A GM essay worth reading

As a follow up to the series of commentaries I’ve posted here, building on this post from the other day, there has been so much news about the second round of hearings over the auto industry crisis and the desired bailout… it’s too frustrating to me to try to cover it. The blackmail of the taxpayer, to the tune of $75 to 125 billion, makes me cringe – the Detroit firms, their elected advocates, and their unions have such nerve to demand the country pay for their shortsighted weakness.

One of the Freakonomics authors pointed to an interesting essay last week. Written by  Josh Rauh and Luigi Zingales, it can be found here. An excerpt follows:

If the US government provides GM with a $25 billion loan that allows it to continue operating under current conditions for another year or two, the money would simply be wasted and the problem postponed. GM would still be completely unable to survive in the long term. We are very sympathetic towards the pain of the hundreds of thousands of workers whose jobs are at stake. It is precisely because we are concerned about their long term welfare that we oppose a bailout. Throwing money at a drug addict only enables the addict to continue abusing drugs and ultimately shortens his life. Similarly, government money aimed at a company that needs restructuring enables it to avoid taking responsibility of its future, condemning it to a certain death.


Big Three CEOs Flew Private Jets to Plead for Public Funds

In case there was any question about how flat footed the auto industry is in gauging public sentiment and portraying itself in ways that build sympathy, well, here’s a reminder…


Big Three CEOs Flew Private Jets to Plead for Public Funds

via Marc Ambinder

George Will on the auto industry bailout

As a follow up to the series of commentaries I’ve posted here, builidng on this post from the other day, the below is George Will commenting on the impending bailout.

Six decades later, a rescue without bankruptcy will make those four entities wards of government. Doing so would make the five entities including Washington collaborators in unfair competition with Americas thriving automobile industry that employs 113,000 Americans making vehicles containing many American-made components, but with foreign, mostly Japanese, nameplates. As Detroit continues to shrink, many American jobs lost will be regained in this industry, and its American suppliers, as Americans continue to buy cars.

Tom Evslin on the auto industry bailout

Ignore for a moment the fact that Detroit may not have a design ready to satisfy the following plan. Ignore also the time it would take to retool their plants. What appeals about this idea is the combination of aid to the auto industry that is coupled to a more innovative agenda than simply enabling them to continue failing in the same manner they have been for decades.

The US government should order a complete replacement for its vehicle fleet to be delivered over the next four years. The new vehicles must be either plugin electric hybrid, pure electric, or possibly natural gas. Obviously retooling both at the manufacturers and suppliers is required to deliver this order so the government should be willing to prepay a significant part of it as it does for new weapons systems. That gets money into the system fast and creates/saves jobs almost immediately.

Via Fractals of Change: Saving US Auto Manufacturing [Hat tip: Daring Fireball]

Robert Reich: The Real Difference Between Bankruptcy and Bailout

While I am on the topic of the auto industry, bailouts, this gem from Robert Reich:

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didnt pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Streets major banks and insurance giant AIG are so important to the national and global economy that they cant be allowed to fail, that doesnt mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than theyre taking now that taxpayers are bailing them out. But theyre the ones who took the risk. We didnt.

The Treasury seems to have lost sight of its real client. Its client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

Hat tip: Get the Flick.

Ryan Avent: A bailout for carmakers wont save jobs or the economy |

Via his blog, Ryan Avent commenting on the impending auto industry bailout in the Guardian:

More important still is the opportunity cost of saving the automakers. It is suggested that millions of jobs might be lost if the firms folded. That may well be true, but those workers wouldnt remain unemployed forever. At present, the Big Three suck up labour and human, physical and financial capital that might instead be employed at more productive firms in healthier industries. Allowing the automakers to fail creates an opportunity for a much-needed reallocation of resources. From their ashes, anything, including an automaker free of the institutional burdens of the Big Three, might emerge. Standing in the way of this process will damage the long-term outlook of the entire region.

Previous posts on this topic here and here.

GM, Chrysler, and Ford, and the automotive industry collapse

For a long time now, the news has featured endless stories about the decline and fall of the American automotive industry. The wounds opened in the 1970s, when Japan’s small and efficient imports started to find their way into more driveways and garages in America in lieu of the bigger, costlier cars that Detroit churned out with little regard for changing market conditions.

As the Japanese makers built up their market share, they moved up the food chain, as well. Starting with small, cheap cars where the emphasis was on cheap and not value, Honda, Toyota, Nissan (Datsun back in the day), Mazda, and Subaru all worked hard, as part of a consistent decades-long effort, to expand the range of products offered, to improve the quality of those products, to enhance their brand image, and to develop long-term loyalties with their customers so that first-time buyers of cheap ‘rice burners’ matured into customers who bought larger, premium cars from the same manufacturers. These efforts, combined with strict attention to cost control, enabled the Japanese to command greater premiums and secure larger shares of the American automobile market.

While the Japanese worked on this, firms like Korea’s Hyundai and Kia joined in the fray, demonstrating that the ability to build high-value, customer-focused cars was not exclusively a Japanese talent. Once Honda, Toyota, and Nissan reached a high-level of consumer confidence, they all launched luxury brands (Acura, Lexus, and Infiniti) which have gone on to challenge not just America’s Big Three makers, but also the European luxury marques, like Mercedes, BMW, Audi, and Jaguar.

86_fordqualityisjob1_adAs this took place, the Detroit firms responded with apparent urgency. Ford’s “Quality is Job 1” ad campaign is burned in the brain of those of us who grew up watching TV in the 1980s, for example. GM launched Saturn as part of an effort to foster the small, import traits under its broader corporate umbrella. Various partnerships were announced – Chrysler and Mitsubishi, Ford and Mazda, GM and Toyota – and that tactic found its ultimate expression when Chrysler was acquired by Mercedes Benz. These efforts demonstrated a desire to change, but the firms’ other actions showed how entrenched their old habits were. Buick turned out year after year of Buicks that were welcomed by an increasingly older set of buyers. Oldsmobile did the same, to the point it was shut down. Cadillac’s efforts to reinvent itself have brought it into new markets, at the expense of much of its traditional cachet. Chevrolet has turned out Celebrities, Malibus, Cavaliers, Cobalts, and the like with little market growth to show for it. And on and on at GM. Rather than innovate and invest in technical improvements, GM focused on incremental changes. The same V-6 lurked beneath the hoods of cars for years and years. Chrysler (and Dodge and Plymouth) went through similar motions as well, of course.

At one point, it is true that GM managed to develop an electric car, the EV1, which is often described as impressive for its time, but rather than build on that, the EV1s were written off as a failure and America waits for the coming release of the Chevy Volt to see if GM’s second take will be any more successful than the first.

Yet for decades it has been apparent to any casual observer of American automobiles that the firms that were defining trends, shaping markets, and turning heads were not American cars. I cannot tell, one way or the other, if the goal of reinventing the American car industry was ever achievable, but it seems much easier to conclude that the goal has not been reached. Look at how the market has assessed GM since 1980 (data from Google Finance):

And Ford (data again from GF):


(Sorry for the anti-alias fuzziness; Google Docs does not permit very much in the way of customization.)

I cannot provide such a chart for Chrysler because of their merger and subsequent acquisition into private holding.

For the last nine years, the market has clearly shown its skepticism about the future potential for these firms. This is not a spontaneous, unforeseen crisis but a process that has unfolded over decades. Consumer desire for different vehicles and for more efficient vehicles has been identifiable not just by industry experts but by newstand pundits for over a generation. The management of both Ford and GM would likely attribute their inertia and myopia to a number of factors. Their imposed dependence on a unionized workforce is obviously part of what has driven such an unsustainable cost-structure. Their legacy plants and their legacy workforce probably deserve a substantial amount of blame. While those issues may be necessary evils in the growth of the American automobile industry, attributing the looming demise of these firms to union issues is not sufficient. If GM and Ford had seen their future clearly, the time to seek government assistance is not now, when these firms are sick and palsied and on death’s door, but thirty years ago. Working with the unions, perhaps with the assistance of government mediators, to redefine how these businesses worked could have taken place while these firms were much stronger than they are today, before their competitors had built up the competencies and momentum they now have. Instead, generations of auto managers and union leaders kicked this can down the road.

The unspoken assumption, unspoken that is until recently, is that when circumstances grew truly dire, the Federal government would step in and rescue these firms from themselves. Having changes imposed on them externally would mean management and labor would not need to make the hard decisions and bear responsibility for them. Instead, they could point to the government and posture and harumph as they always do. While submitting the bill for their expedient cowardice to you and me.

I am mindful of the importance of these firms to the American economy. I live near two of the last auto plants in the East, one of which is already slated to close. The failure of these firms will be painful for their employees, for their business partners, and for the communities that have depended on them for longer than living memory. The hardships that accompany business failure, as awful as they are, do not mean that these firms’ problems become the responsibility of the American taxpayers.

If taxpayer money is to be spent on future solutions for personal mobility, let it be through constructive efforts to foster innovation and bring solutions to market. Prizes like DARPA’s unmanned car competition are a perfect example of how the government can extend funding to (forgive me a moment of jargon) “incentivize” the sorts of revolutions that we need to move beyond the gas-powered, internal combustion cars. If Ford, GM, and Chrysler win such prizes, so much the better. They do not deserve a monopoly on such grants however. The Teslas and Kamens of the world are perfect examples of the sorts of new thinking that recent entrants to this market can offer, and shoveling taxpayer cash into the gasping Big Three will surely smother the ability of other firms to bring their ideas to market.

Congress, in the current lame duck period, and President Elect Obama, will be given many reasons why GM and Ford and Chrysler need to be rescued with our money. It is imperative we all speak up and tell them that these firms have ignored the inevitable for decades, and such arrogance shall not be rewarded with a baliout and clean slate.