The auto industry sees other industries getting government bailouts, and wonders why not? Others hear the pleas of the Big Three carmakers and wonder, why?
Democratic leaders in Congress crafted a plan to fork over $25 billion to Detroit, above and beyond the $25 billion in loans the government already committed to help the Big Three make more fuel-efficient cars.
But a majority in Congress, along with the Bush administration, balked at the idea. Critics of the bailout plan argue that the real problem for General Motors, Ford, and Chrysler is that their cost structures are bloated, their management doesn’t work, and they can’t make cars of high enough quality to attract American buyers.
Throwing money at the same people who couldn’t get it right wouldn't solve any of that.
Following are 10 top reasons why a bailout is not a good idea:
1. A bailout would provide money only for short-term survival. It wouldn't alter carmakers' flawed business models. GM is running through cash at the rate of $2 billion a month. So $10 billion from the government would give it only five months’ breathing room. Can they turn over their business practices in that period? Please. The temptation would be simply to come back to taxpayers for more.
2. A government handout would allow the Big Three to avoid necessary cost cutting. Because of a strong union, the average GM employee received $70 an hour in combined pay and benefits last year. And it’s not just line workers who are making too much. GM chief executive Richard Wagoner garnered about $24 million a year in 2006 and 2007, while leading his company toward oblivion.
3. Bankruptcy isn’t all bad. It doesn’t mean liquidation. It means taking the painful steps the companies have been unwilling to contemplate to date. The real losers in such a deal are carmakers, equity shareholders and creditors. Bankruptcy would give the automakers the chance to throw out existing employee contracts with their onerous health and pension systems. The unions would be forced to temper their demands if they want the car companies to survive. In the case of GM, it could also dump some of its uncompetitive product lines such as Pontiac and Saturn. Discontinuing five of GM’s eight domestic brands would save the company $5 billion annually.
4. Taxpayer money won’t change the fact that many foreign cars are made better than their U.S. counterparts. Kelley Blue Book announced its top 10 brands for resale value this week, and not one of the Big Three was on the list. Chryslers, for example, keep only 24.2 percent of their sticker price on average after five years. By contrast, Hondas retain 44.5 percent of their value.
5. Bailout funds would help automakers continue their outsourcing of auto jobs to foreign countries, where costs are lower. All of the Big Three have increased the percentage of manufacturing and assembly done overseas in the past year, especially in China and Mexico. In May, Ford agreed to build $3 billion auto plant in suburban Mexico City and upgrade two other Mexican plants, the largest foreign investment in Mexican history.
6. Big Three bankruptcies wouldn’t mean the end of auto industry in the United States. Foreign companies, which already have plants here, could pick up the slack and open new factories. Some 78,000 Americans already work for foreign carmakers, a number likely to rise in the wake of any U.S. automaker demise. The depressed South could benefit particularly from increased production of foreign auto companies.
7. Other industries have survived bankruptcy just fine. Most of the major airlines have spent time in bankruptcy, including United, Continental, Delta, Northwest, and US Airways. Their predicament looked particularly dire after 9/11. But the major carriers made it through. And to the extent that they suffered, low-fare competitors such as Southwest and JetBlue picked up the slack, often offering superior service in addition to cheaper prices.
8. Bailing out the auto industry would only encourage other sectors to beg for government handouts. Remember that the $750 Billion Troubled Assets Relief Program was designed only to assist banks, but now insurance companies and even credit card giant American Express are trying to get in on the action. Homebuilders, who arguably are as strapped as the automakers, could lobby for some of the action.
9. Stockholders deserve no mercy. Some argue that they should be compensated for the fact that GM and Ford’s share prices have hit their lowest levels in decades. But in a free market, stock prices go down as well as up. The automakers’ problems have been clear for years, so investors had plenty of time to get out. As for Chrysler, it’s owned by private equity firm Cerberus, no innocent victim itself.
10. Bailouts have been tried in the auto industry, and they don’t work. In the 1970s, Britain’s Leyland hit the skids, hurt by slipping quality in its vehicles and imports from Germany and Japan. Sound familiar? Leyland, which made MGs, Jaguars and mass-market cars, accounted for 36 percent of the UK market. So the government sunk in $16.5 billion to keep it afloat. The result? Unless you’re a car buff, you’ve probably never heard of Leyland, because it no longer exists.
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Great summation. This puts all the elements in perpective and highlights historical events which appear to parallel todays situation. Good read.
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10. Bailouts have been tried in the auto industry, and they don’t work. In the 1970s, Britain’s Leyland hit the skids, hurt by slipping quality in its vehicles and imports from Germany and Japan. Sound familiar? Leyland, which made MGs, Jaguars and mass-market cars, accounted for 36 percent of the UK market. So the government sunk in $16.5 billion to keep it afloat. The result? Unless you’re a car buff, you’ve probably never heard of Leyland, because it no longer exists.
I might very well be wrong, but being something of a Brit car fanatic, I think this story ran more along the lines of British Leyland getting more like $10 billion in bailout funding, getting hit hard by subsequent worker strikes and going through a number of name changes until finally reorganizing as Rover, followed buy a sellout to BMW, which proceeded to take what it wanted (particularly the rights to MINI) and selling off the rest.
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Wow, a Republican auto enthusiast... but Dan should consider the real-world economical consequences of his reasoning.
Mello Yello's points were well stated.
The business models of the big 3 are outdated and are now dinosaurs in the industry. Throwing good money after bad only makes things worse.
The big 3 need to re-structure (and should have years ago).
Continuing to do business in the same way is a continuation of bad business.
They need to slash staff, get rid of the unions, get creative, and get lean.
It's time for them to become lean and mean like they used to be.
I don't want my tax money to be given to folks that will just continue down a destructive path.
I'm so sick of hearing about (name kept private)'s years of receiving almost his entire salary from GM for doing no work... and he worked for cash on the side at the same time. What kind of BS is a 'job bank'. I'm so sick of that kind of wasteful BS. No way should tax money go into something with those kind of stupid ideas.
The unions have had their joy ride and contributed to the destruction of some fine companies. It's time for the unions to be booted and for the companies to get serious.
Get rid of the unions, reduce the number of models, slash the workforce, slash the management, yank the golden parachutes, eliminate the fluff, etc. It's past time to do it.
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Quote:
Originally Posted by TucsonSSR
Mello Yello's points were well stated.
The business models of the big 3 are outdated and are now dinosaurs in the industry. Throwing good money after bad only makes things worse.
The big 3 need to re-structure (and should have years ago).
Continuing to do business in the same way is a continuation of bad business.
They need to slash staff, get rid of the unions, get creative, and get lean.
It's time for them to become lean and mean like they used to be.
I don't want my tax money to be given to folks that will just continue down a destructive path.
I'm so sick of hearing about (name kept private)'s years of receiving almost his entire salary from GM for doing no work... and he worked for cash on the side at the same time. What kind of BS is a 'job bank'. I'm so sick of that kind of wasteful BS. No way should tax money go into something with those kind of stupid ideas.
The unions have had their joy ride and contributed to the destruction of some fine companies. It's time for the unions to be booted and for the companies to get serious.
Get rid of the unions, reduce the number of models, slash the workforce, slash the management, yank the golden parachutes, eliminate the fluff, etc. It's past time to do it.
Jeff in Tucson
How about the rest of the Union workers in this country? Might as well get rid of them too. School teachers, College professors, Nurses, Skilled trades workers, Railroad workers, Police and Firemen just to name a few U.S. Union workers! Lets get rid of them all and have a level playing field!
How about the rest of the Union workers in this country? Might as well get rid of them too. School teachers, College professors, Nurses, Skilled trades workers, Railroad workers, Police and Firemen just to name a few U.S. Union workers! Lets get rid of them all and have a level playing field!
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I'm not anti-union, but, 3 unions I take issue with are the TEACHERS and the PROFESSORS and local Govt.Workers. They ALL have more lucrative retirement and health care benefits than the auto workers. The point being that THEY GET PAID OUT OF TAXPAYERS MONIES that have been paid in the form of taxes, not from building and selling products. Most Professors spend too much time knocking the system that supports them. Years ago they would have been hung for treason, now they are worshiped as 'intilectuals'(sic). I actually favor Police/Fire/Nurses unions as these people are dedicated to HELPING the very people that give to their wage sources.
In Virginia we don't have teacher unions, they are illegal. We do however have associations, which are optional for employees but they do make a very big difference. By the way, those of us who teach never stop going to school and continue to pay a lot of money for required courses, and even courses not required, to stay in the educational loop. I have an AA, BFA, and MFA and still have to continue going to school and I enjoy it very much. My question is how much are the union workers (who by the way make a whole lot more than I do after 30 years) paying for self improvement? How many years of college is required for their positions? I recently paid $250 for a workshop that I had to take. Do union members have to do that? I doubt it. Education and learning are what put this country on the map. How can we compete globally without knowledge and understanding of what has happened in the past and what will be in the future? Why do you think the poor countries in this world keep their citizens from getting an education? In most poor countries, only the wealthy get an education. Gee, I wonder why?
In Virginia we don't have teacher unions, they are illegal. We do however have associations, which are optional for employees but they do make a very big difference. By the way, those of us who teach never stop going to school and continue to pay a lot of money for required courses, and even courses not required, to stay in the educational loop. I have an AA, BFA, and MFA and still have to continue going to school and I enjoy it very much. My question is how much are the union workers (who by the way make a whole lot more than I do after 30 years) paying for self improvement? How many years of college is required for their positions? I recently paid $250 for a workshop that I had to take. Do union members have to do that? I doubt it. Education and learning are what put this country on the map. How can we compete globally without knowledge and understanding of what has happened in the past and what will be in the future? Why do you think the poor countries in this world keep their citizens from getting an education? In most poor countries, only the wealthy get an education. Gee, I wonder why?
I applaud everything you have said. It sounds like VA is still kinda like back when I went to school up here in the Detroit area. Up here it goes back to what I posted before that the DETROIT METRO AREA is just like "FOGGY BOTTOM" (DC area for thoses that don't know) where as they are too far removed from the realities of the outside World. Like horses running with blinders on, (Congress too).
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Ten Reasons Why the Auto Bailout Is a Bad Idea
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