No, for the Automotive Industry Bailout

Posted by on November 18, 2008 8:56 pm
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The G20 came and went without any solutions worth discussing, just like back in 1933. Perhaps that’s not a bad thing at all. Now we have to deal with yet another political push for doing the right thing; Bail Out Detroit. I say simply, No!

On November 12, 2008 the Charlottesville Virginia Daily Progress ran the story that House Speaker Nancy Pelosi had bought into the arguments from the big three automakers that they would run out of cash and were in desperate need of an additional $25 billion in loans to make it through or they’re going to go bankrupt.

Let me take a look at why we should do it.

First: As the article says the automotive industry, GM, Ford and Chrysler plus all their first tier suppliers, and second and third tier suppliers plus all their sub suppliers’ account for 1 in 10 jobs in America (not including the jobs in Mexico and Canada). So if they go into bankruptcy each of those jobs are in jeopardy. If that many people lose their job, then the economy must be endangered.

Second: Further if we bail out the big three with $25 billion we can own, as taxpayers through the government, a piece of the automotive industry and when it recovers like Chrysler did under Lee Iacocca we can all benefit.

Third: If we protect the automotive industry then we also protect the lenders the body shops, the car dealers, the mechanics and all those that support the sale of a car.

Let me now take a look at why we should not do it.

First: I believe this has been a distraction to the top management of the big three and that they will suffer from it. They, the top management, should be focused on how to enerate cash and turn their companies around.

Second:
If it is true that the foreign car makers in Ohio, Alabama, Louisiana, and all the other States that have foreign car makers, pay around $100.00 per car for Health and Benefits when the US automakers have a $1,700.00 cost per car, then there’s no hope that the US Automakers will ever compete in the long term.

Third:
Back in the day of Lee Iacocca’s Chrysler (very short lived) all they needed was time to introduce the minivan. They knew they had a hit on their hands (well, at least they truly thought so and history proved them right), but they did not have the money to keep the company open. The loans were paid back, and they were paid back early just to prove a point. Too bad they lost their focus so quickly and Chrysler ended up in the merger (acquisition by) Daimler-Benz, and then the final blow once the cash was sucked out of it, the buy out by the private investment firm.

Fourth:
The big three do not have any magic bullet and even though gas prices are back in Kansas City down to $1.659 today, no one is ready to go buy a big SUV today. Mix of products, and of value streams has hurt the big three. Without a plan to succeed, a loan only prolongs the death pain. What is the fix that GM will put in place? What fix have they had in place that just needs a few more months to generate enough cash to save the company? How many people will the big three have to lay off to match the lower buying? How will that be offset by the fix that they will put in place? Does anyone know? What about then for Ford and Chrysler; what are they doing?

Basically, if you show me a good business plan, then I’d vote for the loan. However, with a proven track record of failure over and over since the 1970’s with a few periods of less bumbling in between, the business plan should have had some success by now.

To GM’s credit, the VOLT is a great innovation in fuel conservation and the use of electricity to run your car. But, I must ask why did they wait so long and bypass the hybrid compact models as well as the SUV hybrids? And even if we give the money to GM because we believe that by the time the VOLT is ready, gas prices will be back around $4.00 per gallon; what about Ford and Chrysler? What do they have on the drawing board that will be in place fast enough to save them?

I opposed the bailout and now the markets, as well as the Senate as well as the House, are proving me right. It was an ill conceived plan. It was rushed and sold on panic. It was impossible to implement. It was a bad idea that is not working. If you doubt me, look at where the stock market was when it passed and where it is today. The market has rejected it.

If we now try to compound the economic debacle started by Freddie Mac and Fannie Mae, enhanced by a $700,000,000,000 bail out, with a $25,000,000,000 down payment on the acquisition of all three major automakers, we will get a further erosion of value on the DOW. Why? Because throwing good money after bad has been a bad business practice since the first business closed thousands of years ago: Let us not repeat bad history.

Let the Auto Industry figure out how to:

  1. Shed itself of dealerships that are a drain on their system.
  2. Negotiate for their very survival with the Unions and find a way to eliminate the $1,600.00 per car difference in Health Care costs.
  3. Rescue itself by innovative thinking and new cars that the world wants to buy.
  4. Focus on cost control and inventory control throughout that system (suppliers, and dealers). Too much cash tied up in parked vehicles because their lead time from order to shipment is too long to do it just in time with the customers. Think of how much cash flow they could free up from their system if they could figure out how to do that.

If the Government wants to help it should focus on:

  1. Opening trade with Japan so we can more easily sell there.
  2. Opening trade discussions with South Korea so we can more easily sell our cars there.
  3. Focus on the free trade agreements in South America that will open doors to sales there.
  4. Work with the Unions and work out a deal where the automotive industry can shed some of the burdens imposed upon it by the unions.

No to the automotive bailout is the right thing, for the right reasons, and for the long term benefit of the economy.

The Lee’s Summit Conservative

2 responses to No, for the Automotive Industry Bailout

  1. Jason November 19th, 2008 at 7:47 am

    The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

    GM bailout nonsense

  2. Emory Mayne November 19th, 2008 at 4:17 pm

    Ok Lee.

    Would you buy a Chevrolet Malibu or a Mazda 6, if the Chevy was $1700 cheaper?

    How about $2500 cheaper?

    At what price point would you buy the Malibu?

    Now do some research on re-sale for both.

    Unit cost is not, and never will be a measurement for Value. GM does not have a labor problem, they have a management problem.

    Emory