A Bailout for Detroit?
The lame duck Congress is currently considering whether to give automakers some of the bailout money - to the tune of ten billion dollars. Intense lobbying efforts are underway right now, with Detroit desperately trying to convince Congress that this bailout money is all it needs in order to become a viable business model again.
You didn't really believe your ex when s/he told you that this loan was the last one, I swear, and then s/he'd never need to hit you up for money again. It was just that s/he was having trouble making the rent this month, but s/he promised, this was it, this was the last time.
Why, then, should we believe the automakers? Chances are, if the government hands them ten billion dollars, very little will change. Because the problem with Detroit isn't so much the economic crisis (although that has certainly exacerbated matters) but decades of poor management and uniformed decisionmaking. While European and Japanese automakers focused on developing smaller cars with better gas milage, Detroit went in for the gaz-guzzling monstrosity formerly known as the SUV.
It seems that the primary reason for the bailout is to protect the jobs of all the mid- and low-level employees - the guys who work on the assembly lines putting together the cars. If so, we're doing them a disservice by turning this into a lingering death. What happens in two or three years, when gas prices go up again, and Detroit is still basing its profits on fuel inefficient cars?
I don't know enough about Chapter 11 bankruptcy to discuss it in any detail, but it seems to me that if Detroit is going to fall, we should use the existing mechanisms in place to cushion that, rather than pouring ten billion dollars into an industry that's no longer viable.
You didn't really believe your ex when s/he told you that this loan was the last one, I swear, and then s/he'd never need to hit you up for money again. It was just that s/he was having trouble making the rent this month, but s/he promised, this was it, this was the last time.
Why, then, should we believe the automakers? Chances are, if the government hands them ten billion dollars, very little will change. Because the problem with Detroit isn't so much the economic crisis (although that has certainly exacerbated matters) but decades of poor management and uniformed decisionmaking. While European and Japanese automakers focused on developing smaller cars with better gas milage, Detroit went in for the gaz-guzzling monstrosity formerly known as the SUV.
It seems that the primary reason for the bailout is to protect the jobs of all the mid- and low-level employees - the guys who work on the assembly lines putting together the cars. If so, we're doing them a disservice by turning this into a lingering death. What happens in two or three years, when gas prices go up again, and Detroit is still basing its profits on fuel inefficient cars?
I don't know enough about Chapter 11 bankruptcy to discuss it in any detail, but it seems to me that if Detroit is going to fall, we should use the existing mechanisms in place to cushion that, rather than pouring ten billion dollars into an industry that's no longer viable.
posted by Bekki at 7:39 AM
32 Comments:
The gas guzzling SUVs were the profitable models that Americans wanted to buy. The jobs, in many cases, are in areas where there will be no successor employers to rehire the workers. The CAFE standards imposed a burdensome "tax" on the manufacturers, and the competition from unequally situated foreign manufacturers who enjoyed various forms of support from their own countries eviscerated the American companies (and, b-t-w, countries like Japan and Korea make it virtually impossible for American manufacturers to sell their products there). So, while there were "mistakes," much of the problem was engendered by a reckless free trade/globablization policy and also the fact that American companies didn't exploit their workers--unlike their competitors. In this decade as well, "What's good for General Motors is good for the USA"
Well said Ben.
Yes, Bekki, your belief that GM would be fine after Chapter 11 DOES indicate you don't have a lot of knowledge of the way it works (it's ok, it appears a lot of republican senators don't either).
Case and point: Delphi. That'll be in Ch 11 indefinitely. GM would only be worse (not to mention the inevitable bankruptcy of GM's suppliers as well). Meanwhile, millions will be out of work, and our already weak economy will take even more [years] to recover.
Delphi is just one example. What about the major airlines, who went through bankruptcy restructuring, and have emerged from bankruptcy as viable companies?
Also, I don't want my tax dollars to pay for idle workers $30/hour to do nothing. Look up the job bank program, http://www.detnews.com/2005/autosinsider/0510/17/A01-351179.htm
This article on the British experience with bailing out the auto industry, is interesting: http://www.nytimes.com/2008/11/18/business/economy/18car.html?adxnnl=1&adxnnlx=1227042000-rCH5QQww6gLtxu6X7ALDOA
And I mean this in the nicest way possible: Bekki, congrats on becoming a normal and comprehensible writer.
12:20 - Ok, I'll bite. You're seriously comparing the consumer industries of airline travel to the automotive industry? The extent of a consumer's interaction with an airline is from point A to point B. If they go bankrupt while you're in the air, they'll still have to land somewhere (hopefully closer to your destination). Meanwhile, people keep cars for years. Would you buy a car from a bankrupt company? Cars of expired brands such as Oldsmobile or Plymouth face depreciation curves that value a 2 year old vehicle at what the industry would have for a 5 year old vehicle. And there's fundamentally not a lot of a difference between a Plymouth Voyager and a Chrysler Voyager - so they don't exactly have to worry about warranties or replacement parts.
Laura: there are big differences between the British car companies and today's American ones. Notably, the Americans have strong customer bases and very strong products in the pipeline. Sure, it's clear they were caught with their pants down when the market shifted [in the most dramatic fashion EVER] to smaller vehicles, but having the credit market dry up at the exact same time surely didn't help.
I take issue with the term "throw good money after bad." What money at all has the government given the automakers? The last time was Chrysler in the early 80's - which led to a resurgence of the brand and the taxpayers getting paid off early AND with a huge return on their investment. If we're bailing out banks for making bad decisions in order to save the economy, why draw the line and say no to the automakers - who are equally essential to our economy? And letting Detroit go under will only require huge bailout dollars next year when entire STATES go under. You don't get ANY return on your investment when you're simply cutting welfare checks to millions of unemployed people.
No offense, Teej, but describing the American auto industry as being "caught with their pants down" in a changing market strikes me as playing fast and loose with the facts.
"The last frat boy at the keg when the beer runs out" seems more apt.
12:20 here.
All I'm saying is that bankruptcy proceedings will allow the big three to make difficult decisions that make business sense. For one, getting rid of the job bank. Second, off-loading pension liabilities. I know, I know, you're completely screwing over the workers. But those pension promises were made at a different time, and were really unreasonable in retrospect.
Bankruptcy doesn't mean that the big three will disappear. My airline reference was used, in part, to suggest that the big three can come out better for it.
I disagree (and so do the facts).
The mere fact that the market was changing was not the unexpected part. What WAS unexpected was how FAST it changed. And in the world of fixed factory assembly lines and 3 year concept-to-production cycles, rapid consumer shifts in taste (read: 3 months) was not predicted by anyone.
Hell, even Toyota decided to increase the weight of their vehicles such as the Camry by 20% in their most recent models. They dumped the appropriately-sized Tundra and unleashed their most recent version as a behemoth they advertise as "bigger and badder" than the American competitors [with far worse MPG than either F150 or Silverado]. In response, Toyota and crew all have faced near similar drops in sales over the past year. The difference is that Toyota was in a better cash position when the credit and auto markets dried up and the economy went to hell.
So to me it sounds like nearly everyone was standing around the keg when it went dry.
Detroit has products that better reflect new consumer tastes in the pipeline, but the problem is that they won't reach showrooms until late 2009. Hence, that's the whole point of the loan they seek - simply to help them survive until then.
The mere fact that the keg was floating was not the unexpected part. What WAS unexpected was how FAST it started to float. And in the world of miller lite and 3 minute beer-to-beer turnaround cycles, rapid depletion of keg resources (read: before 3:00 am) was not predicted by anyone.
Before 3:00am? What kind of gatherings are you having up in Idaho? In Wisconsin, our kegs begin to float much earlier. No matter how many we start with.
This keg died before midnight, and the government is in the business lately of replenishing corporate beer supplies.
Matt, that's just because you have to milk the cows at dawn.
Certainly the Fed. gov't pro-union laws that encouraged such a strong union, and thus resulting in an economically infeasible situation.
Plus, it's really hard to swallow that the transfer to smaller cars was not coming. Rather, the decrease in inflation-adjusted gas prices in the 1980s and 1990s reflected a deviation from what has otherwise been the trend of increasing oil and gas prices. Even the problem of adapting to Japanese and European competitors and new environmental regulations is the same exact problem as the 1970s. The truth is, the companies are fundamentally broken and won't ever be truly competitive in any familiar form. Anyone thinking that somehow massive government intervention in the management and financing of a company is the key to creating a more efficient and economically sustainable company has little knowledge of economics or history.
Remember Chrysler already had its bailout in 1979. How well did that work out?
If the only concern is the jobs, then why not go all FDR (you saw the cover of Time magazine, didn't ya?), and hire the auto workers to build bridges, roads, walls along the border, and all the other parts of our public physical infrastructure that are badly in need of repair. Somewhat better than just flushing money down the toilet bowl that is the American auto industry.
tj - Of course, in a once every 100 years economic crisis, the most critical consideration is that the resale value of some cars will be moderately less. WTF.
"Remember Chrysler already had its bailout in 1979. How well did that work out?"
Clearly you're the one that may need help with economics and history if you think that the Chrysler bailout was anything other than a huge success.
But I'm not going to disagree that union labor in America has driven up the cost for the American car companies more than it has for their Asian competitors (double, in fact).
2:24 = you missed the point. I was simply noting that nobody is going to buy from GM if they declare bankruptcy - because it's not a wise economic move. And if nobody buys from them, then 12:20's assertion that bankruptcy could be a viable/healthy alternative is false.
Why not? If they file for Chapter 11 reorganization, why would people stop buying GM cars (any more so than usual given their crappy lineup and outrageous pricing)? If people don't stop shopping at retailers under chapter 11 or fly airplanes serviced by companies under chapter 11, why is a car any different? But even assuming it costs GM some lost revenue in the short term to file for Chapter 11, in the long term the benefits far outweigh any losses. They need to shed the ridiculous contracts. If I was an autoworker right now, I'd rather be working in Kentucky for Toyota than in Michigan for the big 3. It's in everyone's interest for the automakers to emerge with a viable long term model as opposed to just throwing cash on a burning heap of garbage.
And your Toyota example is complete bull shit. You're seriously claiming an automaker with 40 years of reputation for fuel efficient cars was in the same position as GM when oil prices hit the roof? Seriously?
No, Armen.
A) People will not continue to buy cars during Bankruptcy - because they are nothing like the airline industry. Automaker bankruptcy will be a very long time (given Delphi as the only reasonable example). This will favor liquidation over reorganization, and there will no longer be any GM (very, very bad for America).
B) I used Toyota as an example for one simple fact: nobody saw the rapid change in consumer taste coming.
If so, why would a company that you claim has "a 30 year history making fuel efficient vehicles" choose to alter their entire lineup to be decidedly less fuel efficient over the past 8 years?
If the 2007-2008 shift to efficiency over style/size/power was so obvious, wouldn't they have been the most likely to have seen it coming?
excuse me - "40 years"
that's 10 more reasons why they should have seen it coming. haha
Entire lineup? Does that include the 10 year old Prius? The 40 year old Corolla? Echo? The entirely new make Scion that's based on fuel efficiency and a "younger/hipper" brand? Yeah, Toyota and the rest of the Japanese automakers were really caught flat footed. Precisely like GM. Even Toyota's pickups and SUVs (esp. if you include Lexus models) get far better fuel mileage than anything out of Detroit.
If you want to claim that GM will be liquidated and not restructured, fine, that's a claim, we the pros and cons of that should be weighed. Right now I don't see any reason to believe that.
Yes the vast majority of the cars they ship, with the caveat of the Prius, of course. Corolla and Camry put on weight and dropped in fuel efficiency over the last 8 years. And you're flat wrong to say their trucks get better MPG.
The current relative fuel efficiency of the entire brand does not refute my very basic point: if they saw it coming, why would they have altered their top sellers in the wrong direction?
It's really not all that outrageous of a statement. It's simple: they didn't see it coming either. So people need to stop giving Detroit so much shit for doing a really good job giving Americans exactly what they wanted at the time - inexpensive and high quality truck-based vehicles.
1. Camry and Corolla putting on weight is a red herring. They are some of the most fuel efficient sedans on the market today. Period. This isn't complicated. 30 MPG to 29 MPG is still > than 20 MPG. You keep making an equivalence on this point. There is no equivalence. A Buick guzzles gas. Toyotas don't.
2. They are also the best selling models, along with the Prius. Toyota has always had a bedrock of fuel efficient cars to rely on for sales. AND THEY'VE LED THE MARKET IN SALES WITH THOSE CARS. CONSISTENTLY.
3. When there was a demand in the marketplace for trucks and SUVs, Toyota moved into that market too.
4. But they never gave up on their core business of building reliable and fuel efficient cars. Somehow this fact eludes you.
But you're still inexplicably arguing that Toyota had the same foresight to the value of fuel efficient cars as GM. Are you kidding me? The company that made the biggest innovation in fuel efficiency in the past 10 years? Really? I mean do you realize what you're saying? "Fuel efficiency in some Toyota models went from really great to just great in some years in the past ten years. Therefore, they were really in the same situation as GM...completely caught unaware. Unawares I tells you." Ok that last sentence might be poetic license.
But just because Toyota saw a demand in the market for gas guzzlers and chose to enter that market does not mean Toyota neglected its fuel efficient models. A slight increase in the weight of the car doesn't mean the company decided, "Fuck it, we're going to single digit MPGs."
And this is GM over the same time period...
Oh god we're getting killed by the Japaense because our cars are crap and inefficient.
Later...oh thank god these idiots have decided to drive off road vehicles in urban areas, park in compact spots, block everyone's field of vision, and generally increase fatalities across the board. Wow, this just saved the company. Better shelve those plans for smaller, lighter, more reliable and efficient cars, we've got jingles to write:
"Twelve yards long, two lanes wide,
Sixty five tons of American pride!
Canyonero! Canyonero!
Top of the line in utility sports,
Unexplained fires are a matter for the courts!
Canyonero! Canyonero!"
And this month: Oh god we're getting killed by the Japaense because our cars are crap and inefficient.
Again, frustratingly, you argue a point that is completely irrelevant to the greater issue at hand. Nobody is debating that Toyota is a company based on good fuel efficiency numbers. Congrats, you've successfully argued something that's already an established fact.
But you haven't addressed my point: the speed customer demand shifted was completely unexpected by ANYONE. Detroit has a number of models in the pipeline, but didn't think that their current inventories would become practically worthless before they could sell these new products.
I only brought up Toyota as further evidence of the unexpected speed with which the demand shifted. Toyota's most recent model re-designs took their brand in the direction of power over fuel efficiency (thus the wrong direction) - and it's really killed their truck business (whereas many industry experts feel they'd be making much more money had they not updated their truck models since their 2000 model- with its much higher MPG) and it caught them completely off guard in their car business (as many of the models you're touting are unavailable at dealerships because they are sold out- had they foresaw such, they would have ramped up production).
Detroit knew it had to change, but nobody knew how quickly.
TJ is right. We should bail out Toyota.
So decades of getting crushed by foreign automakers because of fuel efficiency wasn't enough notice.
but didn't think that their current inventories would become practically worthless before they could sell these new products.
That's precisely right. Meanwhile Toyota can't make cars fast enough. If you want to talk about completely irrelevant points, I think "the speed" with which oil prices shot up is high up there. GM had plenty of time to change its designs. It chose not too. Now it's paying the price. I'm not shedding any tears.
"I'm not shedding any tears."
You will be when it's hitting your bottom line.
Which would be right about when that bailout check clears, right?
haha. Ok- I thought I'd get somewhere with y'all but I clearly have not. So my parting words on the subject:
(1) American companies have good products, and great products coming. Just look to how well Ford is doing in Europe and you can see that it's not just Japanese who can build great cars.
(2) Hindsight is 20/20
(3) If anything, take it up with that dude you all fought to get elected. He and I seem to be among the few who actually see eye-to-eye on the topic.
Here is a great article about how Mercedes, Nissan, and *gasp* Toyota all have thousands of cars just sitting at the ports because no one wants to buy them.
http://www.nytimes.com/2008/11/19/business/economy/19ports.html?_r=1&hp
tj, I don't think it's a given that people will stop buying American cars because of chapter 11. Yes, they're concerned about warranties. But they could do a ch 11 plan that guarantees the warranties. The creditors of the Big 3 would recognize that unless consumers have confidence in the companies as going interests, the companies will die, and thus would not shoot themselves in the foot by opposing such a guarantee. They would much rather get 90 cents on their buck over the long term than 15 cents on their buck in a liquidation.
Also, you don't explain why just because Delphi has perenial bankruptcy problems, that means the Big 3 will experience the same fate. What exactly is the link, other than 'they both are in the automotive industry?'
Meanwhile, your desire to shower the Big 3 with cash doesn't help them overcome the habits that got them here. Labor costs too high. Soprano-esque "job banks." CAFE hamstringing them into making unprofitable cars. Poopy management.
You've got to be delusional if you think that the best explanation for the Big 3's current sad situation is that fuel prices jumped in the last two years.
2:46 - without beating a dead horse, I'll add:
(a) you're right that the warranties can be secured. but when was the last time you bought a car based on the warranty? look at Daewoo's bankruptcy. you see any of them anymore? people buy cars based on soft qualities like "feel" "prestige" etc.
(b) Delphi is similar because of the UAW and supplier contract issues. Run a google search on those keywords and you'll see more about what I'm talking about.
(c) You're right that this loan doesn't solve all of the problems. But it gets them through a very bad point in our economy. Hopefully on the other side of this recession, they'll be able to make in-roads on those challenges. But the American economy doesn't really need to be dealing with losing its industrial base at a time like this.
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