Bailout Dilemma: Why Reward General Motors For Lousy Managers & Products?

I've been pondering the same thing. It seems axiomatic that any bailout package should be tied to direct spending in R & D for smaller, hybrid, and cleaner cars. But just handing over money to pay the bills without demanding competitiveness sounds like...well, a handout.

The Big 3 are losing their shirts because they were developing 3 different kinds of Hummers while Toyota was figuring out how to make hybrid affordable. And with the recent (temporary) drop in oil prices, I'm afraid the Big 3 are still holding onto hope that people will start buying SUVs again.

www.internationalpoliticalwill.com

The big three and their unions made the assumption back in the 1950's and 1960's that their current short term operating environment would continue forever. thus they made long term commitments based upon short term conditions. The Big Three developed in a culture that they did not have to save for tomorrow because growth would always occur and costs could always be passed onto the consumer. Thus, they did not invest in new development, the unions openly opposed qulaity improvements, and the companies promised great benefits to the unions to be paid out of future revenue growth instead of funded by setting aside current revenue.

Of course, the Democratic Party is its rush to receive more campaign contributions and to create more automatic Democratic voters has proposed giving all large businesses the same level of labor troubles that the car companies currently operate under. Of course in the rush to use card check to unionize Wal-Mart and hospitals will probably end up killing what ever is left of manufacturing in the U.S.

Shaun, I don't know if you've been following my commentary on the automobile industry, a fairly frequent topic at my place. My most recent post on the subject is here.

The situation that the Detroit automakers find themselves in is precisely the sort for which Chapter 11 bankruptcy was designed as the solution. They're burdened with 30 years of bad management decision-making that's got to be undone. A government-backed loan can't do that for them and corporate culture won't allow them to do it. The courts can do it for them. It's the best solution.

Auto manufacturing in the 50s and 60s was chugging along just fine thanks. The big 3 even made some pretty nice autos during for that environment, but as others have observed, they never changed with the times. By the 70s it became obvious a new vision was called for and here it is over 30 years later and all they've done is make bloated, guzzling vehicles for consumers who were as clueless as the manufacturers themselves. I have serious doubts about the wisdom of "bailing" these folks out, but if they are going to be given a large chunk of change then there should be stringent conditions attached - as WilRobinson mentioned. Heck, maybe Dave's solution is the right one.

Shaun -

Breaking up GM would probably be the best for them. That way the brands that deserve to succeed will (and will attract capital), and those that don't die a deserving death.

Ford is slightly different. By most measures, they have truly turned around their long-standing quality issues, and are actually making good cars again. But it takes time for those perceptions to change in the general public's mind, and maybe that time is just not there for them.

And it is time for Chrysler to go to the way of so many other failed companies, car manufacturer or not. I mean, if you continually make a crappy product for decades, why should you be saved?

The final issue is that the as some predicted, now that the government has gotten involved in direct bailouts for the financial industry, every company and their brother is coming hat-in-hand. Obviously, every industry and company that is in dire financial straights at this time cannot be bailed out. The line needs to be drawn somewhere, and fast, and this seems like as good a place as any.

As always,
your personal troll

Please mention the American consumer who buy Hummers big SUV's with temperature controlled cup holders, This demand for SUV's fueled near record profits at the Big Three just over 5 years ago. Why suburban soccer moms needed a Hummer to drive to Starbucks at the local strip mall instead of in a Smart car Plymouth Omni is just as big of a problem. Even the Japanese are building US SUV's and monster pickups, so blame the US consumer with equal effort.

In support of AustinRoth's comment above, Ford's quality is just fine and the company is quite healthy in Europe. North American sales have been in the dumps for a while now. It does need to get some of its European products over here. I presume the reason it doesn't has to do with intra-company politics and the UAW.

The credit crunch is a major problem for all manufacturers that sell through dealers in the United States which is, basically, everybody who sells here. Dealers are highly leveraged and are having problems getting the financing to buy new product, going belly-up, and as a consequence of the agreements they have with their auto company patrons, the auto companies are being forced to re-stock unsold vehicles. I think there's quite a bit of strategic bankruptcy going on.

Dave:

Quality is no longer an issue with the Big Three, but Ford does not get a pass because it is selling slews of cars in Europe. As it is, GM is doing great in China.

Ford has only been slightly faster than GM and Chrysler to face reality and all you need to do to confirm that is walk into one of its dealers and look a largely ossified product line.

Shaun -

I forgot to add, that Buick in your picture would be a great project car! Even as old and unkempt as it is, no rust-through, and all that beautiful chrome. It may be a dinosaur, but it is a potentially gorgeous dinosaur.

As always,
your personal troll

I'm going to look like a dinosaur here but I remember back when the japanese cars first really started making their debut. Instead of trying to keep up with their innovation, Detrioit decided to embark on a negative campaign to beat back their competition (now where have I seen this before?). I remember rumors flying around about "not being american" if you bought an efficient japanese car. There was real and significant pressure fanned from the small minds around then that weren't being allowed to see the future of our current energy crises.

Detroit had their hands in up to their armpits in keeping the truth from citizens. They were in bed with BigOil for decades. The free market continued to allow in foreign cars that kept getting better and better and better...while american clunkers only kept pace just barely enough to pretend like they were actually innovating.

Then came the energy crises with a WHOMP. Detroits lassitude in R&D to face the reality of the quickening future was caught with its pants down. After all those years of conspiring with BigOil to keep American consumers buffaloed, and driving gas-guzzlers like the Hummer (promoted over the forcefully-scrapped 2000 Volt), and corporate laziness...suddenly they find themselves out of the game in international competitiveness.

And we're supposed to dive in and give those same SOBS a golden handshake, right? I say if they want a bailout, they instead sell their company to Uncle Sam, suffer the collective loss, and allow Uncle Same to hire some innovators to retool those factories of tunaboats and get them churning out little hybrid skiffs and natural-gas combusting pickups.

Goodbye BigOil. We'll not miss you. The earth is a better place without your far-reaching monopoly..

Shaun,

First, congratulations on recovering some sanity. Perhaps it's because Obama is merely pandering to the silly crowd while wisely leaving it up to Bush as well as the Dem Congress to make all the first moves, and find out what is and what isn't supported? (He's smart, and so is his team -- Obama and his team, that is. The Paulson-pushed bailout of Wall Street has become a predictable farce.)

Everyone,

Second, don't just bash management. The UAW has been a parasite that has destroyed Detroit in a pathological symbiosis between it and Detroit's "HUA" management. GM is bleeding billions per month; where is the immediate termination of the JOBS bank, and pay cuts for the established UAW members that matches the lower-tier rational rates of new hires, or pay rates corresponding to the healthy US auto industry in the South? Without such things, not a single penny is merited being spent on any kind of bailout. Chapter 11 is needed for Detroit, and that means an end to retiree health benefits (over-65s should have been put on Medicare already), and dumping of the pension plans to the PBGC. There are, correctly, limits to what PBGC will pay, and if this causes financial difficulties for PBGC, all pensions paid by PBGC, not only to the Detroit people but to all beneficiaries, should be subject to a reduction, if need be ten per cent or more, to address the financial effect of a Detroit pension dumping.

Third, the bailout effort actually surprises me, cynical as I am, in how low the Dems and to some extent Obama have already descended (appealing to the lower elements of our society and human nature). There is no demand for any true reform plan, any plan to change Detroit to make it not only modern, and rational, but viable. Instead, we just want to give public money as a crutch more or less to buy time for Detroit, which makes no sense at all. Now we hear of federal equity purchases, reeking of smiley-faced fascism, with, yes, idiotic requirements being sought already to prod Detroit into being more magically eco-friendly. This is lunacy and worse -- beyond what Ralph Nader could hope to have ever achieved. And Obama descends into lowliness by discussing the possible "need" [sic] for an auto industry "czar," and is thinking of a Detroit insider, Bonior. Lunacy! Hopefully any such wretched excess and worse will get a Bush veto and subsequent delay leading more likely to a Chapter 11 bankruptcy chain. What then, Jennifer Grandholm as Energy Secretary?

Fourth, *** DETROIT IS NOT "THE" "AUTO INDUSTRY" or "THE US AUTO INDUSTRY" *** It is one-half at most right now. Not only that, but Detroit is decades obsolescent, on a failed lifetime-employment paternalistic-employer market-share-monopolizing model, whereas the modern auto industry in this country has thrived for ages -- in the South. It is insulting to hear the assumptions that are implicit in the language commonly sputtered at us about Detroit as "the auto industry." That is a lie. So is the statement that buying Detroit is patriotic while buying foreign is not, much less that we Americans are somehow "obliged" [sic] to aid "our industry" [sic; DETROIT].

Fifth, obviously Chapter 11 bankruptcy is needed for Detroit, more than with the airlines earlier.

Sixth, I look forward to a fractured GM with an independent Chevrolet, which likely could succeed. For years (about the time I got my RX-7 in 1986; where's Detroit's rotary engine sports cars and other good cars? California in the 1980s already showed Detroit as obsolete) I've wanted to see GM broken up and in particular, Chevrolet freed to be truly Chevrolet. (I grew up driving a pair of old Chevys.)

Seventh, yes, management (the HUA management, a characteristic shared by the UAW) has been in denial or simply been imperious and has come to assume that Detroit is more important than it actually is (which isn't that important; Detroit is the second least-respected corporate entity after the oil companies in this country, and in the case of Detroit the common attitude toward it in the USA is contempt for it, its failed model, the UAW bloat, and the still-often-perceived-as-lousy products). It is not that important, period.

Eighth, everyone should enjoy the following, which reflects healthy American (and foreign) views based in the real world about Detroit, and often, its management. (Reader remarks in large part are aimed with especial contempt at "Red-Ink Rick" Wagner.)

http://www.thetruthaboutcars.com/

Current examples (delicious reading) include the following:

[Is The American Automobile Industry Worth Saving?]

http://www.thetruthaboutcars.com/is-the-america...

[Big Mo Grows for GM C11]

http://www.thetruthaboutcars.com/bailout-watch-...

[Ford vs. GM]

http://www.thetruthaboutcars.com/detn-reveals-f...

[Tuesday, Nov 18 -- initial bailout idiocies]

http://www.thetruthaboutcars.com/bailout-watch-...

[Detroit Free Press's pro-bailout stance addressed]

http://www.thetruthaboutcars.com/freep-how-coul...

[Pro-Detroit crowd hates Detroit critics, #1]

http://www.thetruthaboutcars.com/autoblog-is-sl...

[Pro-Detroit crowd hates Detroic critics, #2]

http://www.thetruthaboutcars.com/autoextremist-...

[Blueprint for a Taxpayer-Funded GM Chapter 11]

http://www.thetruthaboutcars.com/editorial-gene...

DLS:

Your congratulations are premature. Check back tomorrow.

Don't worry, Shaun. I have patience and a thicker skin than my favorite defensive measures may imply.

* * *

Incidentally, on the way to work here in Detroit today I was listening to AM radio, and while the host was an old-school Detroiter insofar as I've heard him argue in favor of protectionism or at least of "fair trade," and he was predictably expressing a great deal of concern for the Detroit automakers, all the callers-in that I heard, and this is from the Detroit area, mind you, were saying enough is enough, that there shouldn't be a bailout (plenty of them as well as us on here never supported the Wall Street crony aid package, either) and (as I favor) some of them favored Chapter 11 bankruptcy. (The Detroit Three look set to fail and any federal intervention ought to first go toward the PBGC's absorption of the pension plans of the Detroit Three, and perhaps include some kind of interim warranty support aid or at least the hint of this while the companies undergo reorganization.)

And here's to an independent Chevy.

"And we're supposed to dive in and give those same SOBS a golden handshake, right?"

The CEOs and Gettelfinger (head of the UAW) want to continue as-is, simply on federal money.

The UAW has already said it's done making "concessions," which is a laughable position, but worse still, the CEOS not only have not volunteered to take pay cuts*, but have not presented any kind of business plan showing how they will change their companies to make it into a viable, successful model. They just want a bailout to buy time "until things get better."

* This morning, a pay cut for those CEOS to either $1.00 or $250,000.00 annually was suggested by some on local radio here in Detroit. Firing the managers as part of a bailout was not discussed as the callers were opposed to a bailout.

I'm on record opposing the bailouts of these companies.

The Big 3 simply made substandard vehicles for too long, and didn't learn the lessons of the 1970s fuel crunch. Maybe they are starting to turn things around, but it's too little too late, especially with the economy tumbling and credit for new car purchases drying up (I was recently forced to get a new car, and getting a favorable lease was nearly impossible).

Bailout or no, the reality is that the market will no longer sustain the giant manufacturing capacity of the Big 3. Jobs will be lost and factories will be shut down, unless we're willing to just give them money in perpetuity.

I don't support but the bailout, but I won't pretend bankruptcy will be pretty. Very few people will want to buy cars they have to keep for years from a company they don't trust. And who trusts a bankrupt company?

If these companies completely implode, Detroit might turn into a total ghost town. But I don't know where to go from here, all the options seem bad, but a bailout just seems like delaying the inevitable.