Let the Detroit Automakers Fail 14 comments
-
Font Size:
-
Print
- TweetThis
Bailing out the three big U.S. based carmakers is a very bad idea. All three have incompetent management, bloated pay scales (especially at the management level), too many legacy obligations, and vastly overpaid line workers, compared to their competitors who produce in America, and abroad. Giving taxpayer money to these three incompetent companies is the same as throwing it down a bottomless pit.
Without firing of all top management staff, no real change will ever come to Detroit’s way of doing business. Bailouts simply reinforce failed policies, including the short-term thinking that got them into so much trouble. With Chinese automakers coming up fast, it is essential that Detroit restructure itself to meet the new competition before the onslaught arrives on our shores. $25 billion would help U.S. carmakers survive a year or so, but will do nothing to change their ways, or their long term viability of their companies. We will simply be wasting money. The Detroit auto companies will fail eventually, if not this year, then next, because their business model is fatally flawed. The people running these enterprises are dinosaurs, incapable of changing with the times. Does anyone forget how strongly they lobbied Congress to prevent increased fuel economy standards? They are simply reaping what they have sowed.
The taxpayers have had enough of bailouts. We don’t need more. Chapter 11 bankruptcy is specially designed for corporations like the automakers. Many large American corporations have successfully navigated bankruptcy reorganization and emerged as leaner stronger companies. Some examples include United Airlines, U.S. Air, Delta Airlines, Northwest Airlines, Texaco and so forth. The automakers argue that, unlike the airlines, it would be impossible for them to successfully operate and emerge from bankruptcy. They say that people would lose faith in warranty coverage from a bankrupt firm, and wouldn’t buy a car if they suspected that the company wouldn’t be around very long. These are nothing more than excuses. What they really want is to keep the gravy train rolling. The current system is nice and cozy, and auto company management would like to keep it that way, at the expense of the American taxpayer.
Frequent flyer programs, like warranty coverage, require customer confidence and inspire loyalty. It can be argued that people who fear the potential loss of their frequent flyer miles would stop flying any airline that entered bankruptcy, just as people might stop buying cars. Yet, people kept flying on United and all the other airlines. Bankrupt airlines successfully argued that frequent flyer programs were essential to future business. So, bankruptcy courts accepted that argument, and issued orders allowed special preference to customer frequent flyer claims, while other debts were wiped out. There is no reason to believe that automakers would not also be allowed to honor all warranty claims, past, present and future. In short, it is entirely likely that people will continue to buy their cars, so long as the Detroit carmakers continue unimpaired service of their warranty debts. The only difference will be that the current management will be out of their jobs.
Auto company management wants bailouts because they don’t want to be removed. Yet, getting rid of them is essential for the long term health of the auto industry. Like the biblical Children of Israel, who wandered in the desert for 40 years, until the slave mentality generation died off, auto company management cannot be allowed to enter the Land of Milk and Honey. They will simply destroy it, as they destroyed their companies. Management must be removed. A bailout will not accomplish this. The only way is to force automakers to file bankruptcy.
In order to insure that all warranty claims are honored, during the interim between filing bankruptcy, and getting a court order allowing them to honor all warranties, I’d endorse the idea of a U.S. government guarantee of payment to dealers, during the interim between the filing and obtaining an order allowing preference to warranty debt. Backstopping warranty claims for a day or two might cost a million dollars or so, but that is insignificant compared to the $25 billion bailout being requested. It is an infinitesimally small sum compared to the trillions of dollars worth of productivity that will eventually be lost as the bailout mentality continues to sweep America.
Corporate welfare has never been a good idea. In spite of this, it became a tradition during the failed presidency of George W. Bush. We’ve given out too much corporate welfare, already, and we certainly should not give out more. Forcing out management, and forcing new management to restructure is the only way for the American auto industry to become competitive again. The problem is that the current management is very good at lobbying, and getting what they want. Let’s hope that the auto lobbyists don’t succeed in getting bailouts the way their lobbyists succeeded in torpedoing the CAFÉ fuel economy standards a few years ago. If they succeed, the end results will be harmful to everyone, just as it was, before.
Disclosure: No position in any automaker.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 14 comments:
There are better alternatives. First, the Fed shouild name a car czar to overlook their "investment" and I nominate Mitt Roomney. He 's a former Venture Capitalist head (Bain). They know how to analyze companies, re-organize, etc. to assure success of their investment.
Next, the loan should be in the name of the Social Security Trust Fund. The Fed owes the Fund Trillions. Now the opportunity to reconstitute the SS into a live entity which can take control of the tax payers investments without objections from anti-socialists
Normally, I would say, "let them fail". But I had also said that AIG and Lehman should fail, and I think, in hindsight, that was very shortsighted. If we would have had an AIG failure, we would be heading for a depression, right now, and as it is, the Lehman failure took a very bad situation and made it much, much worse.
Letting the big three fail will cost this economy an enormous number of WHITE collar jobs. For all the talk of how efficient the foreign auto companies are, where are they designed and engineered?
We need to have industries that actually make something, and the one thing about a car industry is that if you can make cars, you can make just about anything.
In any event, if you see GM go under, expect a 6000 Dow because an ENORMOUS number of jobs and income will go with it. FAR more than just the big three.
$25 Billion, or even more realistically, $50 Billion is PEANUTS given the stimulus needed to get this economy going. Even Martin Feldstein is talking about $500 Billion++.
It will be a lot better to save the jobs, in the short run, until the economy gets back on its feet.
Once it does, though, I say, let them go if they cannot compete, and while I am not happy to have sent the bailout money down a rat hole, and would still be much happier than if we did not spend the money.
Lets talk about the unions for a while here and add their name to the list of causes for the US automakers demise. Toyota, Honda, etc are paying less than half of what GM and Ford pay for an hour's worth of ( ha ha ha ) work.
You can blame everyone a little for this crisis up to and including an American public who is about as loyal as a hooker to her last customer. A public who doesn't know some of those out of the country automakers supported the value of their own used cars to make them appear to be a better value. Smart guys they are, cause it worked.
Let them go down, who cares, its not that big of a deal? Yeah right, just keep your head in the sand....Its about time we stopped attacking our own corporations and support them like it matters. It does matter.
On Nov 20 08:19 AM jarco wrote:
> Riding an airline is much different than putting $25K into a car
> without assurances they'll be there to warranty service it. Sure
> there's a risk critical airline maintenance is overlooked, but not
> having a dealer, parts, and good will behind your car purchase would
> halt all sales and put 1 in every 10 workers at risk.
>
> There are better alternatives. First, the Fed shouild name a car
> czar to overlook their "investment" and I nominate Mitt Roomney.
> He 's a former Venture Capitalist head (Bain). They know how to analyze
> companies, re-organize, etc. to assure success of their investment.
>
>
> Next, the loan should be in the name of the Social Security Trust
> Fund. The Fed owes the Fund Trillions. Now the opportunity to reconstitute
> the SS into a live entity which can take control of the tax payers
> investments without objections from anti-socialists
I do believe in real capitalism, however, which is something that has not been practiced under the Bush administration. What we have seen is crony capitalism in the past, and, more recently, we have seen privatization of profits and socialization of losses in the financial industry. Now, the same folks who brought us bailouts for billionaires, want to bailout the dysfunctional Detroit auto industry. Detroit shares many characteristics with the banking industry, not the least of which is overpaid and incompetent management.
It is not the financial downturn that is causing the automakers to fail. It is a lack of desirable products that people want to buy. The Asian automakers are feeling some pain, too, but they are not collapsing. This is because, for years, as Toyota, Nissan, Honda etc. accepted lower profits, in pursuit of long term market share, GM, Chrysler and Ford were trying to maximize profit in the short term. Instead of capitalizing on the Japanese automakers' voluntary restriction of imports, that had been negotiated, back in the 1980s, to increase market share, instead, Detroit merely took the opportunity to increase prices. More recently, they were extensively lobbying Congress to prevent passage of critical CAFE fuel economy standards that would have saved them from the current situation. They succeeded, and promptly embarked on a short-sighted program of maximizing profits and bonuses for top executives.
Managerial incompetence and short-sighted thinking is so in-grained in Detroit that it cannot be removed with anything less than extraordinary measures. With the exception of the recent attempt by Cerberus to turn Chrysler around (which was timed terribly, unfortunately), the auto industry managers are an in-bred lot, with no new ideas. They have presided, for 30 years, over the destruction of what was once an iconic American industry. The latest financial crisis precipitated their demise, but, for many years, it has been a matter of "when" not "if".
The argument that Japanese currency manipulation is responsible for torpedoing Detroit's changes is not a good one. First, right now, the yen is valued higher in relation to the dollar than at most times in history. Against most currencies, the dollar is still selling at historically low values, even though over the last few months it has had an amazing upward momentum.
Indeed, the Asian car makers don't seem to find it impossible to build profitable cars in America. A large number of Toyotas, Hondas, and Hyundai's (S. Korean), sold in America, are made in America. These American production facilities are highly profitable. The inescapable conclusion is that there is no reason why Detroit cannot build good quality, reasonably priced cars except for managerial incompetence.
Contrary to the opinions of some, Chapter 11 reorganization will not destroy the American auto industry. It will only rationalize their operations, remove their management, and restructure them so that they can compete in the world economy.