The Great American Car Company Bailout

by Mike Holman

I have mixed feeling about bailing out the big 3 car companies – GM, Ford and Chrysler.  On the one hand I completely support the theory that weak businesses should be allowed to fail so that the industry and general economy can be strengthened.  On the other hand I recognize that excessive disruption in the name of economic theory isn’t always beneficial either.

It appears to me however that the big 3 car companies are past the point of “saving” in their present form so it doesn’t really matter if they get bailed out or not.  They make too many cars, pay too much in wages, their pension obligations are too high, too many dealerships.  They need to do some radical changes in order to survive in any form.  I humbly present some of my ideas for these companies along with a few other thoughts.

The bailout

I think any bailout has to have major strings attached – the status quo clearly isn’t working since the companies are about to run out of cash, so unless the business model of these companies is significantly altered – the bailout money will be a waste.

Over capacity

Of all the problems, these companies have – I think over capacity is the biggest.  In the past few years, there has been an American credit boom like never before.  Because of the resulting easy credit along with rising real estate values (which make people feel wealthier), the average person was spending more money than they should have – especially on cars.

Now that credit has tightened, now that real estate has gone down and now that a recession is in place – the average person is not going to spend as much money on cars as they did up until a couple of years ago.

They are going to consider used cars, cheaper cars, keep their new cars for longer – which will result in a less cars being sold overall.  I would suggest that the car companies plan to cut production by a third or more.

Hybrids and new technology

I hate to sound like a green grinch here but I find it odd that everyone is jumping all over the car companies for not anticipating the need for greener cars.  There is no question that the car companies have been mismanaged but the reality is that they built big cars and trucks because people were buying them.  Toyota and Honda started off with small cars because that’s what sold in their home markets – both of the Japanese car makers tried as hard as they could to break into the more profitable American markets which included SUVs and pickup trucks.  It was more a situation of luck and circumstance rather than lack of foresight that led to the situation where the American companies were making larger vehicles than the Japanese companies.

As for the question of the car companies trying to develop alternative cars – hybrids are not very profitable and they are not a large percentage of overall sales.  I think more fuel efficient cars should be part of every car companies long term goals but if you are staring bankruptcy in the face then you need to worry about short term profits – not about saving the world.

What’s wrong with bankruptcy?

The big 3 need to make some major changes and I personally think they would be better served by going in to bankruptcy.  This will force all the parties to make their concessions relatively quickly and the new leaner companies can get on with things.

One of the comments that the auto executives like to parrot is that bankruptcy is not an option because then nobody will buy the cars because of a lack of confidence in the warrantees.  I have news for those executives – when you have to go to your government and ask for a handout and talk about how little time until your company runs out of cash….you are, for all intents and purposes already in bankruptcy.  Nobody in their right mind has confidence in your companies now – bankruptcy won’t change that.

The unions

The UAW (United Auto Workers) union has been criticized for being too greedy and helping to bring the car companies to their current situation.  All I can say is that I will never fault anyone for wanting more money.  The reality is that the union executives have done a far better job for their members than the auto executives have done for their shareholders.  It was the lack of will of the auto companies to stand up to the unions when times were good that lead up to current events.

At this point the unions need to forget about their past successes and do the best they can for themselves going forward.  They are going to lose a lot of jobs…a LOT of jobs.  The remaining jobs will be paying less than currently.  The ridiculous “job bank” will be gone and unfortunately the pension obligations to retired workers will have to reduced as well.

Pensioners

Currently retired auto workers are screwed.  While they might have made many a sacrifice in the past for their union – once the auto workers realize how much of a hit they will be taking – the union pensioners will be tossed overboard like yesterday’s dinner.  They have no leverage except maybe a bit of public opinion.  My advice – get going on the PR machine.  If the auto execs can give up their private jets because of embarrassment, then maybe a good pr campaign will help you guys get a bigger slice of whatever is left of the pie.  In Canada pensioners should be calling on their local retiree associations like CARP and tell them to stop worrying about useless causes like RIF payments and help those who need help.

Dealerships

I have no idea why the big 3 have so many dealerships but what I do know is that if a company like GM has 14,000 dealer franchises and 20% market share compared to 1,600 for Toyota with 17% market share – then there is something seriously wrong.  A lot of dealerships have to go.

Congress

I thought it was unfortunate that when the auto execs travelled to Washington the first time for a handout – some of the congressmen chose to use the air time for comedy routines.  Yes, it was amusing to comment on the fact that the execs flew private jets but so what?  They are highly paid executives with billion dollar companies on the brink of bankruptcy – would you rather they be planning strategy aboard a jet that costs a few thousand per trip?  Or spending all kinds of time on a car trip arguing about which fast food joint to stop at?  Given the way they have run their companies into the ground – my argument doesn’t really hold water, but you know what I mean.

Summary -‘tude change

All the different parties involved in this mess have to accept one fact – things are going to get much worse no matter what they do.  They can take their licks now and move forward or they can do nothing and when the companies eventually fail – it will be a lot worse for everyone.

Be Sociable, Share!

{ 26 comments… read them below or add one }

1 Nurseb911

I agree almost entirely Mike.

The one thing I would add would be the need to consolidate brands, especially for GM. You don’t need three identical pickup trucks made at 3 different plants, sold at three different dealerships with the only difference being some trim and a different badge on the front.

2 Jordan

I’ll steal a good idea from my father in law.

How about instead of the government bailing out the car manufacturers, let the oil companies do it!

They have been making record profits for years with the higher prices of oil, they’ve got the money. They directly benefit from having the auto sector continue to make cars that people will actually guy (gas based, not electric). So maybe it’s in their best interest to buy or bail them out.

3 Four Pillars

Nurse – great point about the brands – I forgot to specifically mention that although I guess it is part of my “reduce capacity” point.

Jordan – that is a great idea – let them “loan” some oil dollars.

4 Jordan

@Nurseb911

I agree having multiple versions of the same vehicle seems like a waste, but I can’t imagine this would be unprofitable for them. If it was, why would they do it?

Having “luxury” versions are probably the most profitable of all their vehicles. They are able to take essentially the same vehicle, throw in a few extra “premium” features that don’t actually cost very much to manufacture and then mark those features up hundreds if not thousands of percent. Since the vehicle is the same they also save money not having to repeat safety tests and future warranty maintenance wouldn’t be any more expensive either.

I would guess the luxury brands actually subsidize the initial production costs of the base vehicles.

5 guinness416

I was at a speech a couple of weeks ago where the guy said that Ford etc are healthcare providers who make cars on the side. Probably an old line but I thought it was funny. I also don’t understand why they can’t just go bankrupt, seems like it would make sense for both the US taxpayer and GM too in a way, because it will give them more leverage with the unions.

I was reading about the multiple brands, and apparently there are a whole bunch of people in the US who will only buy a Saturn, have done so for years, and would never touch a Chevy. Sounds weird to me, but somebody has decided it makes sense.

6 Nizam

I do agree with you regarding the connection between market share and car dealers in the USA. Too many dealers also contribute to the high credit squeeze.

Regards from Malaysia

7 Mr. Cheap

I’m absolutely a free marketeer, so I say stiff them all and let the market sort them out. I definitely understand the perspective of trying to avoid “excessive disruption”, but which is worse, a short harsh correction, or a lingering malaise?

I have no idea if its true or not, but I’ve read Japan’s economic trouble have lasted as long as they have because the government is very intertwined with the big, old school companies and by not letting them fail, they’ve dragged out the problem.

I was saying some of these things (along with a helping of anti-union rhetoric) to a friend from Oshawa recently, and she was… unimpressed.

8 Kyle

Your assertion that Toyota and Honda succeeded primarily because small cars were what sold in their home market is dead on. The national environment and home market plays a FAR bigger role in internatinoal success than most people realize. It was more consumers’ fault than the automakers’ fault.

9 Jerry Hung

People fly with bankrupt airlines too!
I say let them go bankrupt and “restructure”, then financial aids, they are kinda beyond the point of help

This is airline industries all over again, and that didn’t turn out well either

10 Mr. ToughMoneyLove

You are being to easy on the unions. It is one thing to “want” more money. It is quite another to demand so much in money and benefits that you put your employer at a severe cost disadvantage compared to foreign manufacturers. I fault management as well for capitulating to UAW demands.

11 Mat H

I agree with almost all points but…

Maybe Toyota and Honda got lucky, but blaming the consumers for buying larger vehicles is wrong. If they had the right people leading the company, I think they could have predicted a shift away from large vehicles. Once the consumer demand has changed, it’s too late. I don’t think it is unreasonable to expect these executives to have some foresight – they get paid millions to do just that.

12 Four Pillars

TML – I doubt that the unions deliberately demanded enough to kill their companies. I think there is always the assumption between two negotiating parties that whatever agreement the other side agrees to, is sustainable. In this case it wasn’t.

Don’t forget – if you want to analyze the current pension and wage situation – you would have to go back at least 50 years to piece it all together – ie look at all the various agreements. How long have foreign car companies had a major presence in the US?

And yes, you are right – the car companies are a good example of what can happen if management doesn’t fight the unions hard enough.

13 Jordan

I don’t think Honda & Toyota are “lucky” for producing cars that are more reliable, have better features, better crash test results and also happen to be more fuel efficient. It’s not just one issue, they beat Ford, GM & Chrysler ages ago when gas prices and hybrid cars weren’t the current issue.

14 Potato

I’ve got to agree 100% with the bankruptcy thing — the government bailout is not really going to improve their PR or their perceived longevity.

On hybrids though: first off, most hybrids are supply-limited, which is a very good sign. Hybrid Civics and Camrys represent about 10-15% of their sales, which is not negligible, especially if there’s any kind of halo effect (get them in to test-drive a civic hybrid, have them drive off in a gasser). So IMHO ignoring (and deriding) them was a misstep. Not enough to bring the D-3 down all by itself, granted, but a misstep.

It’s however indicative of a problem there of ignoring practicality: Ford and GM stopped making minivans some years ago, and not, AFAIK, because they were losing money on minivans, but because they could try to sell a much bigger and more expensive Expedition/Yukon to the part of the market that actually needed 7 seats. They just got into the habit of selling more metal and they cut off a lot of their flexibility.

15 Four Pillars

Jordan – my “lucky” comment referred to the fact that the the Japanese companies make smaller cars than the big 3. Good point about quality though.

Potato – I agree that the big 3 should have put some effort into fuel efficient cars but it’s a moot point right now since the top priority should be reorganizing their companies.

16 Mr. ToughMoneyLove

The foreign auto makers have been selling in the U.S. through many negotiating cycles. They have been making cars and trucks here for 10-15 years. U.S. makers have struggled to compete on labor costs so instead sacrificed on material and other quality costs.

17 Jordan

Mike – Yes your point about the small cars being a product of their local market is a good insight and I do agree. Maybe the small size is also a result of their brand’s attempt to offer better value in their vehicles by having a lower operating cost no matter what the fuel prices are at.

18 mjw2005

The Japanese sold more and are more profitable because they are better run companies….I have had American cars and I swear after 5 years they fall apart….like its designed in to make the parts departments money…..My Asian owned cars seem to last a lot longer and just feel more well put together….It was more than just dumb luck why Toyota and Honda are not facing bankruptcy….

19 nancy (aka money coach)

Damned if we do; damned if we don’t. Bear in mind that if they’re not bailed (and I hope they’re not, end of the day) dealerships in Canada will shut down too = greater unemployment = all that goes with that.

20 Peter @ Canadian Banks

Throwing good money after bad, won’t solve the problem, and these companies will be either bankrupt within a year or will require even greater bailout to keep them afloat.

21 Jose Roncal

Since the U.S. has become a Bailout Nation, why dont we just give them the $100 billion now, check it off Obamas to-do list and stop wasting time and taxpayers money on a Congress that seems to be operating without a compass. This has already dragged on too long.

In my opinion, any so-called Car Czar that can rescue these two companies with $14 billion, also wears a cape and can leap off tall buildings. This whole deal strikes me as a way to buy time. The auto industry has a long row to hoe before they reap any results, what with restructuring, slashing their work force, closing plants, dealing with UAW, etc not to mention actually producing cars that consumers want.

So what exactly is on the Car Czars to-do list? So far it sounds like hell come up with some guidelines for restructuring GM and Chrysler by the first of next year. But if the auto execs cant prove that they have a plan to reinvent themselves by Feb 15, they have to give the money back. Give me a break!

If the $14 billion is an emergency loan, its just a survival kit, so what money will be left to give back? One forecasting firm is saying that with or without the bailout, Chrysler is already a lost cause. And what restructuring plan? Didnt they already submit a plan? Furthermore, under whose leadership will these terms be set? A lame ducks or will they be enacted after Obama takes the oath?

Apparently the bill will restrict executive compensation, but why are these two CEO’s still there? I personally would have resigned a long time ago. But these poor excuses for leaders either werent paying attention to the mess they were creating, or they just didnt care. Who are they going to blame now? The reluctant consumer? Oil prices? Japanese and Korean cars? The economy? Who?

Ill tell you whos to blame. Its you, the auto industry CEOs who bear the full responsibility. You were the ones who were either too complacent or else didnt have the vision to foresee the geopolitical and economic forces that shaped competition as you continued to crank out gas-guzzling SUVs. It is you who have not mastered the core principles of leadership or even the most basic skills required to manage. Im referring to the bottom-line business basics of planning, organizing, motivating, performance management, risk management, forecasting, and so on. Its all there in Management 101!

And I also fault the boards of directors for failing in their oversight. Boards are charged with the responsibilities of setting broad policies and objectives, selecting, appointing, supporting and reviewing the performance of the chief executive, ensuring the availability of adequate financial resources, approving annual budgets, being accountable to the stakeholders for the organization’s performance.

These are standard duties for members of any corporate board, but they should be even more rigorously adhered to by high-profile publicly-traded corporations. I give these CEOs and their boards a failing grade on all points they not only failed, they failed miserably!

And whats worse, millions of people are being affected, not only throughout the Rustbelt, but millions more across America and around the globe in places like Argentina and other countries where there are manufacturing plants. You have let down all your stakeholders!

Perhaps the savior in the cape, the one they will call the Car Czar, will do a better job than the two CEOs have done. And while the czar will only be a puppet position until Obama takes the reins, Id like to suggest this as the first order of the dayfire everybody at the top of the auto industry chart who was responsible for creating so much grief.

22 John Smith

34 Billion for the car companies? Let’s see, there are about 7 million new cars sold each year in north america. We could take that money and give a rebate of $10,000 per new car sold for the next five years. I say let the market decide which brands and stlyes come out on top. With that kind of incentive the dealers would have a hey day, hell I might even look at buying my first new car. For the save the earth crowd we could tie those rebates to fuel efficiency. Instead of tilting the incentives towards SUV’s and HUMMERS why not make it cheaper for us to buy hybrids and electrics. What if it was cheaper to buy the hybrid than the V6? If the oil companies have a problem with that lets see them prop up the big three. At the end of the five years we would have stronger more inovative car companies, better fuel efficiency, and an even playing field for all. With the current bailouts we only delay the inevitable, reward the weak and pour good money into a sink hole.

23 casey

This article doesn’t state that ford didn’t take the bailout. Why pay over price for a crap car???? GM and Chrysler don’t have the best warrenty’s or the best customer service. I live in an area where cost of living is high, I don’t make nearly enough money to cover housing and cost of living but I still feel strongly about buying american even though it costs me. Ford has a decent warrenty and customer service. Not sure about GM but I KNOW chryler has let me down many times. I will stick with ford or switch to a foreign company if the other american american car companies can’t make me feel confident with the cars they build. I am not saying I have only bought american, I have had many cars in the past 20 years, Ford, Dodge, Hyuandia, VW, Ford (again), Toyota, VW (again), Mazda. Ford held strong the longest. American cars are good, last a long time (?) but not sure worth the money I have pai (VW the worst!) American cars are good just way too exspensive to buy brand new.

24 AnneHi

Something that I discovered just recently, although it occurred a few years ago:
Ford built a huge technological wonder of a car manufacturing plant in Brazil! As I said this was a few years ago. They claim how much money it really makes for them because the union is not involved! I’m just trying to do the math: taxpayers bail out Ford, finance them through troubled times, they close or layoff American businesses and workers. They invest in a country and hire workers and build a plant in Brazil, so they can make more money OUTSIDE OF THE U.S. That just doesn’t seem right?

25 AnneHi

Now, these employees who are represented by the union? There comes a point when, the best benefits of the job are worthless; if you can’t get the job!!! Ford says they would never be able to maintain that Ford plant in Brazil, if the union was involved.

26 Jordan

@AnneHi

Ford didn’t take a bailout. I think all the major car companies have plants around the world in different countries.

Leave a Comment

Current ye@r *

Previous post:

Next post: