My Stance on the Auto Bailout/Loan/Donation
I don’t currently work in the automotive industry, but I feel at least somewhat qualified to voice my opinion on this matter because a.) It’s my blog and I’ll write whatever I want, b.) I grew up in the Detroit area and had plenty of friends and family of friends who worked directly for the automotive companies, c.) our injection molding company was an automotive parts supplier for many years, and d.) to reiterate: it’s my blog.
The Problem
The companies Chrysler, Ford, and General Motors all say that they can’t survive the current downturn in the market without an infusion of cash. The fact that no private sector investor, or investment group has stepped up to the plate should be a big warning sign that the future doesn’t look good for U.S. automotive companies.
In November, the CEO’s from all three American companies appealed directly to congress for government assistance. Not even thinking twice about it, all three flew from Detroit to Washington D.C. on their corporate jets. While I agree that private jets have their usefulness (mainly saving time by having the ability to reach small airports in remote areas), reaching Washington isn’t one of them. The fact that neither the CEO’s themselves nor their yes-men (and yes-women) thought this was a bad idea is very telling of their mindset.
Public outrage ensued, so what was their response? To fly coach on their next visit? No, all of them decided to drive to Washington in their most “green” vehicles. In the early morning on the eve of their next visit to congress, I watched an interview with GM CEO, Rick Wagoner, as he left for Washington in his “Chevy Malibu Hybrid with OnStar technology.” He was a rolling commercial! In the passenger seat was his driver who would take over the driving duties once they were out of sight of the news cameras so Mr. Wagoner could “work on his upcoming testimony and make calls on [his] OnStar system.”
My major problem with the current proposal is that, as a conservative, I don’t favor government involvement with private companies. This violates a whole tenant of conservatism. While I do realize that currently there is plenty of government involvement with business in the form of taxation and regulation (to differing extents in different industries), this proposal (which smacks of a nationalized auto industry) is a grand step in the wrong direction. I do realize that almost 30 years ago, Chrysler received assistance in the form of public loan guarantees, but this is a completely different situation.
Additionally, the idea of the government investing in or loaning money to the auto industry opens up a whole new host of problems. Obviously if someone is passing out money, there should be some oversight (unless it’s to the financial sector, but that’s another post). This need for oversight further illuminates the problem. Congress is currently proposing the creation of a position (the “Car Czar”) to oversee the business operations of the auto companies should they receive government funds. The government hasn’t proven itself capable of managing anything, let alone a vast manufacturing operation. In the now immortal words of Ronald Reagan, “government is not the solution to our problem; government is the problem.”
Outside of my general principles about the separation of government and business, here are my main “beefs” with the American automotive industry in no particular order:
- The U.S. auto unions absolutely had a place at some point in time, but in the past 50 years they’ve gotten entirely out of hand. They’ve taken the notion of entitlement to a whole new level. They’ve continually fought automation and other improvements in manufacturing technology in favor of keeping the same amount of people “on the line.” All the time this was happening, most of their rivals were pouring billions of dollars into technology and automation and have maintained their lead on the Detroit automakers in quality. As proof that unionized labor is a problem and not American labor in general, I can point to other manufacturers in the U.S. who make quality products with American labor: BMW (South Carolina), Mercedes-Benz (Alabama), Toyota (Kentucky), and Honda (Ohio). Just a small side-note here: If you even want to hear the most hilarious “stupid things we did while at work” stories, talk to a current or former automotive assembly line worker.
- A division of our family business supplied plastic injection molded parts to the “Big 3″ for many years (and parts for the Nissan Qwest for a few of those). Mainly, we supplied different types of under-hood shrouds and shields, interior parts, and were the major supplier of HVAC blower wheels (known in the industry as “squirrel cages”). When I worked there in the 90’s I saw first-hand how they treated their suppliers.
They’re arrogant. They displayed an attitude that said we “should be happy to have any work at all” (most of our work had an 8% gross margin. After subtracting costs for inspection, scrap, tool maintenance, financial carrying cost, and overhead, our net margin fell somewhere between 0%-2%). Representatives of those companies regularly threatened to “pull the work” or “look somewhere else” if we wouldn’t “meet them” (read: capitulate) on price decreases. Their way of dealing with out-of-control health care costs, labor costs, and spending was to squeeze their suppliers for things like a 5% price reduction per year for the next 3 years (alas, now that well has run dry). As normal course of business, they would also pay their invoices far past their due dates. It was not at all abnormal for GM to pay their bills 180 days after receiving them. Ford and Chrysler were better in this respect, but not by much. - Executives of the “Big 3″ love perks and living the good life and I don’t believe that government backed loans or government investment would change that attitude. If finances are really that dire then they need to operate their companies and conduct themselves in the same manner that a small bootstrap company would: save and scrimp. This “good life” attitude is so ingrained in the culture, I have almost zero confidence that it can change.
I just read today that now Tesla, hardly credible as a high-volume auto manufacturer adversely impacted by high gas prices, is looking for a $650 million slice of the government “bailout” pie. They’ve stated that the money will be used to finance development of their new Model S for which they were unable to get private-sector funding. Where does it stop?
The Solution
Get smaller. No government funding. Some people believe that without government intervention, the U.S. auto industry will just die a quick death. This isn’t the case at all. They’ll just need to file bankruptcy and reorganize into a more efficient and sustainable organization. Whether that means a merger of one or more companies, I don’t know. Personally, I think that some of the freedoms that filing Chapter 11 could give the auto companies is attractive. Painful, but attractive in the long run. Will it be pretty? No. Necessary? Yes.
4 Flippant remarks so far
Do Your Worst
RSS
I’ll take ‘File for Bankruptcy and kill the UAW’ for 200, Alex.
First off, I’m glad to hear that you are not one of the people in this country that has a complete double standard and agreed with the the “Wall street Bailout”.
Next, I absolutely agree about the UAW, their contracts need to be re-structured if the automotive industry is to survive. I understand that you and many (including me) had issues with the poor quality control in the 80’s but, I do not agree that it continues today.
I also agree that they had an “arrogant” attitude” in the 90’s but how does that affect today? There are completely different people running them (in one case a different company all together) so what gives you the right to call this particular management team arrogant it’s now 2008?
Did you read the bill and see that they are willing to take a $1 salary a year just like the “completely different situation” Public loan guarantees? How is it so different since they are absolutely intending to pay it back like a loan?
Michigan has been in a single state recession since 2001 and needs help, if the automotive industry had asked for $34 billion before the government GAVE Wall street $300 billion maybe people wouldn’t be so “up in arms” and naive about what it really means to our country.
I’ll just address your points one-by-one:
The UAW contracts will be much easier to negotiate if the company is in Chapter 11. That affords them more leverage in dealing with labor.
Information gives me the right to call people arrogant in 2008. Having spoken to family and friends who are still involved in the auto industry, I am absolutely sure that arrogance and greed is still alive and well.
I have had quality problems with all makes of American cars since I could drive. I own a 2005 Dodge Ram and Jamey has a 2008 GMC Denali. They have been driven a combined 25,000 miles. We’ve had more problems with them than with any foreign car we’ve ever owned. We don’t even live in a harsh environment! The roads are smooth and there isn’t any snow or salt. From what I’ve heard, you’ve had your share of problems with your minivan. Are you of the opinion that foreign cars have the same problems that you’ve had? For proof that this isn’t true, consult JD Powers.
Taking a $1 salary means nothing in the grand scheme of things. It’s just a gesture. Steve Jobs makes $1 in salary. Apple gave him a Gulfstream jet as a bonus once, but he still makes only $1 in salary. The $1 salary is a red herring.
I’d need to make another whole blog post to explain how the industry and Chrysler was different in 1979 compared to today. If nobody in the private sector is willing to loan money to the Big 3, that means there isn’t much confidence that they’ll ever be able to pay it back. So it’s a “loan.”
Michigan has been in a recession since 2001 which also coincides with the Governor raising corporate taxes. Also, who in their right mind would move their business to Michigan when taxes are high, labor is expensive, and you’re likely to be unionized? The Big 3 and Big Labor got themselves into this together, now it’s up to them to extricate themselves. Tax money is my dime and I should have a choice.
Nobody would agree more than me that the US automakers are not competitive, and haven’t been for a long time. For the past 20 years, it would have been totally appropriate to stand in judgment of the automakers and blame all of their problems on themselves.
However, I think the situation today is very different. For starters, the big 3 have made massive changes in the past 7 years — reducing white collar staff by close to 50%, cutting expenses, and basically being on austerity measures the last year (particularly in the case of Ford). There is no comparison between the automakers of 7 years ago and the automakers of today. Again, I am not saying that they have become competitive — they haven’t. But at least Ford and Chrysler have made serious improvements (and even GM cut 50% of white collar staff in the last 7 years).
But the real reason I hesitate to judge too quickly, is because *nobody* could have prepared for the current economic meltdown, and you cannot blame GM and Ford for not forseeing that the U.S. government would engage in absolutely suicidal economic policies. I got out of the stock market entirely back in November 2007, based on warnings from several bankers — but the point is that even those who saw this coming, *never* in their wildest dreams would have bet on it being as dire as it is. Mercedes and Toyota are paying the U.S. ports to store cars, because the demand ground to a halt so abruptly that the cars on ships in transit to the U.S. arrived to find no buyers.
I am 100% in agreement with you that a “bailout” is doomed to failure. Same for the bailout of the bankers. But my point is that I cannot really convince myself that this is GM’s fault. And more importantly, this is just the tip of the iceberg. The entire newspaper industry is going bankrupt. And that, too, is the tip of the iceberg. There will be many more industries that are ravaged — industries that scrimped, acted like startups, and were relatively blameless. This economic situation is a tidal wave that is wiping out good and bad alike.
And IMO, the fact that the automakers still cannot compete with Japan and Korea on quality, price, etc., is a bit of a red herring. You could say the same about practically every American industry. Biotech, Pharma, Software — foreign companies have made massive strides while American companies were shielded from competitive pressures by gorging on the artificially induced bubbles and insane deficits. We have become increasingly less competitive in every industry across the spectrum, while other nations have become more competitive. The magnitude of this is roughly measured by the national debt, and this imbalance will be redressed.
So my take is that the entire American economy is in for a decade of austerity and unprecendented scrimping, and the auto companies are ironically the only industry that has had some practice at this in the past 7 years.