Why We Shouldn’t Bailout The Detroit 3 / $375,000 Per Employee Bailout

America’s Two Auto Industries – Why Bailout The Old – The New Is Healthy

Government Aid to GM, Ford, Chrysler Could Preserve Old Way of Building and Selling Cars 

Last Friday, November 7, 2008, GM announced that unless its financial performance improves, there is a substantial risk of the company collapsing by the middle of next year. http://online.wsj.com/article/SB122608860916209213.html?mod=article-outset-box

Discussions abound about the current “credit freeze”, economic turndown, etc ….. a discussion of current economic trends is misplaced …. a broader historical perspective is needed. A perspective that looks ahead and not just back at GM’s and the rest of the Detroit 3’s  historical importance to the Country.

I believe the term is “throwing good money after bad”.

The value of GM did not suddenly decline. In 2007 GM lost 38.7 Billion Dollars. It has been a five year slide for GM stock from $60 a share to today’s $3.00 and change per share.  http://meganmcardle.theatlantic.com/archives/2008/02/gm_loses_big.php  Also see: http://money.cnn.com/2008/06/24/markets/thebuzz/index.htm?eref=aol

GM’s solution, “reduce costs by offering buyouts to more of its union employees. It’s astonishing how lavish these buyout packages can be, and yet still save the company money–early retirement plus $45,000 is apparently cheaper than keeping them on the line. It’s a sign of something deeply out of whack in the labor market when companies are consistently this desperate to shed workers–how can the UAW swing enough clout to keep the automakers tottering in and out of unprofitability?” http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened            http://money.cnn.com/2005/11/25/news/gm_possibilities/index.htm

Critics say leaders over the years at Ford Motor Co., General Motors Corp. and what is now Chrysler LLC were slow to take on unions, failed to invest enough in new products, ceded the car market to the Japanese and were ill-prepared for the inevitable rise in gas prices that would make their trucks and SUVs obsolete.                http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

“There’s been 30 years of denial,” said Noel Tichy, a University of Michigan business professor and author who ran General Electric Co.’s leadership program from 1985-87 and once worked as a consultant for Ford. “They did not make themselves competitive. They didn’t deal with the union issues, the cost structures long ago, everything that makes a successful company.”    http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

Whatever the reasons, the Detroit Three are closer to collapse than ever, and likely won’t make it without billions in government loans. http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

On Friday, GM posted a $2.5 billion third-quarter loss and ominously said it could run out of money before the end of the year. The company spent $6.9 billion more than it took in for the quarter and reported that it had $16.2 billion in cash available at the end of September. http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

Ford reported a $129 million loss but said it burned up $7.7 billion in cash for the period. It had $18.9 billion on hand as of Sept. 30. Its chief financial officer says he’s confident Ford will make it through 2009, but that’s because the company took out a huge loan last year. http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

Industry analysts believe Chrysler, now a private company that does not have to open its books, is as bad off as GM as U.S. sales continue to plummet because of tight credit and lack of consumer confidence due to the economy. http://news.yahoo.com/s/ap/20081109/ap_on_bi_ge/autos_what_happened

The Detroit 3 failed to challange the Union, the companies say the UAW drove up their labor costs to $30 per hour more than Japanese companies paid their workers. When the Detroit 3 have pushed for change the Union has simply called for strikes, strikes which cost the companies 10’s of billions in lost profits. The last strikes came just this past summer, in the midst of the current economic turmoil.

America has two auto industries. The “Old Auto Industry” the one represented by GM, Ford and Chrysler is Midwestern, unionized, burdened with massive obligations to retirees, and shackled to marketing and product strategies that have roots reaching back to the early 1900s. http://online.wsj.com/article/SB122608860916209213.html?mod=article-outset-box

The other American auto industry, the “New Auto Industry” is largely Southern and non-union, owes relatively little to the few retirees it has, and enjoys a variety of advantages because its Japanese, European and Korean owners launched operations in this country relatively recently. Their factories are newer, their brand images and marketing strategies are more coherent — Toyota uses three brands in the U.S. to GM’s eight — and they have cars designed for the competitive global market that exists today. http://online.wsj.com/article/SB122608860916209213.html?mod=article-outset-box Despite the economic turmoil, they are all profitable.   

The New Industry has controlled costs, developed superior products and marketing. In fact the “New Industry”can’t produce some vehicles (Toyota Prius) fast enough to meet consumer demand.

The Old American auto industry is represented by the “Big Three” of Detroit. The “Detroit Three” employ approximately 200,000 people.   http://online.wsj.com/article/SB122608860916209213.html?mod=article-outset-box 

The New American Auto industry employs approximately 113,000 people, this is according to a recent study by the Center for Automotive Research.  http://online.wsj.com/article/SB122608860916209213.html?mod=article-outset-box

This bailout debate is strictly about the Old American Auto Industry.

At present, the “Detroit 3” are talking about a preliminary bailout number of an additional $50 Billion dollars. This would bring the total to $75 Billion Dollars for the “Old Auto Industry”.  

The original $25 Billion has already been approved but is currently tied up in the Energy Committee of Congress. http://ca.news.yahoo.com/s/afp/081110/business/stocks_us_auto_company_gm 

A $75 Billion dollar bailout for the “Detroit 3”. $75 Billion Dollars!

$75 Billion for an industry that has 200,000 direct employees?  

That comes out to $375,000 per direct employee. I kid you not, $375,000 per direct employee.

You try the math, $75,000,000,000 divided by 200,000. ($750,000 / 2 = $375,000).

You’ve got to be kidding me. 

It just isn’t worth the gamble. Over the last 30 years the Detroit 3 has failed to demonstrate it can complete globally. How will throwing more money at their problem help. Throwing money at the Detroit 3 won’t solve their problems and they seem incapable of solving them on their own.

At Ford Motor Co. they called it “Blue,” a team set up around the year 2000 to design an array of small, fuel-efficient cars to compete with the Japanese. It didn’t get far because no one could figure out how to make money on low-priced compacts with Ford’s high labor costs. The same thing happened at GM & Chrysler. The Detroit 3 concentrated on trucks and SUV’s, markets that the New Auto Industry nearly conceeded, because focusing on that market (SUVs & Trucks) was just too short sighted for ongoing business success.

Now the Government is considering buying the Old American Auto Industry. That is essentially what a bailout would mean. The Government buying the Detroit 3.

“We are lowering our target on GM equity to zero dollars,” the Deutsche Bank report said. “Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” it said. “While we believe that GM’s secured creditors may get a par recovery, unsecured creditors may get very low recovery. Equity shareholders are unlikely to get anything.” http://ca.news.yahoo.com/s/afp/081110/business/stocks_us_auto_company_gm


Duetsche Bank’s assessment, the bailout isn’t likely to work. Duetsche bank noted, “even if there is a government bailout of the auto giant, shareholders would not benefit.” http://ca.news.yahoo.com/s/afp/081110/business/stocks_us_auto_company_gm

The US Government should not be in the business of buying private businesses, especially not businesses that will still be bankrupt after a $75 Billion cash investment at taxpayer expense. 

Throwing good money after bad? Absolutely!

In a Capitalist economy, poorly run companies that can’t control costs, successfully plan future product or get desired products to market in a timely manner, fail. Simple enough, bad companies fail. They are not rewarded for inefficency. Successful companies are rewarded. 

The current proposal to bailout 1/2 of the US Auto Industry does so at the expense of the other successful half and at tremendous costs to the American taxpayer.   

Further bailouts are a bad idea. Its time to let the chips fall where they may.

3 Responses

  1. Well written.

    It’s interesting seeing what reasons different people attribute the failing state of the auto industry.

    A lot of people attribute the lack of competition of US automakers to the UAW and lack of cost control there. I think upper management is just as inefficient regarding cost control and has absolutely no foresight.

    Here’s my analysis:

  2. to whom ever. there saying they should bail out the 3 motor companies . i think the 3 motor companies they should be able to fell the pain like we do every day of or lives .and we the people never get a bail out from the fed gov. let em fell the pain we go tho ever day . if they hadn’t built those big trucks that was so stupid on there part look at the japan they know how to keep the company’s going by building small car and like the 3 in the USA . give me a brake i could do a better job then the people who prints the cars out . well i know nobody will see this but i had to say this to you that reads this . thanks for look at my story .

  3. The big three auto industry in Canada has never been a real business. It has been subsidized for as long as I can remember through protective trade pacts, tax incentives, low cost loans and out right grants. It’s time management grew up and begin operating on their own.

    The scare tactics in Canada are now reaching the ridiculous in saying the cost of failure of the big three will be the loss of 500,000 jobs over five years. Surely 500,000 people will not simply be sitting on their hands waiting for a hand out for five years. Necessity is the mother of invention. Not bail outs.

    The 500,000 figure in Canada is absurd.

    We are not going back to walking.

    The auto infrastructure will not die. There are over 400,000,000 cars and trucks on the road in North America and they all need servicing. They all need parts, tires, spark plugs, oil changes. They all buy gas. They all need insurance and they will continue to crash and need repairs. Mortuaries will still clean up the mess whether it is a new car or 2 years old that caused it.

    Car and truck dealership generate most of their profit through service departments. The number of dealers may go down but they won’t disappear.

    The wheels of commerce may slow down, but they will not stop. Cars will be sold, people will be needed to build those cars. But there will be a long overdue rationalization of the industry.

    Every one should be forces to watch the video on the Ford’s Brazil plant. info.detnews.com/video/index.cfm?id=1189

    The bailout will not bring that kind of expertise to North America. Nor will it get rid of the Rubber Rooms or 8 hours pay for 6 hours work. But most important, it will not encourage people to buy their cars.

    Instead of saying we can’t bring that technology to Canada or USA, we should say yes we can.

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