Long story short?
photo credit: Mike Licht, NotionsCapital.com
Yes, bail them out.
One can’t have a conversation about bailing out the automobile industry without examining the cost of NOT bailing out the auto industry. Clusterstock links to a John Maudlin newsletter, excerpted below:
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of “millions” of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)
All told, a partial bailout of $25B is slightly more than 10% of the anticipated fallout of the failure of GM.
There are several parties who share some portion of the blame. Executive management often made wrong headed decisions throughout the last half century, from ignoring Demming’s push towards quality, underestimated the competency of the Japanese (who did listen to Demming), to making bloated land yachts through through the late-sixties, to the horrible technological compromises of the 1970s in reaction to the fuel embargo, to badge engineering in the 1980s. The 1990s brought gradual improvements, and now, some of the GM portfolio are worthy of standing alongside with their competitors. They have largely attoned for the product sins of the past.
The existing (and almost extinct) business model of the domestics has been that of volume and not profit. As the big three found themselves shedding market share, particularly to Honda and Toyota, they became increasingly dependent on both leasing and fleet sales – both of which have the short-term effect of driving sales, but also have a negative systemic effect of flooding the market with used cars, which in turn drives down the residual value, which devalues their product and makes it increasingly difficult to continue leasing.
Unions are the next to be heaped with scorn, largely from the starched pundits and the white collar world, as well as free-market zealots. One cannot criticize the union for trying to hold on to whatever they have, especially within the context of our current economy. At the same time, many current union members as well as retirees would agree that the benefits paid to retirees and their families are quite generous. The cost of unionization effects the cost of the vehicles produced, but the UAW doesn’t not design, market, or sell cars. The union does effect quality and cost, but no more. Further, the union know what the costs are, and have and will continue to make whatever sacrifice is necessary. The union realizes that manufacturers are victims of the current economy, and not solely to blame for the industry’s woes. There is an anti-union atmosphere in the United States, especially among the elite. Witness what is omitted from this AP article, as highlighted by Emptywheel at FDL:
In its contract last year, the UAW made painful concessions, adopting a two-tier wage structure, such that new employees make just $12 to $15 an hour. The move is projected to bring the American manufacturers in line with their Japanese rivals’ non-union labor costs in the near future.
In addition, the union has taken responsibility for providing retiree healthcare, thereby eliminating one of the last remaining competitive disadvantages for the American manufacturers’ unionized workforce as compared to their Japanese rivals.
With these agreements, the UAW has managed to save jobs, while still providing the superior labor force that leads most segments (big PDF, see page 10-11) in terms of the most efficient plants measured in hours per vehicle.
The UAW’s workers have made deep concessions to ensure American-owned auto industry remains competitive with its foreign competitors. Now that the American-owned manufacturers have eliminated some of the structural disadvantages that gave foreign competitors a market advantage, it would be a terrible waste for its country not to do what’s necessary to sustain American manufacturing though this tough financial period.
Post-9/11, with extremely low-interest rates (to 0%) and thousands of dollars of rebates as well as pull-ahead leasing programs, sucked business forward from the future, depriving them of future sales. At the time, post 9/11, the industry was in a position to absorb those costs, realizing that in a volume manufacturing business, stopping sales would not be sustainable. After incentivizing sales, they enjoyed some record months. But that too, was not sustainable.
When comparing domestically produced autos to the imports, we tend to focus on the differences in quality and cost of labor – certainly no small factors. But there are also systemic trade advantages that the Japanese have enjoyed – with Honda and Toyota enjoying a several-thousand dollar advantage per vehicle. Also, the more-strictly regulated selling environment and higher-taxed gasoline in Asian and European markets enforce efficiency, while (until recently) cheap gasoline and a preference for large and powerfull cars has pushed our marketplace in the opposite direction.
Fast-forward to the present. Rebates are smaller. Margins are squeezed. Costs are up across the board. Leasing is off the table, as their financing arms are unable to get residual insurance to guarantee post -ease auction prices. The financial outlook for the immediate future is exceedingly grim. Most importantly, consumer confidence is slumping at extreme levels. The American consumer, especially those who can buy, are increasing waiting it out. As I have been shopping for a new minivan, I’ve encountered stories. The dealership I formerly worked out, accustomed to 75 or so vehicles per month, delivered 19. Another dealership had 3 customers in a week. With very little effort, I negotiated a dealer down 30% on a minivan (which we didn’t buy, choosing to extend our current lease on a month-per-month basis), and a friend negotiated a $31,000 Dodge Grand Caravan down to $21,000. The cost-to-dealer on said van was $26,000.
It’s on this last anecdote that the story hangs. Manufacturers make money selling cars and trucks to dealers, who in turn sell them to consumers. The dealers carry the costs of running their franchise, delivering and servicing those cars, as well as advertising in local and regional markets (while the manufacturer does the same in national and mass-market advertising). The dealer’s business is heavily dependent on credit – both in terms of their own access to credit for capital improvements, working through the winter months, and financing their inventory (called floorplan), as well as credit made available to consumers, which has since dried up, or become increasingly expensive as risk is being more appropriately evaluated. It’s these factors that are hurting the manufacturers. They are starving for cash flow. We are entering another consequtive months of declining sales. Dealers either can’t or won’t acquire new inventory, and they cannot sell the inventory they already have. Without the ability to continue production and generate cash flow, the domestic manufacturers have had to burn through their capital reserves. Those reserves are about to run out.
It is also worthwhile to point out that this trend is also effecting non-American, non-unionized automobile manufacturers. Toyota, Honda, and Mercedes have all scaled back operations. To view the current situation solely as effecting the domestics, and as such their thought, is naive and self-serving.
Who exactly are we punishing in denying relief to industry? They have made sufficient contrition for a slew of inadequate vehicles such as the Pacer, the Gremlin, the Pinto, the Chevette, the K-Kar, and the Aztec. They have shuttered factories, eliminated models and divisions, and played hardball with labor and suppliers. They’ve slaughtered trucks and cash cows alike. They are aware of what the future will require, and will make the changes they know will have to be made. GM has entertained purchasing Chrysler, and euthanizing their entire lineup with exception of the minivans and pickup trucks. The entirety of the industry has divested non-core business these past few years. They know the future may not include Lincoln, Mercury, Hummer, Buick, Pontiac, Saturn, or Saab. Ford has sold off Volvo and Jaguar – this map is already inadequate, and will be more so in the future. Dealer networks are expected to shrink, mostly through attrition. Tough decisions have an will continue to be made, with pain being felt across the board.
If we bail out the airlines because travel is essential for commerce, and the finance industry because credit is essential for commerce, should we not bailout the automobile industry simply becuase one of the constituencies are unionized labor, which in turn benefits the Democrats? Are we willing to torpedo the economy as well as an American institution, simply for ideological and partisan purposes? Surely we’ve all seen Roger & Me. Do we all want to be Flint, MI, when GM files for bankruptcy, and GM’s domestic production is outsourced to China?
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- A Bailout for Me, But Not for Thee.
- For one GM dealer, the inevitable could no longer be delayed
- ResourceShelf’s DocuTicker: 2005 Beer Industry Economic Impact
- What does the future hold for the domestic automobile industry?
- Boing Boing: Computer industry to entertainment industry: we lied (right on!)
Tags: Automobiles, bailout, Buick, chevrolet, chrysler, dodge, economy, ford, General Motors, GMC, Hummer, Lincoln, Mercury, Pontiac, Saab, Saturn
Why don’t we use the bail out money to help the automakers make the public transportation we need instead of promoting adding more automobiles to the congested roads we have?
By the way this also would help to balance the huge trade deficit, improve the air we breathe and give us more time to be with our families instead of being stuck in traffic.
Thank you for that comment – you’ve just inspired a post.