Let the Detroit Automakers Fail

Includes: F, GM
by: Avery Goodman

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.