It is kinda sad that the industry in USA is now so dependent on the tax payer largesse. It is sadder still to note that the congress is completely clueless as to the right way of deploying the tax payer capital. We, the private citizens, should expect and demand more from our elected representatives.
Bailing out Autos
The democratic congress is pushing to bailout GM and other autos. Many talking heads and pundits are calling for a bailout for the car companies as a way of saving jobs. Am I the only person around who thinks this is a singularly bad idea?
The Real Problem
I have spent my pre-entrepreunarial career working at and strategic consulting for auto companies (all three of the big three). It is not true that these companies do not know that they need to restructure, and that they need to bring out better designs at prices that are attractive to the consumers. It is not true that these companies are not aware of their dwindling market share, or their antiquated production systems, or the quality problems in their vehicles. They have been trying their best to address these issues in the last 10 years with varying degrees of success.
But their hands are tied.
Case in point: GM is unable to shift production to Mexico. GM is unable to shift procurement of certain parts from Delphi to another vendor despite a Delphi part costing more, technologically behind, and of bad quality. Infact, even when GM agrees to continue to buy from Delphi, they are unable to implement a design change in the parts
Or the fact that Ford was required to hire back any Visteon employee who was laid off
Or the fact that some of the best ideas in these companies are shot down because it affects the relationship with the unions, or that some executive somewhere overrides a change in vendors because he knows the incombent vendor on a personal level
Or the fact that many many employees have gotten used to 2 hour lunch breaks and frankly the management cannot do anything about it and that most of these hourly employees are being paid 3-4 times the minimum wage for what is essentially unskilled or semi-skilled jobs
Or the fact that there is an alarmingly large turnover rate amongst the engineers and designers, some of the brightest and best hires, due to the fact that they constantly see their best ideas shot down meaning Ford has to constantly relearn how to eliminate squeaks and rattles (folks, this is not rocket science)
Or the stifling bureaucracy
Or the mindless narrow focus on cutting material costs at all cost resulting in the consumers getting turned off when they look at the cheap plastic that pretends to be the dashboard
Ladies and Gentlemen, the problems of the big 3 boil down to two things:
1. The lack of flexibility and resultant high cost of change due to the existing power of the unions and the contracts negotiated with the unions, and
2. Unsustainable cost structure due to high labor costs and legacy costs (retiree benefits and pension)
And unless these two issues are tackled, no amount of bailout is going to improve the US automotive industry
Taxpayer help may be necessary, but it needs to be accompanied by and be contingent on, a. Cancelling all the union contracts and disbanding of the unions, and, b. Fresh ideas on how to restructure the legacy costs. If these two things are accomplished, then the management will have the flexibility to implement their turnaround plans. Absence of any actions on these two fronts, the bailout will only buy these companies some time and they will be back with the begging bowl sometime in the future. The problem of moral hazard is real. The fact that Chrysler was bailed out once served to instill confidence in the unions that these companies are too big to fail and the government will step in whenever it becomes necessary. And the results are now for all to see.
I firmly believe that the bankruptcy of one of the big three automakers is the only way forward. Under the protection of the bankruptcy court, the automakers can finally take tough steps to confront the unions and nullify the contracts. Under the protection of the bankruptcy court, the automakers can finally take tough steps to restructure their business model. And for the record, bankruptcy does not mean complete liquidation. In fact, that may be the best option to preserve as many jobs as possible and create jobs in the future as the industry comes out stronger when they emerge from the bankruptcy process
Many jobs are going to be lost in any conceivable action that the government chooses to take. Why not take the path that has a chance of ensuring a stronger viable US automotive industry in the future!
As for the argument of no one will buy a car from the company that is under banruptcy protection: Well, people are willing to trust their lives flying on bankrupt airlines despite not knowing whether the company is able to keep up regular maintenance of the aircrafts. And warranties on autos can be purchased from third parties. Now may be the best time to restructure the industry as even the foreign competition is suffering from sales declines.
AIG Junkets
Here is a story about the most recent AIG sales/training event that the congress is so affronted by that they are demanding the CEO to step down. While avoiding excesses is important, do we as a taxpayer really think that shutting off AIG’s chances of selling new insurance policies is the best way to get our money back? I watched congressman Cummings on CNBC this morning and he was asked if he wants AIG to stop training its agents so they can sell more policies and whether he thinks this is the best for the tax payers. He had no answer to this question.
Why do we elect such clueless people to represent us in the Congress?
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I believe one of the reasons GM asked for so much money was to pay off people they need to lay off. The reason it’s so high? Unions. Unions have their place in some industries but in others they are outdated and seem to provide more benefits to workers than they do to the companies. I agree that something must be done with union contracts.
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@FFB, here is the quandry. One of the key democratic platforms for this years elections was strengthening the unions. That of course is precisely what is wrong in the automotive industry and is a problem that needs to be tackled. I am afraid that a bailout will be passed and nothing will be done about the union problems and that the problem will become worse in the years to come. In short, a large chunk of the taxpayer’s money is about to be flushed down the toilet
Great insight you’ve provided here. Nice work. Didn’t know much of this.
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Excellent content…keep up the good work!
Great post. Damned fine post, in fact. The problem here, is this — you’re not going to have the current bunch in Washington ever allow one of these companies to get to the bankruptcy court. Such an action would undercut the power of the unions and they know it.
Interestingly, you’ll hear no talk about dismantling unions in this atmosphere in which the government is allegedly embracing “change.” Unions, frankly, are obsolete and some changes do need to be made in that regard.
Unions were altogether too successful. The abuses which gave birth to them have been legislated out of existence. The only thing they can do now is howl for more money for their members.
Ironically, such a radical change is not one the Democrats are willing to embrace.
Sad.
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Excellent article. If the auto industry is deprived of the flexibility to become more nimble against its foreign competitors, then taxpayers’ money is their only lifeline. In the old days, “what is good for GM is good for America”… but times have changed.
The $65 per hour wage for auto workers is going to be maintained by those who are earning much less. Is it fair to burden the mass public to ensure the inefficient rice-bowl of a select few (even though the few is a substantial population)?
Reality is harsh but by adapting, America will emerge with a fitter automotive industry.
Jeflin
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@Hawg, I am flattered with the writeup on your blog. Thanks! And I agree, the current crop is lame duck and the new crop is union-fed, unlikely to bite the hands that feed them. Hope to see good sense prevail but I am not expecting it.
@Jeflin, I would think that in times as desperate as these, the big-3 will have all the leverage in the world over the unions. I mean, what else do they have left to lose? But the management of the big-3 appear to be strangely incompetent as well.
A plan for Detroit. GM, Ford, and Chrysler want taxpayer-funded bailouts.
Here is my solution:
Plan A:
Both labor and management take an immediate identical pay cut of 10% or 15% or whatever it takes to turn a profit. If Plan A is unacceptable to GM employees,
Plan B:
GM, Ford, and Chrylser go to DC and ask for taxpayer-funded bailout.
President answers, If you want taxpayers’ money, sell them a damned car. If GM, Ford, and Chrysler are unable to do that.
Plan C:
If you refuse to cut your pay and you cannot sell the taxpayers enough cars, drop dead. We’ll all drive made-in-the-U.S.A. foreign cars. Most of us already do.
Auto workers who want to stay in the car business should move to the right-to-work states. Oh, and with regard to your UAW union card, leave home without it.
Its nice to get an inside view of the situation. You seem to be suggesting that these companies are sinking under their own weight and there are no “feasible” solutions? The ones you mention seem impossible to implement.
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This was a wonderful post. I’m with you as an American who thinks that it’s just best to leave all of the auto industry alone. I have a strong view that supports the thought that the market will correct itself. I think the market would have corrected itself without the seemingly failed mortgage bailout as well. We called our public officials as much as we could to voice our opinions, but could never even get through.
They shouldn’t bail them out, the companies have a job to do, not only for themselves but for their stock and stake holders.
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Bailing out the auto industry is no different than welfare, although just allowing GM to handle the distribution and take a sizable chunk out of it for themselves. Can you imagine a year from now when we’re still sinking billions of dollars into this welfare program and the government tells us we have to pay an auto tax on cars not manufactured by the big three? That’s protectionism. With little other incentive to purchase inferior automobiles, they will have to do something to help the industry support itself again. Get ready.
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I wish that the new government makes the situation better
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Excellent post! Why aren’t you running for office?
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@PaulsHealthBlog, excellent way of outlining the foolishness in bailing out these companies
@lvs, these are desperate times for these companies and the question is whether they want to do the impossible or just curl up and die.If these companies indeed exist to maximize value for all stakeholders, they should stop pandering to only one stakeholder, their unions. If they don’t than there is no return to a taxpayer investment in a bailout
@Mommie, yep, one year of bailout orgy and our children will end up paying for this for many many years to come. BTW, it is now official that we have been in recession for last one year
@Paul@TechByPC, I have thought about similar things. There is nothing that the government can do to force people to buy Big 3 cars. if they give a tax credit to buy a vehicle, most people will probably go and buy the Toyota or Honda that they were planning to buy anyway. They can not tie tax credits to domestic content in the vehicle as many foreign label cars have as much if not more domestic content in the vehicles as the Big 3 cars. Heck, did you know that Chrysler was planning to import Chinese made Chery cars to US and sell them as Dodge cars. Not components or parts, the whole damn car link. If they do find ways of subsidizing Big 3 cars to the consumers, it will probably end up being a big WTO issue. Besides, it is like asking the government to favor big 3 american jobs over an american job created by Toyota or Honda
@Christmas Budget, things will improve in the new administration in the overall economy, although not because anything that the new government will do. Things will just improve as the market will finish correcting and capitalism will assert itself as primarily a growth engine. The new government though has an excellent opportunity to NOT MEDDLE although I really doubt if they are upto it.
@pam, thanks for the compliment! Running for the office requires a certain thickness of the hide which I do not think I possess yet
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Hello, these inside information seems plausible to me. They should impose conditions on giving the taxpayer’s money., in order to get it back sometime in the future.
On the other hand, UK has no automobile industry any more but they do drive cars. Maybe the american consument and the environment would benefit from a change by getting cars, with better quality, less fuel consumption and more ecological standards….
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I did hear just a little of the hearings held today right before I went to sleep. I do not know what the union leader said or contributed but he was there and I guess the union is willing now to make some concessions. At least I hope so.
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I agree with you they should not have given the bailout!
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Nice post. Thank you for the info. Keep it up.
Although my dad would be rolling in his grave for me saying it (he was a lifelong Ford worker), the last thing the big 3 needs is a bailout. Bankruptcy would not be the worst thing for the automakers; they then could redo labor contracts and get rid of the unions’ stranglehold on them. I understand why the government is bailing out the banks and automakers, as they don’t want a bigger recession. However, this is just going to lead to a much larger burst of the financial bubble down the road I’m afraid.
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The substance of the article is strong. Why should a common taxpayer be burdened for the loss of a private enterprise – will never have an easy answer. And more so the resultant situation is due to various business decision factors as mentioned in the article i.e. Mexico, Delphi, flexibility, etc. But the enterprises in question are operating in such a large scale that can hardly be ignored. Their activities influence the entire industry and a substantial chunk of population. The bail out necessitated as Fed is attempting to revive all the sectors to bring back the consumer confidence. Since the banking sector received favors from the Fed, so Auto sector do not want left behind.
Lou
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I have obviously discovered this blog post late, but I guess better late than never! Since Nov 2008, the auto bailout is well in place even though it makes no sense as you point out. I supply parts to the auto industry and let me tell you the pricing pressure on us small suppliers is so severe that it burns me to see these unskilled union workers being paid so much and that now that they are in trouble, I need to give them more of my money so they can continue to beat me up on price even more. Sometimes I wonder if it is all even worth the hassle. Thank you — you have written a great article.