Oh, the US auto industry. Oh, GM. There are some ugly facts out there:
GM is heading for an ugly crash, and the domino effect of that – because it’s not just GM, it’s all their employees and suppliers and an entire regional economy that will be affected – an ugly crash of GM is a very bad thing for all of us.
Probably the only way for them to avoid that crash is a Chapter 11 bankruptcy, which allows them to keep operating while the mess gets sorted out. This is not the same as a liquidation, though it’s ugly; I’ve worked for a company while it went through Chapter 11 (and came out the other side of it) and it does one good thing: it allows the central business operation of the company, the actual economically productive activity at the heart of it, to continue and survive.
GM’s central business activity is a pile of crap. From Thomas Friedman, in a strongly worded piece from the New York Times:
Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?
How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.
This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being more than they really were — provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain dead.
Friedman also calls out the Michigan Congressional delegation for special blame.
And finally: GM’s chances of actually executing a Chapter 11 bankruptcy are pretty terrible. Here’s why: when a company files for Chapter 11, everything stops; they can’t even write a check to pay the light bill. What keeps them going is a financial instrument called debtor-in-possession (DIP) financing. Without a DIP loan, the bankruptcy is the end. And guess what? With the current financial crisis, the market for DIP financing is pretty horrible. Nobody wants to write DIP loans. For anybody, really. Good luck lining that up, GM.
Which is where the government comes in. And I think providing or backing up DIP financing for GM is a reasonable thing for the government to do, considering the economic chaos that would result if nobody else does it. But here’s the thing: when you have a basket case like GM, whose management has been unable to make anything work properly, this only makes sense if the first step in the bankruptcy is cleaning out the management of the company, and replacing it with people who who might actual make it a going concern again.
That could be new management. That could also come about by selling the assets to somebody who knows how to run a car company. (Toyota? Honda?)
Either way, needless to say, equity holders – that is to say, stockholders, like perhaps your 401(k) – are the big losers. GM has managed to destroy all its shareholder equity. Oops! It’s just that if the crash and burn of GM is handled properly, maybe everybody else doesn’t lose as big.
Enjoy the weekend!
{ 8 comments }
I’ve got a lot of mixed feelings here, since my livelyhood was entirely funded by my dad’s life long career at Chrysler. When looking to buy a new car in ’03, I knew I wanted a fun, small hatch-back with decent gas mileage. While I could have enjoyed a tremendous employee discount with Chrysler, their closest match for me was a PT Cruiser, and damn, that was simply too ugly. My other choices were minivans, and huge, gas guzzling SUVs and pick-up trucks. I opted for a VW GTI w/a manual transmission.
The thing is, the market was demanding these huge, gas guzzlers with hemi engines, and the big 3 were churning them out in full force – also competing with foreign companies looking to cash in on our desire for bigger horsepower, inefficient SUVs (think the V8 VW Tourag w/11 mpg). Gas prices were relatively low, so people didn’t didn’t give a hoot that their cars got about 10 mpg. Even now, I see oodles of what I call the “stay at home country club moms” driving their one or two kids around in giant Denali XLs and Expeditions. In this sense, I think the American public has to share some blame for the situation.
I really do wish the U.S automakers had paid attention to gas prices in other countries, i.e. $7/gal in England, and had the foresight to re-tool some of their European offerings to be sold here, and were faster to market with alternative fuel vehicles.
That said, we have no problem bailing out a horribly managed financial industry, we financially prop up very sketchy “democracies” around the world, and offer up huge tax incentives for foreign auto companies willing to build plants here and make it so they don’t have to deal with the UAW . It just seems to me that having a solid, U.S. owned manufacturing base is important, and that we need to dig in and help our auto industry – with big, big strings attached, of course. When Lee Iaccocca borrowed money back in the 70′s to help bail out Chrysler, that money was paid back, with interest, and our government actually made a profit on the loan.
In other thoughts, although it would be horribly unpopular here, what about a big-ass tax on gasoline that would bring us on par w/Europe? That would drive peoples’ decisions about how far a commute they’re willing to do, driving habits in general, and what kind of car they’re going to buy. US automakers would quickly follow suit.
Ok, I’m done here!
I’m just doubt that there is the political will for that, though I do not disagree with you. Propping up GM as is seems like a losing proposition. There will be major opposition to a gov’t backed Chapter 11 – generally that lets a company get out of a lot of contractual obligations (think labor contracts) and that won’t be popular. And then there’s the question of what happens to the assets at the end – what is the likelihood of US investors buying them? I would think it would be an appealing target for developing world car manufacturers, like Chery in China or Tata in India.
Meanwhile, as long as GM’s fate is up in the air, it’s another hit on their sales: apart from their US products being largely out of step with the market, who wants to buy a car when the manufacturer might not be around to support it? Which tends to accelerate the downward spiral.
I hope it doesn’t get to a chaper 11 situation, because of the reasons you stated. It would seem logical though, that if it did happen, big 3 car owners, (and I’m lumping them together because if one goes down, I see them all going down), would have some sort of protection and guarantee that their cars would be serviced under warranty. People are super skeptical these days, so I agree, it doesn’t help future sales, though, does it?
So, on a larger issue, I only have questions here: if we end up having no major US manufacturing companies, and a lot of US firms outsourcing software/hardware development, what do we have to offer to the rest of the world (besides our current ability to attack other nations)?
“Survivor?”
Web 2.0 startups?
Paris Hilton?
Perhaps the USA can no longer make automobiles cost efficiently for today’s market. If that’s the case, they deserve to go out of business. If they’ve been too saurian to adapt to the changing business environment, again, they deserve to go out of business. Subsidizing Detroit is not going to make them more competitive — quite the contrary.
While I have great sympathy for all those who will be hurt by such a catastrophe, propping up the auto industry will only delay the inevitable, making it all the more painful when it finally occurs.
Instead of trying to hang on to failing industries where we find it difficult to compete, perhaps we should be promoting new industries where we could be profoundly profitable, like, say, stem cell research, clean energies and renewable resources.
Plenty of cars are efficiently manufactured in the US, but not by the Big Three. Japanese, German and Korean companies are all making “real American” cars but typically in places where the UAW has no pull.
I’m usually pro-union, but I think the UAW and their entitlement orgy are what will kill* Detroit and not just GM. Why should I get paid $30/hr with lifetime medical benefits and pension for assembly work that requires no special skills nor an investment in education? I shouldn’t, of course.
* well, along with fuel prices that WILL go back up, crappy fat wallowing pig-wagons that nobody now wants to buy, executive idiocy and greed, and a willful ignorance of market demands and conditions. Bob Nardelli used to run Home Depot before he was fired after running them into the ground. What the hell does he know about making cars?
I support unions. Unions are not the problem. Bloated executive compensation and an inability to adapt to a changing market are at the heart of the problem.
Americans are not the only car buyers on the planet. Why aren’t we making fuel efficient, safe, inexpensive vehicles for marketplaces like Brazil, Poland, India and Ghana?
In this week’s The Economist there’s an article about just this situation and their verdict is to let the Big 3 go Chapter 11.
“Bailing out Detroit would be a bad use of public money. It would be bad in principle, because it would be an open invitation to companies everywhere to apply for aid to survive the recession. Banks qualify for help because the entire economy depends upon their services. They are vulnerable to sudden collapses in confidence that can spread to other banks that are perfectly solvent. A good car company does not face the same threat.”
Further, good times may be ahead for automakers: “America has nearly one car for every person of driving age; China has fewer than three cars for every 100 people and India fewer still. Once people have a roof over their heads, meat on the table and a good job, the next thing they want is a set of wheels. In the next 40 years, the world’s fleet of cars is expected to increase from around 700m today to nearly 3 billion.”
Hang on, Detroit.
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