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by Steven D. Laib | November 19th, 2008
Unless businesses learn from their mistakes they will continue to make them. A bailout is not the answer for Detroit
Take a business, any business; anywhere, and any time. Those that are successful are the ones that have a product that buyers want, available at a price that the buyers can afford, and which keep production costs in line so that the business can turn a consistent profit over the long term. These are the three foundations of success. Eliminate one of them and the business will fail. It may not fail immediately, but it will fail eventually. Sell a product no one wants, or that everyone wants but no one can afford and you will not make a profit. Allow your costs to get out of line, take unacceptable or unwise risks and expenses will exceed income making the company unprofitable. That’s the way business goes.
Recently, Washington DC has involved itself in a variety of different plans for providing assistance to the financial and insurance industry, with requests for similar help coming next from the Detroit based automobile makers, and other companies as well. Even some of the states, such as New York and California have gotten into line with their hands out. If the handouts keep coming and the federal government doesn’t learn how to say “no” the cure for bad business management may be worse than the disease. Something has to give, eventually. The government cannot guarantee that it will keep businesses alive, no matter what.
The main problem with “bailouts” is that they never work unless the underlying problems are solved. In the 1980’s when numerous Savings and Loan companies got into trouble, the Resolution Trust Corporation (RTC) was formed to solve the problem. Much of what had happened was bad management and improper accounting which overstated income, making the companies look much more successful than they were. This is extremely similar to what happened with Enron just a few years ago. The RTC solved the problem by purchasing troubled assets, and selling them later at a profit. The troubled businesses were generally restructured or purchased by other companies and things went back to a semblance of normalcy. In a similar manner, when the government loaned money to Chrysler Corp. it received the money back with interest, while Chrysler reorganized and became profitable again; temporarily. The reason why it worked was that Chrysler had top management who knew how to get out of trouble. The same does not appear to be true today.
The other problem with bailouts is that they often have the net effect of transferring wealth from productive aspects of the economy to unproductive ones. Or they may transfer wealth from future generations to the present by long-term government borrowing. This last is the most dangerous at present, as the nation is in difficult financial straits, and should be concentrating on cutting borrowing and expenses, rather than the reverse. Democratic political figures have been leveling serious criticism at George W. Bush over the increase in deficit spending during his watch. Of course, Congress holds a major part of the blame. Only the Legislature can authorize spending and they could have said “no.” Yet, now they are talking about spending for proposed business bailouts that would make past spending look miserly and President-elect Obama has gone on the record saying that deficits are of no importance.
The biggest reason why the Wall Street investment firms got into financial trouble was that then neglected to properly assess the risks to that their investment activities posed. Then costs suddenly increased drastically when the risky mortgage backed securities went bad and the companies also lost equity that was necessary for them to continue in business. If this had put them out of business it may not have been such a bad thing. It might have presented a lesson to future generations to avoid excessive risk. However when panic grew in the financial markets the government decided that it must “do something.” A drastic financial package was shoved together with little planning and now the Treasury Dept. has decided to change its course in midstream. We really don’t know what is going to happen with all that money, and there is no certainty that whatever eventually happens will work.
The number one problem with the automobile manufacturers is that they became enmeshed in a net of union contracts created within the confines of a class warfare concept; that the companies were, for practical purposes, the enemy. This foolish concept prevented the creation of a long-term partnership between worker and owner that would have been mutually beneficial. The contracts have now become such a burden to the companies that the worker’s jobs are now in danger. Add to this the fact that the companies have become uncompetitive in terms of product and price. The Japanese and Korean, in particular are out-competing Detroit because they can generally produce a higher quality vehicle at less cost. Management has done little to compete through technology and innovation, particularly in the amenities available to the consumer and the overall quality of the product. America used to set the standards for innovation. Now, it is playing catch-up, and not doing well at it.
The main reason why there is so much Union support for a federal bailout is that any conventional method of reorganization would likely result in the companies being bought out by the competition. However, providing money to Detroit would not solve the problem if the manufacturers cannot reduce costs while producing a competitive product, therefore throwing money at the situation amounts to a band-aid on major arterial bleeding. Obviously, it would not be desirable for these companies to cease operations so another approach must be found.
In order for the companies to survive management and workers must both cut their losses. Unions must understand that they cannot expect to live on the gravy train forever and that the good of their members requires this understanding. Owners must change management and develop new directions, apply new technology, and return to competitiveness. New technology must be found to leapfrog the competition. The Chevrolet Volt is not the answer. It is a stopgap that will not solve things long term. Likewise, the new, higher mileage vehicles will not be successful unless they have the quality and longevity needed to compete with companies such as Honda and Toyota whose vehicles seem to run forever.
The best approach might be a prearranged Chapter 11 bankruptcy where the outcome is determined in advance and the Unions understand precisely why they must change from a 19th century view to a 21st century view. And, to allay the concerns of Representative Barney Frank, in Chapter 11 it is not necessary to “shaft” the parts suppliers; they debts to them could be reaffirmed, restructured, and eventually paid in full. Anything can happen in Chapter 11 if the parties agree to it.
However, if the proper actions are not taken, I agree with Mitt Romney. A bailout for Detroit is not the answer. We should take his advice or the Big Three auto makers will become a part of our past history.
Steven
For the most part I agree with you. I grew up in Detroit and worked for Chrysler and GM. My father and grandfather worked for Ford.
I disagree with you, and most critics, on the quality issue. Big three cars are very good and comparable to imports. It would cost nothing if American leaders would stop all this bashing of American quality and come out in favor of apple pie and Chevrolet. Imagine if President Bush and President Elect Obama came out to the Rose Garden and said Americans have a duty to buy American cars.
Then there is the problem of small cars. I was inside Ford in 1997 when we installed a line to make the 5.4L V-8 and 6.8L V-10 engine block for the F150. Everybody and their brother wanted a SUV back then and the Big Three responded. Did you or anyone else know that gas would go to $4? I doubt it. Detroit can build small cars at a profit. They just need some support and it will happen.
Next, I would suggest that the UAW come out immediately with an announcement saying they will take a 10% cut across the board staring January 1, 2009. This would give them the bully pulpit to join other leaders in promoting American cars. If half the people driving Hondas, Toyotas, and other foreign cars got the message the problem would be solved.
Comment by Ivan Ivanovich | November 20, 2008
[...] If you've been following the liberal push for the Detroit automaker bailout, check out the argument against the bailout as given by the Intellectual Conservative blog. (Although it already looks like the attempts to [...]
Pingback by thinking thursday! « blogsdon. | November 20, 2008
I agree about the quality issue. I think the US car bashing currently going on is just momentum left over from the 80's. There is also a lot of variation from person to person on what constitutes "good". For example, I used to have a 1990 VW Jetta GLI that I adored, but I was fixing it all the time. Was it a good car? To me it was, but to e.g. a single mom it would not have been.
We have owned 3 minivans: a 1994 Chrysler, a 2005 Dodge, and a 2007 Honda (this replaced the 1994 Chrysler). All good, but frankly the Honda is not the greatly better experience I had come to expect, given the general buzz surrounding Japanese cars. The mileage has been considerably less than expected, it rattles, the paint looks thin, the stereo is cheap. On the other hand, it is much more comfortable inside than the 2005 Dodge.
My mom owned a 1981 Corolla. Not a bad car, but again not the big deal that we expected. She has since gone through a progression to more luxurious vehicles, a Mercury and 3 Lincolns. These were all excellent cars.
One thing I don't like about the Honda minivan is that it seems to have been built with a different philosophy than American cars. It is constantly getting in your way, presumably in the name of protecting you. The Dodge is just as safe, but easier to use. For example, on the Dodge I can open the side power sliding doors by pushing a button on the driver's overhead console. In the Honda I must first unlock the doors (all of them, maybe this is less safe) before the similar thing will work. In the Honda I can lock the power windows so that rear-seat passengers (i.e. kids) cannot operate them. Doing so also prevents the driver from operating the rear windows. ???? The list goes on. Don't get me wrong, it's a good car, just not better than the Dodge or the Chrysler.
Comment by GriffithLea | November 20, 2008
GriffithLea
Somehow that reminds me of a story my boss told once. He said the second happiest day of his life was when he took delivery of his new Jaguar. Of course that leads one to ask “What was the happiest day?”
Reply: “Oh, that was the day I sold it?”
Comment by Ivan Ivanovich | November 20, 2008
Ivan, the issue, like it or not, is that American manufacturers do not offer competitive products in terms of either price or buyer preferences. Why don't they? Good question part of which is answered by a reading of the union contracts with clauses like pay for not working (sounds like our soil bank payments to farmers), lifelong medical insurance, and hourly rates far beyond the value of the skills of the workers. This part translates into a unit labor cost component 3 to 4 times that of non-union competitors. Couple this with having the wrong product mix and you have a disaster. So what can you do to fix the problems? Certainly not business as usual since that brought us here in the first place.
Bankruptcy may be the only viable solution to get the labor and product mix issues fixed. And for those thinking the government can do things better just remember the Mustang Ranch:
Back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed. Now we are trusting the economy of our country to a pack of nit-wits who couldn't make money running a whore house and selling booze?
Comment by Mickey G | November 20, 2008
Mickey
I can't speak to price. I have not shopped for a new car in a long time. But, on quality I would rate my American cars higher than the German and Jap car I had. On product mix it seems to me that they build what people want. It was just a few years ago that SUVs were the big thing (pun intended). It takes at least 4 years to come out with a new model, so that is not a short term solution. I agree with you on the union, that's why I said they would be smart to offer a cut. I don’t think the ratio is 3 or 4 to one. I saw a few days ago a number like $78/hr vs. $48/hr. I also agree on bankruptcy. So, anyway, we are not far apart on this one.
Comment by Ivan Ivanovich | November 20, 2008
Ivan, 3 years ago I wanted an SUV but the writing was already on the wall that the oil markets would be very shaky. I have had three years of surf fishing on the beach and got my enjoyment out of the vehicle.
As a result of my concerns (the 14+ years with a utility developed a habit of looking at oil markets) I did a first for me and leased. Turns out to be a good decision since I negotiated a guaranteed turn in price so next March I go back to diesels or something small, comfortable, and very high mileage.
Comment by Mickey G | November 20, 2008
Mickey
Sounds like you did the right thing. I'll be looking for a big rig soon. Maybe I can get a 454 4 X 4 cheap:>)
Comment by Ivan Ivanovich | November 20, 2008
While I am against bailouts in general, and am probably against this thing (some call it a loan, some call it a bailout, and I haven't examined it enough to know what it really is) I can say that American cars seem okay on price, too. I feel like I got fewer features for more money in our 2007 Odyssey than our 2005 Grand Caravan. Admittedly, there is a 3-year difference (the 2005 GC was bought in summer 2004), but when shopping for the Odyssey I looked at the GC's, too. The reasons I went for the Odyssey were mainly that the its seats were very comfortable compared to the GC and I thought it was going to get better mileage than the GC (it doesn't). After owning it a while, I realized that there were several little things that the GC does/has that I had begun taking for granted, that the Odyssey does not have.
The Odyssey is a good car, and I mostly like it, but I had been led to believe that it was really going to wow me, and it doesn't. It's just okay.
Comment by GriffithLea | November 20, 2008
Hey guys face it the car market has changed. It used to be one where there was strong product differentiation and that helped to create loyal buyers. Today to me a car is a commodity and I buy the one I fit in (long torso short legs)at the best price I can find. Not much difference in quality and they all look alike.
Comment by Mickey G | November 20, 2008
Regarding the actual subject at hand, has anyone visited here:
http://www.local-motors.com/static.php?p=what_is_local_motors
. . . and, comments?
Comment by michaelbp | November 21, 2008
Local Motors is interesting, but I would be surprised if it works and it's not going to work it's the short term. A similar thing happened in the machine tool industry after the 80’s collapse of the companies in the USA. After WWII there were many companies like Kerney & Trecker, Giddings & Lewis, Warner Swasey, Excello, Leblond, Jones & Lamson, Cross, F. J. Lamb, Cincinnati Milling, Monarch, Browne & Sharp, and a few more whose names I have forgotten. They all designed and built machinery to make automobiles, airplanes, appliances, farm equipment, and yes war materials. Most or all of these are gone now or owned by foreign agents. Some new companies came along years after the collapse, but they are a minor part of the total business and not serious threat to Japanese and German competitors. If the pattern is repeated with the auto industry we will see the day when American cars are like American TV’s.
Comment by Ivan Ivanovich | November 21, 2008
A question I keep having to ask msyelf is: why should America have a domestic auto industry? Particuarly if the industry has to subsidized with taxpayer dollars, or nationalized. If you believe in free markets, the answer is very clear: if our domestic industry cannot remain profitable and sustain its business, we shouldn't have one! Countries all over the world have been surviving without domestic auto industries for decades by importing American cars. Why shouldn't America do the same thing if it is more cost efficient? We have this very strange idea in America that our economy should be static, and that our relative strengths and weaknesses should remain constant, despite the fact that rest of the world is rapidly changing all around us. An individual business that was so inflexible would bankrupt itself. And then we're back to the American auto industry…
Comment by Patrick Mulligan | November 23, 2008
Patrick
That's a good question. Let me answer it. The USA has lost many industries in the last 100 years. Shoes, TVs, textiles, machine tools so why not the auto industry? Well, let’s assume we lose all of our manufacturing. Then what do we do? Ah, services! Lawyers, doctors, banks, insurance, teachers, post office, government workers, and others who do nothing but shuffle other people’s money around. Where does the money come from, with nobody taking a raw material and working it into something more valuable? Capitalism is all about value added and making things that people want to buy. Take away that entire base and the whole system collapses. Then comes the war. Who will make the guns, bullets, and bombs to fight the next war? The USA, Britain, and Russia won WWII by out producing the Axis. Auto companies were turned into factories for making airplanes, trucks, tanks, and guns. In the 60s, I worked with some good managers, engineers, and tradesmen who worked on the B-24 Liberator, made 50 caliber ammo, jeeps, and diesel engines for the ships that landed on D-Day. Take away the auto industry and you take away the ability to defend this nation. I agree we should not bail them out, but a Chapter 11 that opens the UAW contract along with a commitment among Americans to buy what is made in America will save a critical part of our economy.
Comment by Ivan Ivanovich | November 23, 2008
Ivan,
There was a condition in my statement: "if our domestic industry cannot remain profitable and sustain its business…" I'd be all for a reorganization under Chapter 11, but if the industry cannot pull itself up after such a reorganization, I don't want them bailed out then any more than now. Success cannot exist without the risk of failure. If the industry should fail, should it be kept operating by taxpayers?
To say that the "big 3" represent all of American manufacturing is an overstatement anyway. Foreign automakers manufacture cars here the same as our home-grown companies in Detroit. In the event of a military mobilization requiring the conversion of domestic industry to war supply manufacturing, we have production facilities that can be used. The big 3 need to adapt and thrive or fail.
Comment by Patrick Mulligan | November 23, 2008
Patrick
First of all the fact that you would be "all for…. Chapter 11" makes little difference. Any company has that right without your permission.
Second, I agree with the NO bailout idea. However, I do favor using the bully pulpit to advance truths about American made products. Does anyone believe that Germany or Japan would watch one of it's major industries go under while being flooded with American made products?
I don't mean to imply that the Big Three are the only manufacturing companies left, but many industries are gone and a pattern has been established. Just walk through any store and see how many "Made in America" tags you see.
It is a fallacy to think that foreign owned companies build here with equivalent content to the Big Three. The design is done overseas, as is much of the decision making of how to build and where to purchase components. I don't know all the details of Toyota's process, but I do know an awful lot about the way Japanese and European companies add US content to make it look as if they are just another domestic company. They don't do it out of altruism. It's very calculated to make it appear to government and the public. The domestic facilities used in WWII were more than buildings. They were a complete system of sales engineering, design engineering, manufacturing engineering, toolmaking, and production including everyone from the CEO to the floor sweeper. If you insist that this can be done in a Honda plant in the Carolinas then you are just trying to win and argument, with no reference to the facts.
And, BTW, why should AIG, Fanny and Freddie get all the money while Detroit burns? If we could go back to pre-TARP, I might be more sympathetic to your words.
Comment by Ivan Ivanovich | November 23, 2008
Ivan,
I didn't mean to imply that the automakers need my permission to go into Chapter 11 bankruptcy and restructure. They DO, however, need my permission, via my elected officials, to get a 25 billion dollar loan, or 50 billion dollar bailout, or 300 billion dollar subsidy, or whatever it shall be called, in whatever amount it shall be granted, from the generous public coffers. Perhaps I should clarify my statement: I would rather see the automakers restructure than to get massive government loans, handouts, or bailouts. The financial industry is a false dilemma – I didn't want them getting bailed out either! As we speak, Citigroup is on the way to obtaining 300 billion new dollars, bringing our total amount for handouts, bailouts, loans, and subsidies in the past 6 months alone to about 1.5 trillion dollars – over 3 times the federal budget deficit last year; over 7 percent of our GDP. I don't want Citi getting a loan or bailout or handout or buyout any more than I do Ford or Chrystler or GM – in a free market, nobody should get bailouts. It isn't the government's job to capitalize private industry.
As far as domestic manufacturing, I'm not just "trying to win an argument". I was just saying, manufacturing capacity is manufacturing capacity. If the government has to mobilize the entire private economy for wartime manufacturing, they can just as easily use a factory that builds sedans for Toyota or pickup trucks for Ford. That sort of mobilization will only be necessary in the event of a global, multi-front war between developed nations, which in our modern age means, in all likelihood, the deployment of nuclear weapons, in which case conventional tanks and bullets will be of relatively minimal concern anyway.
Comment by Patrick Mulligan | November 24, 2008
OK Patrick, you win. We can fight the next war from the factories of Toyoda, Bavarian Motor Works, and Lukoil. I'm sure they won't mind.
Comment by Ivan Ivanovich | November 24, 2008
Well like I said, we haven't had to mobilize private manufacturing for wartime since WWII. If we have to in the future, it will almost certainly be coercively (i.e., the government puts its boot on the neck of private manufacturers and they tool up for warmaking – private enterprises don't voluntarily shut down and retool for warmaking), so it doesn't really matter whose factory the government "persuades" to cooperate, really.
Personally, I think it would be more cost effective for the government to just build a system of military-run manufacturing facilities and leave them as a contingency plan than to nationalize the automotive industry in the event that it goes belly up. For 30 billion dollars you could build a couple pretty decent facilities, I imagine. Let alone for 300 billion, or 700 billion. What say you?
Comment by Patrick Mulligan | November 24, 2008
I don't say. I already said you win.
Comment by Ivan Ivanovich | November 24, 2008
Well, how pouty. I'll just take my ball and go home then…
Comment by Patrick Mulligan | November 24, 2008