Big Three Bailout?
I know, I know, the issue of a bailout for the Big Three Automakers isn’t specifically a PC topic, but, after all, we all drive cars and pay taxes, so it does affect us.
So, let’s get your opinions and the reasons for them. As for me, this puts me at odds with many Democratic lawmakers (not all), but I am leaning against any bailout. It’s not that I don’t believe the dire warnings of economic disaster if one or all of them fail, it’s just that I don’t see them as salvageable, at least Chrysler and GM. I would like to see at least one make it, probably Ford.
But, I remain persuadable.
14 Comments to “Big Three Bailout?”
Leave a Reply
I think that we shouldn’t just hand money out. This isn’t exactly like the banking industry, where a bankruptcy would likely cause a run on all the banks after triggering some pretty serious panicking.
Perhaps requiring a serious restructuring plan - the kind you’d have to concoct for bankruptcy - would improve the way the big three operate, as well as streamline them. Handing them money doesn’t solve the underlying problem.
I am for a bailout, preferably in the form a bridge loan. I also want to keep the existing management, they are doing the best anyone could do under the circumstances. We must also tweak the CAFE fuel economy requirements, and have some federal legislation that prevents individual states from setting their own emissions requirements - building cars to these artifically imposed requirements means building cars to some standard other than market demand = less profit.
I speak mainly of GM becasue I am most familiar with their situation. They are not the big dumb oaf building cars the people don’t want that many of the talking heads with little auto industry knowledge seem to think they are. Yes, they have a lot of SUVs, and own Hummer. But they also offer more cars that get over 30mpg than any other automaker. They are right in the middle of a 10 year revamp of product and operations, led by Rick Wagoner and Bob Lutz. Every new vehicle introduced in the past 5 years has been very competitive - higlights include the Malibu, Cadillac CTS, and the current Tahoe (70% of the large SUV market). They’re exploring several different alternative propulsion sources, and have put several in production already. And they have made great strides to reduce UAW legacy costs.
However, all this revamping burns cash for a while before it produces a return to great profitability. Unfortunately, a larger than expected downturn in car sales has hit in the middle of this process. It isn’t due to business decisions made by the current managment of the big 3, it is an industry wide phenomenon. Everyone’s sales are down 30 to 45%. This is an important industry that contributes greatly to our national pride and our economy. If even one fails, the supply chain will come down with it, and it will not be pretty. We loaned 700 billion to some folks on Wall Street, we can loan Detriot a paltry by comparison $25 billion.
I am against any bailout. I can be persuaded to support Mitt Romney’s proposed solution outlined in two days ago in the New York Times - “A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.”
As far JG’s remarks on keeping existing management, see Wagoner’s comment, “I have a significant amount of General Motors stock, including a lot which I’ve bought myself, which basically is valueless.” A resounding testament of his 8 years of leadership at GM.
Charles, a lot of inside commentary about the auto industry can be found here, http://www.thetruthaboutcars.com.
And oh, my business is down 55%. Where is my free,er, I mean bailout cash? I got pride too!
While they may have a large portion of the SUV market the question is how viable is the SUV market? Not very (our beloved state aside). US Gypsum has a large portion of the outstanding asbestos market but i don’t think anyone would say that continues to be viable. Just like that damn lead paint company i started last year.
But the singular problem with US auto is the UAW. The average hourly worker at GM makes just shy of $80/hr with benefits factored in…compared to Toyota’s US workers which are in the $50/hr range. Those costs for GM add $1500 to the average px of every car…cars which already lag behind the foreign makers in both quality and global demand. The UAW has a program with GM that ensures “close” to full pay for fired workers UNTIL THEY FIND A NEW JOB (per the nytimes this week). While preferable, i realize completely destroying the union is impossible but until they can pull the reigns in on those costs they simply do not have a competent business model. Let them restructure in bankruptcy then we can talk about some form of assistance, but this “well no, we don’t have a plan…but we’re GM!” argument is complete nonsense.
A $10b loan to GM today would be gone by February…band aids are no longer sufficient…amputation is needed.
The UAW is a problem. Many current workers have very pricey pay/benefit/golden parachute packages, and there is a large burden of former workers’ healthcare and retirement costs. The deal struck with the UAW (by the current management, includign Rick Wagoner) a few years ago to shift many of these costs was a big step in the right direction, but the problem is mutifaceted and there is more to be done. Certainly it needs to be futher addressed.
I was hesitant to even note the Tahoe, for the reason that everyone homes in on the large SUV, and the idea that its time has passed. That is true, large SUVs will no longer dominate the market. But there is still a smarket for them, and they are still very profitable. The fact remains that having the best vehicle in this market segment is a positive for GM. Particuarly since they have done it while shifting resources and company emphasis to crossovers (GMC Acadia/Buick Enclave, Saturn Vue), midsized( cars Saturn Aura, Chevrolet Malibu), and small cars (next year’s Chevrolet Cruze). There is also a great deal of work on alternative fuels, and maximizing the mpg of the current gasoline engines, the some of the results of which are already in showrooms.
It is the renewed focus on things other than large SUVs and trucks that will bring future profitablity, but ideally, you need to do it as GM has done it - while maintaining your superiority in the SUV and truck market.
Romney is right about the need for restructuring, I just think he’s wrong in the way to go about it. It doesn’t look like a Chapter 11 will work, because there is no place to get the debtor in possession financing. I also think Mitt is wrong in his opinions about the product. The product at GM is competitive, and has been getting better every year.
I knew there would be some expertise on this subject from our readers, and I was right. Keep the comments flowing, as this has already been helpful.
While a Chapter 11 initially makes sense to me, I, too, am concerned that the DIP financing won’t appear. Of course, the government could step in at that point to provide it, I suppose.
It’s a funny thing about American cars. I have rented many of them when traveling, and it is true that their quality seems competitive with foreign cars. Yet, when it comes time to buy a car, I always opt for the foreign model.
Partly I think this is because of reputation and perception, which take so many years to change.
I think that would be the best case scenario, Charles. Yes, people would lose their jobs, but in the long run, I believe the industry could emerge even stronger. It’s happened to plenty of companies before.
I think I lean more toward Chapter 11, with the government providing the DIP.
UAW Chief on CNBC right now…sounds like he just wandered out of the woods from one of his many breaks. Definitely not helping their cause by speaking.
Say what you will (and i’ve said plenty) about Mexican labor in Texas but at least they work hard without the sense of entitlement of these factory goons.
I note that the House Democrats just elected Henry Waxman to replace John Dingell as chairman of the House Energy and Commerce Committee. That strikes me as a big deal and a blow to the influence of the auto makers in Congress. Dingell has been a staunch defender of the Big Three for years.
By defeating measures to increase fuel efficiency, however, Dingell may have done far more harm than good to the auto makers.
Charles, I’m with you on “no bailout”, but not with you on the quality of American cars. Maybe you’re referring to the mechanics, and I’m no judge of that. But when it comes to aesthetics, American cars are inferior to foreign models. And the colors that American cars are offered in are limited to the same-o-same-o-YUCK-bore-me-stiff.
OK…just call me shallow.
Charles, you have hit two very good points.
1) If the feds don’t provide assitance now, they may end up providing assitance later in the form of debtor in possession financing. I think the cash outlay will be similar, but the economic pain will be greater if GM ends up in bankruptcy, because of the impact on all their suppliers. Given similar $ costs, pick the option with less economic downside - assitance now, with the goal of preventing bankruptcy.
2) Overcoming the public perception does take many years of building quality products, and that is one of the things that GM and Ford and Chrysler are dilligently working on. I think GM is furthest along in this aread, Ford 2nd and Chrysler 3rd. Yes, it’s true that an 86 Oldsmobile Cutlass Supreme Sedan really couldn’t hold a candle to an 86 Nissan Maxima. The products are right there with the imports now, and in several cases, they are exceeding the imports. Now it’s a question of continuing to offer quality, competitive cars, and marketing them correctly. They have a foothold with the trucks and SUVs (think how many people you know with a Yukon on one side of the garage and an imported sedan on the other) which they should be able to translate to cars.
Since you mention rental cars, I’d like to point out one area where GM (and Ford and Chrysler) have made a wise decision to lose market share. They are have greatly reduced their fleet sales to rental companies. Not only are these sales less profitable, they can dilute a car’s reputation and resale value - many people don’t want to own something they think of as “just a rental car.” You lose some market share, but what you gain is much more valuable.
I like the idea of a prepackaged bankruptcy with the US government providing the DIP financing if none arises from the free market. Pay the key suppliers in full, but use the filing to flush the labor contracts, entitlements, etc. But the bailout must fully dilute (to basically zero) the current equity and unsecured debt. Give the US government “investment” a chance for profit in proportion to the risk it is taking! A handout is just pizzing into the ocean.
Instead of a bailout, why don’t we get them to sell their private planes on E-bay (like Governor Palin)?? GM has about 8, that’s about $250 million and by the time you add the other two automakers…I’m sure we can get close to $1 billion. What is wrong with these men? They show up in their private planes and ask for $50 billion and don’t even know if that’s enough for them. It’s like going to an interview and not preparing for it!
The airplane issue is a sensationalized distraction that plays well in the media but is not related to any real issue.
They already own the planes and already pay the pilots. Each CEO’s board of directors requires travel in this manner for security reasons - both personal safety and trade secrets. To my knowledge every Fortune 500 company’s board requires this of their CEO.
Then you have the time issue. Especially in a time of crisis, the best way to provide value to shareholders and other stakeholders in the company is to maximize the amount of time the company decision makers can spend working for the company. Reducing travel times is an important way to do this. GM is a large global operation, and corporate jets are likely the most efficient way to shuttle management between its far flung outposts. If you’re trying to get to save the company, why not take the fastest route to D.C?
In the face of the many valid business reasons for keeping a few corporate jets on hand, if you still wanted to sell the planes, you aren’t going to get top dollar for them in the current market.