and maybe Ford and Chrysler, are not efficiently run operations. That is, they are historically uncompetitive, and the various resources tied up in those companies would be better used elsewhere in the economy. This is the reason companies fail; they are not a good use of society’s scarce resources.
If the problem with letting GM fail is enormous unemployment (emphasis on ‘if’) then the problem is not GM failing; the problem is unemployment. You may make arguments about how best to address sectoral restructuring, but then please make those arguments. The cost of allowing the market signal to be heard is high; the cost of ignoring it is higher.
I dispute that “true, honest-to-goodness economic darwinism is long past its prime.” This is an empirical question, and the overwhelming evidence is that on whole, the world economy is more open and free than at any time in human history. Increased trade may serve to highlight the areas where more freedom is yet to be achieved, but this is an issue of perception, not lack of freedom.
I appreciate the civil debate. Feel free to have the last word.
Let’s put it this way: General Motors has more people working for it and its suppliers than the city of New Orleans had employed, productive individuals directly prior to Katrina.
It’s pretty easy to work to numbers to show that the closure of General Motors would have a wider, more tragic effect than Katrina did.
I’m just sayin’.
Other governments have helped their auto industries for years states have given import companies huge tax breaks to build factories here. As far as making the vehicles that people want for the most part they do. There are alot of F150s and Silverados on the road. The biggest problem with G.M. is they are still running it like the control 50% of the market not 25%. I also keep hearing about fuel economy but gas is down to $1.79 a gallon. feal sorry for those who rushed out and paid $10,000 over sticker for a Prius. The Neon was pretty successful in SCCA racing and not really a bad car for its time and the SRT-4 was for a while the fastest front wheel drive car you could buy.
Your house is on fire. You can deal with it now or deal with it later, but deal with it you must. Detroit’s time is over, a bailout isn’t going to make it right.
Slapnuts, if you notice, this is a discussion between people that atleast have an idea of whats going on. You, quite clearly, do not. Research the auto industry and you will realize what im saying. For example, Ford Motor Company will have atleast 7 european Ford cars for sale in the United States by 2010. These include the european Ford Focus(far superior to the US Focus, which is either number 9 or number 10 in sales this year), the Ford Fiesta(approaches high-30MPG), possibly the Ford Ka(approaches low-40MPG), the convergence of the Ford Fusion(US) and Ford Mondeo platforms, as well as the implementation of EcoBoost(marketing name for twin turbo-direct injection) which will cause a ~20% MPG increase at the same power level of an existing engine(im being vague in the interest of saving time), the implementation of 6 speed automatics in all products(aids in fuel economy without sacrificing performance), and the list certainly goes on. All of this adds up to ~35% fuel economy increase by 2015. But I’m not sure if you understand what all of this means.
This should open your eyes though; Q1 2008, Ford Motor Company reports a profit. Yes, Ford was making a profit before the economy fell out. Your readily willing to let GM die, who is not far behind Ford in completing their restructuring(and yes, they have been restructuring for the past few years, even though the media says they “need” to because they “havn’t”), whole heartedly knowing that it will more than likely bring the death of Ford too, who i have pointed out is profitable under all but the worst(I.E. right now) economic conditions? You, sir, are either a “moron”(as Jack pointed out), or extremely naive.
Jack,
There is so much conflicting information in the media it’s tough to know who/what to believe. What is the current combined monthly cash
burnneeds of GM and Chrysler (assuming Ford is truly only looking for a credit line)? Given the limited size of the proposed bailout, does it really provide a benefit? How do thegovernmentwe, the taxpayers, get our money back if the bailout doesn’t work? From what I understand, the companies have a limited time to make “adequate progress” by a certain date (February of ‘09). If this “adequate progress” is not made, then the government can demand a repayment of the loan. That’s great, but unless I’m missing something, how is that guaranteed? What keeps any one of the three from simply filing bankruptcy after burning through the “loan”? I would assume the US Government is a secured creditor? As such, do they move to the front of the line ahead of everyone else (and then what happens to those creditors in the event of a bankruptcy)?I agree something needs to be done, I’m just not sure the proposed plan (assuming I understand it correctly) is the right way to go about it.
Thanks for another great article!
You’ve hit the nail on the head once again! Putting the whole catestrophic aftermath of one of the big three going under… I’d like to address some of the main concerns of the supposed car fans out there that have been bashing the Big 3’s output.
I absolutely cannot understand the categorical hatred people have of American cars. How many cars does GM produce that get over 30 MPG? And yet we have congressmen whining that we’re so desperately behind the Europeans in gas consumption per car. What was the number one selling car in the US this year? The number 2? You got it — both Detroit products.
Not to open up a new debate entirely, but I do believe part of our problem lies in our treatment of diesel. Dammit Americans, the infrastructure is in place for us to have scores of cars that completely demolish the fairy-tale hybrids (that in the end have a more negative effect on the environment due to their massive batteries) of which you’ve been salivating. We have these absurdly pig-headed assumptions about cars in general as a nation and we’ve chosen to tax 18-wheeled transport via diesel taxes (stupid.) that together make the 40-50-60 mpg diesel cars of Europe seem like a non-solution. We have the technology, we have the infrastructure. We’re just too stupid to realize/implement it.
Furthermore, in terms of this fantasy we have about ‘build quality’ please please please tell me the last time you were ‘impressed’ with a mainstream Japanese interior?! They make my tahoe look like a work of ART! I mean really. It’s utilitarian. Everything works. Nothing is confusing with stupid symbols, etc. It had 879 cupholders. It has everything I want in a giant SUV. Shoot, it even has heated, full-power seats. And it’s a ‘98 model. With over 120k miles. The new ones are even better on the inside (though, progressively more wussy in the axles/transmission/suspension it seems). As a former Audi S4 driver, my love for the tahoe’s interior ought to hold even more weight. I’ve only ever liked one Japanese interior ever…. and it was a bloody SUV. The rest, right on up to the nicest of Lexuses just somehow feels cheap. wherever they put plastic, no matter how little. It’s just cheap-feeling.
What about exteriors? Have you SEEN the new Maxima? It’s taken the title away from the Pontiac Aztek as the Ugliest Car in Recent Memory. The new Malibu looks great and it’s tearing the competition to pieces in the car rag comparos. That competition includes America’s favorite car: the Toyota Camry. (As an aside: optional BBS wheels and gold lettering do not a luxury car make, you terrible, terrible yuppies.)
Reliability? There really is not sufficient data anymore to show that Japanese cars are any more reliable than anything else. Hell, two years ago I remember the cheapest car R&T had in its long-term test fleet to operate was a friggin’ XJ8. And that was because the windshield got hit by a rock and broke and they didn’t feel like paying the deductible. Don’t cite consumer reports. Anybody who’s taken a college-level statistics class will tell you that’s a classic self-selection problem. Anyone boring enough to respond to a consumer reports survey DEFINITELY drives something as horridly bland as a Toyota Camry.
I just don’t understand how some of you can be so thoroughly ignorant and nonobjective. Just for reference (and to show I’m not some terrible GM fanboy, since I know this will inevitably garner a ‘zomg u hav 2 try german carz they are teh awes0mest evar!’): Between my parents, myself and my brother we’ve got 2 German sedans (S55 AMG and an M3. I sold my S4 and bought the Tahoe last March), 2 GM SUV’s (Yukon XL and a Tahoe), and one Japanese SUV (Acura MDX).
And Grant @ UNC is exactly the type of person I was afraid would be attracted to the unnecessary Japanese criticism.
For the record, although I am a firm believer in the quality of American cars and I’m also a bit of a German-car loyalist (of the seven cars in my personal mini-fleet at the moment, one is American and six are German), I have plenty of respect for Japanese-brand cars and I’ve driven/owned a fair share of them.
My first car was a 200SX, although it didn’t last long. I would go on to own a Plymouth Colt (by Mitsubishi) and a Nissan Frontier in the years which followed.
In the past year, I’ve been pleased to race both a Toyota Supra and a Mazda Miata in wheel-to-wheel competition.
Unfortunately for me, I’m a bit of a vintage Japanese-car enthusiast. When I think of great Japanese cars, I think of the Eighties Honda Civics and Accords, the RWD Toyota Celicas and the MkI – MkIII Supras, the 1989 Nissan Maxima, the original Infiniti Q45, J30, G20, and the entire series of Mazda rotaries. The last Toyota to really turn my crank was that angular, lightweight last-generation Celica GT-S.
The past decade has seen the Japanese brands create some really bloated, bland, depressing vehicles. Once upon a time, the Honda Accord was a repudiation of the ‘78 Cutlass; today it dwarfs the old Olds.
The author should to do some basic reading, like on the difference between chap 7 and 11 bankruptcy, before going on such a diatribe.
In any case, the problem we have right now is the big 2.8 have structural problems that cannot be solved with money (whereas the banks have a problem that money can solve). They are fundamental liquidity losers that are in need of restructuring to be even remotely profitable (whether in the form of chap 11 bankruptcy or a facsimile of another name).
Agenthex,
Even a Chap. 11 restructuring of one or two of the automakers could be catastrophic because it could collapse one or more of their suppliers, thus causing the very chain reaction that analysts are so concerned about. See the big picture.
I don’t agree. This is like gambling more when you’ve already spent more than you can afford. I think this link says it all:
http://www.autospies.com/news/photo.aspx?photoId=36726&galleryId=1751
There has to be better alternatives. For instance, why can’t the segments of Ford and GM outside of the US continue to make cars and sell them here? They seem to be doing pretty well over there. Why does the US have to have so many and often ludricous “safety regulations” mandated for our cars that Europeans and Japanese seem to get along fine without?
The Big Three will probably get a bailout, but in my book they don’t deserve it.
You guys dont seem to get it. Ford HAS restructured and is now in a position to be profitable, and GM is well on their way to finishing their restructuring(my proof includes the numerous 30MPG+ cars they currently make, as well as the gigantic quality strides demonstrated by the CTS, malibu, etc.). I guess when people cant take 1 hour out of their oh so busy lives to research something that could dramatically affect said lives, they wont know this stuff.
For example: “Well then why hasn’t GM cut Hummer from their product line up yet, Mr. Smart guy?!” Because that costs money. GM paid $2M to shut down Oldsmobile, largely because of state franchising laws(all those dealerships that had to change their product/close doors). If you didn’t know this, then you should definatly research the subject at hand so you know the position these companies are in at this current time.
To reiterate what I said earlier; it’s amazing that people cant take 1 hour out of their oh so busy lives to research something that could so dramatically affect said lives.
Even a Chap. 11 restructuring of one or two of the automakers could be catastrophic because it could collapse one or more of their suppliers, thus causing the very chain reaction that analysts are so concerned about. See the big picture.
Have you heard of delphi? Chap 11 is not “collapse”. The “big picture” is that the market for parts is conserved to the count of consumer demand. If there is demand for X cars a year, it will be readily met especially coming from the overproduction side. The only question is how much gov subsidies will be loosened by the tugging at heartstrings.
The fact remains that domestics are going to continue losing a few billion a month at taxpayer cost, which is what they’ve readily admitted since this coming 10B+ is only for a couple months of life support.
Ford HAS restructured and is now in a position to be profitable, and GM is well on their way to finishing their restructuring
This is what’s so sad. They’ve already done much of what can readily be done. A lost reputation can take a generation to rebuild, and their burn rate is rather high.
There is really no saving them. It’s American Leyland.
The 7+ Euro cars that we will be getting within the next ~2 years wont salvage their reputation? Sorry, but not all of us are as pessimistic as you are.
As for chapter 11, it is NOT viable. GM and Chrysler have both highered outside firms to determine if C11 would be the best soloution(this was part of the summaries that congress demanded) , if viable, and they have determined that it is not an option.
Further more, I’m sure you’ve read the congressional hearing mini-transcripts on this very site(the 2 live blogs on the main page), if you remember Bob Corker(from the senate hearing) was taking every single shot he could at the automakers, anytime there was an opening(yea, we actually have these ignorant people “running” our COUNTRY). If you havn’t, atleast read the senate hearing so you know where im coming from. Anyways, this is what he had to say after talking to analysts, firms, investors, etc. about the situation:
“During previous Senate hearings on the Detroit 3’s aid pleas, Corker said the companies should go into bankruptcy immediately. But he said today he has met with industry and UAW leaders, analysts and investors, and “came back with a much fuller understanding.” He said he now fears what bankruptcy would do to the supply chain.”
When the man that painted them as the most ignorant and evil minded companies during the hearing says that, i think it holds a damn good bit of weight.
BTW, interesting new stat i read. Approximately 500,000 people became unemployed last month(“became”, as in they got layed off or fired), which is a record amount for the number of people in one month for the country. It has been estimated that, if the automakers were to collapse, it would send 3,000,000(!!!) people would become unemployed. That is(for those of you who cant do simple math) 6 TIMES the latest monthly “record” that i quoted above.
Now, by Agenthex’s theory, the overseas automakers would easily pick up the slack in auto production to make up for the shortage of automobiles after the collapse(quite simplistic and naive thinking IMO, but there aren’t really any stats available for that sort of situation), but that certainly doesn’t make up for the job loss, and the resulting economic disaster we woud be in.
The 7+ Euro cars that we will be getting within the next ~2 years wont salvage their reputation? Sorry, but not all of us are as pessimistic as you are.
You can try using the Astra which we get now as a standard bearer.
As for chapter 11, it is NOT viable. GM and Chrysler have both highered outside firms to determine if C11 would be the best soloution(this was part of the summaries that congress demanded) , if viable, and they have determined that it is not an option.
How is this even an argument? Clearly they’re waiting for the handout first if at all possible.
Bob Corker
You mean this Corker? http://detnews.com/apps/pbcs.dll/article?AID=/20081211/OPINION01/812110339
Note that he says something bankruptcy-like is necessary, but without the stigma of “bankruptcy” (since apparently most people don’t understand what chap11 means), which would be reasonable.
It has been estimated that, if the automakers were to collapse, it would send 3,000,000(!!!) people would become unemployed.
Nothing but deception. As I’ve already said, the industry will right-size to a level significantly declined from 17-18m units/years. The only question here is how much taxpayers will pay for welfare (both corporate and individual) to dampen the impact. Chap 11 (or something very similar in all but name) will provide the most efficient means towards this end, much more so than hysteria.
Agenthex, I didn’t say Chap. 11 was a collapse. I said a Chapter 11 restructuring of one of the Big 3 could lead to the collapse of one (or more, really) of their suppliers.
Mr. Baruth, thank you. As for everyone else, please read pages 10 & 11 of this:
http://www.autonews.com/assets/PDF/CA59103122.PDF
In the current “frozen” credit market, how would Chrysler or GM obtain Debtor In Posession financing to complete even the first year of what would be a protracted Chapter 11 proceeding? Bankruptcy is never a fun proposition, but at least the major airlines and giant auto supplier Delphi had the good fortune to file Chapter 11 when the capital markets were working normally and capital was available. In the current credit climate, Chapter 11 is a death sentence for GM and Chrysler.
I said a Chapter 11 restructuring of one of the Big 3 could lead to the collapse of one (or more, really) of their suppliers.
It doesn’t take much imagination to figure out what the solution there is, and without the stigma this time. Ch11 was designed for this sort of situation.
how would Chrysler or GM obtain Debtor In Posession financing to complete even the first year of what would be a protracted Chapter 11 proceeding
The gov. DIP loans are the best possible deal for the taxpayer given that some form of bailout is inevitable.
Hopefully this posts. Was giving me the spam notice, lol.
Also, I should point out that while something bankruptcy-like is the least worst solution, it’s likely to fail anyway. Forecasts for 2k9 call for a drop to only ~10m units. Now try to think of how companies with huge fixed costs and without a big piggy bank would survive something like that (even with injection of substantial liquidity). Also, it’s worth mentioning the credit problem is going to be significantly worse for the Detroit 3 than the competition since their captive lenders are insolvent and their residuals are in the toilet.
To head off the obvious but incorrect rebuttal to this, the alternative of essentially nationalizing the industry is going to carry all of the costs PLUS whatever concessions due to chap11 haircuts, and thus is MORE full of fail.
I don’t think you’ll see anybody here advocating nationalization of the industry. Even I am not that much of a lefty.
Now, socialized medicine on the other hand… that could do wonders for Detroit’s labor/legacy costs.
Just sayin’. =D
I guess “Agenthex” didn’t read the link that I so thoughtfully provided…
Three questions:
1. Where is the Chapter 11 financing going to come from?
2. How much will be wasted on legal fees during Chapter 11 proceedings?
3. In which Southern, right-to-work state does “Agenthex” live?
Byron, there are only ~3 options:
1. Nationalization
2. Chap11 or the like
3. Chap7
In order of our money spent. In my opinion, at this point, 3 is likely the best option. Since I’ve already made it clear it’s just down to gov money smoothing out the human impact of the fall off the cliff, let’s just kill the problem (structural deficiencies of the big2/3) in the most effective way (sale to whoever actually knows how to make cars profitably) and use our money to directly benefit those impacted instead of shoveling more into the fire.
But that’s never going to happen, so realistically it’s varying shades of 2.
—-
ACR man, here are the answers:
1. Either the gov directly or gov payment for loan guarentees (from another lender). All 3 options are going to be our tax money because if it’s not already obvious no one else is willing to do this.
2. A significant amount (let’s say a Billion). But very little compared to the overall charge we’re going to take even in the best case (3 above will take the least, but the realistic choices are >100Billion).
3. I don’t live in the south, and it doesn’t matter either way because reality has no regional bias.
Wow. It’s a good thing that not everyone is willing to cede the US auto market to the Japanese, Korean and (soon) Chinese automakers. If you think that foreign owners have the best interests of their American employees at heart, just ask a Chrysler employee who lived through the DaimerChrysler experiment.
BTW — Using the phrase “MORE full of fail” does not exactly create an image of experience and wisdom on the part of the author. It’s more like: “recent college graduate with a business degree who thinks he/she knows everything.” I’m a 15-year non-union, white-collar veteran of the auto industry, and I haven’t got time for that cutesy crap.
This divide between “foreign” and “American” is just jingoism The owners (and bondholders) are out to make money, and your emotional gestures for camaraderie are not going to be reciprocated.
If anything, cerberus ran chrysler into the ground even harder than Daimler. The only thing they’re going to be better at is peddling for our tax dollars with their board members.
Perhaps you can try to use your experience to make accurate points less full of fail.
When/if you get a job interview out there in the real world, try not to use phrases such as “full of fail.” Adults in the business realm don’t talk that way. Have nice day!
I guess I must be fortunate to work with people who understand irony.
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