Bail Out the Big Three? History Suggests “Don’t Do It”!

It would be catchy to lead with something like “I’ll give you fifty-billion reasons why the US government shouldn’t bail out the Big Three automakers.” Instead, I’ll just write: don’t do it.

I need to make something crystal clear here. My views are not ideologically-based. If you’d like some Republican versus Democrat, free market capitalism over big government socialism, Apple against Microsoft rants, you’re not going to find it here.

What you will find is a simple statement: history and common sense intersect at a point with a big marker titled “STOP”.

The Meat Of the Deal

Congress has already given General Motors, Ford and Chrysler around $25 billion so they can retool for production of more fuel-efficient cars. Last week the three CEOs returned to The Hill to ask for as much as $50 billion more to keep their companies floating while they hemorrhage cash in the down economy.

It is true that consumers are not buying new cars right now. That’s a huge problem for all automakers, not just the Big Three. When they start buying cars again, fuel-efficient vehicles like hybrids and compacts will be in demand. Actually, if we’re being truthful here, these vehicles are in demand right now. Just go try to find a Prius on a dealer lot.

So the Big Three CEOs have the audacity to go to Congress and say “give us money so we can ride out the bad economy and have what the consumers will want when they are ready to buy.” Audacity? Why did I choose that word?

Simple, because unless you’ve been living in cave for the last decade, you’ll know that even when GM, Ford and Chrysler were selling SUVs and trucks faster than a Ramones drum beat, they were largely losing money. Keep in mind that SUVs and trucks had a hell of a lot higher profit margin than compact and hybrid cars could ever hope to attain.

Imagine if the CEOs told Congress: “we need money, because we couldn’t make profits when we were selling high-profit vehicles. Since we pocketed that money in salaries, union deals, benefits, and executive bonuses, and got drunk on cheap gas (although in our hearts we knew it wouldn’t stay that way, but we hoped we’d be retired by the time it hit $4 per gallon), we never spent enough on R+D, so we didn’t have vehicle products ready to go for this current marketplace.” Unfortunately, that’s the truth.

Here is a scary reality
If Congress gave $50B directly to American consumers with the condition that we went out and bought new cars, here’s what would happen: $50B would buy 1,666,666 cars, based on the current average price of around $30,000 each. Given the current market share, GM at 22.4 percent would sell 373,333 vehicles, Ford (14.8%) would move 246,666 units, and Chrysler (11%) would sell 183,333 units. In other words, with fifty billion dollars going directly into the hands of consumers to buy a new car, the best any of the Big Three could do would be to sell a group of additional vehicles equating to less than one year’s worth of Honda Accord sales in America. (392,231 Accords were sold in the US in 2007.) Think that’s enough to keep them (or dealers) from failing? Nope!!!

Inevitably, there are those out there who will say the Big Three are “too big to fail”. Television news channels are already reporting huge job loss potentials if the companies go out of business—from a few hundred thousand to somewhere around 1.5 million. For every one job at GM, Ford and Chrysler, there are seven positions at vendors providing parts and services for domestic auto production. In other words: if they fail, we’re in a depression with millions of unemployed workers.

The logical conclusion, claim these folks, is to keep the government money flowing– no matter how long it takes, otherwise the companies will implode, everyone in the industry will be out a job, and a depression is unavoidable. To these people I have just two words:

BRITISH LEYLAND

Allow me to follow up those two words with a description of why this is critical history for every Member of Congress to know. England used to be tied with America as the automotive powerhouses in the world. We had Ford and Chevy, while they had Austin and Morris. Just like the contraction of companies in America that formed Ford-Lincoln-Mercury and General Motors, Austin joined Morris in BMC. Standard joined with Triumph, which was joined with Jaguar. Finally, by 1968 most British-owned brands were rolled into British Leyland.

Thanks to equal parts ineptitude, greed and lack of ethics, BL drove the British car industry into the ground. BL executives blamed the economy (including an oil crisis) and labor. Everyone else pointed the finger at products that were inferior to foreign competition, as well as short-sighted contracts and profiteering.

Despite selling forty percent of the vehicles in Great Britain, by 1975 British Leyland was broke. The British Government sank millions into the group and became the majority shareholder. The corporation was reorganized, and millions more went to cure production and labor problems.

The company was again reorganized into saleable units. Jaguar-Daimler was sold-off in 1984 (two years later it went to Ford). The Leyland truck and bus unit was merged with Dutch DAF in 1987, which later sold bus operations to Volvo. Just a year later the Rover Group (including most of the remaining car business) was sold to British Aerospace, which turned around and immediately sold this remaining part of Great Britain’s auto industry to German BMW.

Which puts us back to GM, Ford and Chrysler

If Congress simply let nature take its course, there is a strong chance that all would fail. But we need to DEFINE “FAIL”. In this case, do we honestly think that if any of the Big Three “fail” everything the company owns would simply be auctioned off to the high bidder in front of the local courthouse? Of course not.

All three companies own valuable plant assets. All still have cash. All own products and technology that are profit centers. There is certainly a big financial value to Chevy’s Volt product, as well as Chrysler’s ultra-modern flexible plant locations, Ford’s Mustang brand, Corvette production, F150 fleet sales, the “Hemi” trademark…

Considering that Porsche just tried unsuccessfully to buy VW, it puts them back in the market for an entity that will enable them to meet 35-mpg CAFE standards. By the way, Porsche has also been one of the most profitable automakers of the last decade. (Turns out that selling overpriced sports-SUVs is a cash cow.) So even after the botched buyout, they have money to burn.

Hyundai is also a strong competitor without a good hybrid play, as is Mitsubishi. Both have money. Mitsubishi’s dedication to cars might be questionable, but Hyundai’s certainly is not. Honda could use a more diverse product range, especially upmarket. Even Toyota could make a case to buy one of the Big Three — Chrysler for flexible production facilities or GM for Volt plug-in technology (since it could take a big bite out of Hybrid Synergy Drive sales).

Then there’s BMW – the same company that at one time or another has purchased Rover, MG, Rolls-Royce, Bentley, Austin/Morris/Mini, and still retains the rights for Triumph. They have cash and good credit…not to mention a pretty good history of acquiring, absorbing, improving operations, and remarketing companies. (We’ll give them a pass on Rover, which was a debacle, only because nothing short of a neutron bomb could have solved that company’s issues.) Finally, BMW has banked way too much on hydrogen over plug-in hybrids, so they could benefit from buying the technology, rather than developing it in house.

Don’t count on Mercedes to get involved. The company is still sore from its marriage to Chrysler. It turns out Mercedes was ill prepared to deal with the complexities of a merger with such a dysfunctional corporation at a time when it was challenged with its own operational and technical issues. Consequently, Mercedes lost more money than a drunk billionaire trying to impress the hotties at the high roller baccarat tables.

Hyundai, BMW, Porsche…Any of these companies could benefit by buying GM, Ford, or even Chrysler.

All have experience designing, building, marketing, selling, and servicing in America already, and do so with high profit margins.

No doubt each and any foreign buyer would bust the unions and negotiate dumping retirement benefits on the US government. Then the companies would kill poor performing legacy products, as well as the people who continued to push losing strategies. Good niche brands and solid future technologies would be exploited, while albatrosses like Hummer would likely be closed down or sold to a greater fool.

In the end, America would have to let go the concept of the American Big Three. One could get caught up in buzzwords like “failure”, but the goal is to save money and jobs.

No matter how we look at it, American jobs will be lost. The difference is that if the US Congress pushes the Big Three to sell, more people will actually be able to keep jobs. Granted some will do so at reduced wages and most at decreased long-term benefits. Wouldn’t it be better, however, for these people to work for a competitive company again – one that isn’t in jeopardy of needing to make more layoffs or beg for more government money next year?

Congress might still decide to throw good money after bad at GM, Ford and Chrysler, just like the British did for BL, but the best course of action is to allow these dinosaurs implode under their own weight sooner rather than later, and work to convince German, Japanese and Korean automakers to bring them back to life as more efficient, better targeted and longer-reaching versions of their old selves using the American workers and suppliers who are willing to adapt to a new world with a view far beyond the self-interests of Michigan and D.C..

Editor’s Note: We here at the Four Wheel Drift realize that this whole bailout issue is far more complicated than can be summarized in one article. We expect that if Alan Mulally or Rick Wagoner read the above article, they’d accuse us of missing important details. (We’d expect that Bob Lutz would say we’ve got our heads up our asses if we thought it was that simple.) The fact is that it isn’t simple. It took nearly a century for GM, Ford and Chrysler to create the mess they’re in, and there are no easy answers. We simply are taking a stand unpopular with car folks, especially those emotionally tied to the long history of American auto producers, and suggesting that the only way to stay competitive is to admit that there is no way to stay competitive by just taking government money and tightening belts.

Advertisements

6 Responses to Bail Out the Big Three? History Suggests “Don’t Do It”!

  1. alan perry says:

    “BL executives blamed the economy (including an oil crisis) and labor.”

    Are you saying that the oil crisis and their severe labor relation problems were not a major contributor to BL’s problems?

  2. Alan,
    There is absolutely no doubt that labor relations and the oil crisis were contributing factors in BL’s financial problems, just as the same conditions plague the Big Three today. Just like GM, Ford and Chrysler, BL helped create the labor problems. One might argue that with the Mini/Minor, BL was better positioned with the oil crisis then than the truck/SUV-heavy Big Three today.

    The point of the statement was that labor problems and the oil crisis were only a couple of the factors. Poor quality, behind-the-times design,as well as criminal activity on the behalf of BL and its suppliers (remember those paper gaskets that were really made of sawdust?) also helped to sink BL.

    In other words, external factors deserved some blame, but extremely poor management also needed to accept its fair share. (The same is true today, as well.)

  3. Chris Phillips says:

    Thanks for some very helpful perspective on the Big 3 bailout plans. I agree that a complete rebuild of US auto manufacturing/sales/delivery/service has been sorely needed since the original Chrysler bailout and the days of the infamous K-car. Like the Brits and BL, I suppose we have ourselves to blame for propping up the old model of our industry. We did it with sales of minvans and SUVs for every driveway. We did it by buying artificially cheap oil and by securing artificially cheap credit. The race for battery technology and emergence of visionary, nimble, venture-capitalized enterprises may become an important factor in a rebirth of our passion for things automotive. Oil prices will become the ultimate fertility drug for a rebirth, but I wonder whether our public will have the political stomach to reshape a whole economic sector at a time when the banking and investment sector is already rolled over in the ditch? Holding on to the outdated business models and cultures of our automotive past will be like trying to play Atari games on our Nintendo wii consoles. It’s going to be painful to reboot, but the old game is over. How quickly can we learn the new one?

  4. Wil - Indy says:

    Friends;
    I see most straw polls & media vox populi opinion readins show 70%-90% population AGAINST the auto industry bail-out. The politicos may do the opposite as if hypnotized by an evil demon and forced commit suicide. The common citizen either instinctively or overtly understand that a UAW bail-out is like a transfusion without stopping the bleeding from a major artery. They need a union house cleaning. Unfortunately the good life in Detroit is over.

    Do you remember when H. Ford raised the pay for Model T workers on his Flanders assembly line to $5 a day? The best paid workers in Detroit in 1919. Doubtless the union thugs will want another sit-in and stoppage like the 1930s when the Ford’s Pinkerton regulators and “off duty” cops shot and whipped the UAW squatters and beat up Walter Ruther. Might be some nice homes available on the Cheap in Detroit. Those middle class neighborhoods north of town are pretty nice, with huge 3-4 bdrom ranch houses and wide 4 lane divided boulevards and beautiful parks and shopping malls, now mostly empty.

    Repopulation. Frankly, because of the self-destructive practices of the current and former politicos and coprporate managers, we will need the illegals to pay the taxes to keep the ship afloat. The self fulfilling suicidal policies of deficit spending on dependancy generating social programs has had a debilitating effect on the character of Americans. It has had just the opposite effect of the traditional American system of stimulating lean self motovated individualistic self reliant population of healthy fiesty patriots. That was the old world. This is the new whining, mewling world of parasites and panderers.

    They (the corrupt politicos), must transplant the migrants of Nogales, Tijuana and Juarez and the cab drivers and janitors of Yemen to Detroit and repopulate with four families to a foreclosed $400K house selling off at auction for $75K. Learn to speak Spanish and Arabic and get along fine with neighbors. The unoccupied houses can be broken up for firewood.

    Trivial aside; Did you ever drive in Detroit? In the north suburbs like Warren and Sterling Heights they have a no-left-turn traffic pattern and all left turns are made mid-block in special turn outs so that intersections remain clear. They used to have some innovative thinking and built a strong, well conceived civic structure with a high standard of living for themselves. Then it went sour and rotted from the inside.

    Greedy corrupt unionism. Crass obnoxious corporate marketing and mimicry in styling. An absurd imbalannce of cost vs profit margins compared to the unencumbered Asian and European mfg. It costs $75+ an hour per union worker to make an US car in a UAW plant, and $48 an hour on average for a foreign competitor to make a competing car.

    Wil
    Indy

  5. Wil - Indy says:

    I hear little commentary about the foolishness of self insuring by the big three. In what universe is it advisable to co-mingle profits, R&D funds with medical insurance, retirement and credit union liabilities? In my corporate working life, 401Ks, medical insurance and other benefits managed by separate carriers or isolated in independent growth funds. Self insurance is a formula for self immolation. Was the rationale behind this, pure greed and the desire to leave the door open to loot those funds?

    Wil
    Indy

  6. uni says:

    very nice car post, i love that

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: