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.

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