Should GM and Ford Be Bailed Out or Not?
This is the question facing politicians today. But it also represents a case study in the conflict between short-term costs and long-term benefits - probably the most difficult conflict faced by businesses and governments today.
If we bail them out, then we definitely avoid a lot of pain over the next year, as thousands of workers retain their jobs, as auto assembly lines keep ordering parts from suppliers, and as thousands of car dealers continue to have uninterrupted supplies of inventory. But using taxpayer dollars to save these misfiring corporate giants today will almost certainly cost us a great deal more in the long term. For a variety of reasons, the business models that GM and Ford are operating make them completely uncompetitive with rivals like Toyota, Nissan, and even Mercedes - all of whom also employ thousands of other Americans in their U.S.-based manufacturing facilities and dealerships.
If you want a terrific explanation of some of the fatal and probably irreconcilable flaws in the very structure of the GM and Ford businesses, when compared to their most immediate competitors, see this Wall Street Journal article by NYU Distinguished Research Scholar Michael Levine.
In the long term, what should be clear is that Ford and GM will NEVER succeed against lower-cost, more nimble and innovative competitors. So while there will be some pain over the next two or three quarters if they fail now, saving them doesn't prevent that failure - it just postpones it. And the longer it gets postponed, the more pain will ensue.
GM and Ford's bankruptcies don't necessarily mean that no cars at all will be produced, or that the assembly lines will simply shut down entirely. Depending on the type of bankruptcy reorganization chosen, it may simply result in a "re-pricing" of non-productive assets, as they are transferred to other shareholders. You may buy Christmas gifts for your family this year from a retail store operating under bankruptcy protection. If you're a frequent traveler, you've probably flown on an airline operating under bankruptcy protection sometime in the last four years or so.
Innovation cannot happen without trial and error. And guess what? Without error, there can be no trial. History shows that for a company to be resilient and innovative, it must have a culture that tolerates failure, because for every successful new idea there may be a dozen or more that don't pay off. The more innovative you want to be, as a firm, the more experimentation you have to be willing to do.
Countries and economies are the same way. The more new ideas and innovations you want, the more failures you have to be willing to tolerate. The more vibrant and resilient our economy is, in other words, the more economic friction will likely exist under its surface, as new ideas constantly supplant old ones. This is why free-market economies make progress in a process of "creative destruction." But if there's no occasional destruction, there can be no creativity.
My suggestion, if Congress just has to burn another $25 billion or so, is to invest that money not in prolonging this train wreck, but in directly educating and re-training automotive workers themselves, relocating them if necessary, and otherwise helping them to re-enter the "real" economy of competitive wages, benefits and prices.
(Full disclosure: 25 years ago I worked directly for Michael Levine, the author of this WSJ article, when I was the marketing director at the start-up airline New York Air, and he was the CEO. He's one of the smartest guys I ever met in business, and one of the most bluntly candid, too.)
A good many years back the UK car industry failed. A load of marques were brought together in "BMC" (British Mechanical Catastrophe) and then British Leyland.
Mainly these were awful cars with atrocious build quality, poor design, bad reliability, and stupidly high prices. Even the prestige Jaguar brand leaked like a sieve in the rain, dripped oil everywhere.
Honda took some sort of a stake in the company and they built badge engineered Hondas. When Honda gave up in disgust BMW jumped in. When they gave up in disgust the whole lot, pretty much, was sold to China.
Why should the US car industry be any different? If you produce expensive trash badly, like we did, then it's going to fail. Nationalise it if you like, but it won't make it any better.
Make cars people want at a price they can afford, with quality that beats imports and you stand a chance.
Tim
By the way: Your CAPTCHA is driving me nuts. It says that valid text is invalid and rejects comments. Maybe that's why you get so few?
I am in complete agreement with Mr. Levine, there is no option other than to enter into chapter 11.
The jobs bank is reason enough not to bail out GM. I understand there are 12,000 people being paid to sit and do nothing - not all are GM employees, all of the big 3 have some form of jobs bank.
The auto makers will not disappear if they file for bankruptcy, someone will come in and take over and rebuild. There are valuable assets and there is a market for American made cars but the automakers as they are currently structured cannot compete against Toyota that has a $48 per hr package compared to GM's $78 per hr.
US automakers have managed themselves poorly and have not taken it upon them selves to tackle the issues that we have all seen coming for many years. They are locked into rediculous labor contracts, stuffed with over paid executives that have managed the companies into the abyss and now they want the tax payers to bail them out.
This is nothing but corporate welfare, they will burn through billions, will not make the changes needed and will eventually be right back in the same place they are today - asking the tax payers to give more.
The taxpayers should not reward poor performance and bad management. Let them go under and watch even stronger companies emerge. As for the argument that localities will also go under as a result - that is just screaming fire in a theater. These localities need to restucture themselves as well. Workers that are strapping their horses to ancient business models and out of date technology will have to retrain to work in more relevant industries and understand that jobs in manufacturing don't provide pay packages at $78 per hr anymore. They have been living on borrowed time.
Don
the words "too big to fail comes to mind"
followed by "you made your bed now sleep in it" but the truth of the matter is everyone is to blame.
The business model was crafted by senior corporate and union labor management. Americans buying big SUV's kept the BIG3 on life support. Government regulations hardwired a rigidity in the dealerships network that is now fatal. R&D spending by the Japanese automakers is comparable to the Big 3 - the only difference is the Japanese are able to focus it on fewer platforms. Japenese are focussed on continuos improvement while BIG 3 are focussed on good enough.
This current outcome has been on the train tracks for years.
No one is innocent and everyone is to blame. Where were the stock holders in all of this? Why werent they pushing or successful in charting a new path for their investment - or were they simply happy with the quarterly results ?
Creative destruction is a wondrous thing - the only caveat is that we keep companies nimble so that the destruction can be better absorbed by the economy.
Too big to fail should be replaced with too big to be adaptive.That's where the future debate/discussion will be. What is the optimal scale. Do global brands adopt a Coke structure where the global office has brand ownership, while local capitalize on geographic opportunities and production is essentially outsourced/licensed?.
Who's next for a healthy dose of creative destructionism- Big Oil? Big Insurance? Big HMO?
cheers
Miro