Tuesday, November 18, 2008

Automakers Come Begging


The Big 3 automakers went to Capitol Hill to beg congress to give them a $25 billion bailout package.  To their credit, congress questioned these CEOs about why the government should come to the aid of an industry that is clearly in decline.  I caught clips here and there throughout the day of their testimony.  Let's look at some of the finer points.

 We are about to turn the corner.  We are in the middle of restructuring

The CEOs made it a point to mention that they just needed a "bridge loan" to make it through these difficult times.  It reminds me when Herbert Hoover said, in 1929, that "prosperity is just around the corner".  Of course the Great Depression followed next.  Anytime that someone tells you, "just a little bit longer" or "just one more time" you know things are not good.

Further, why the hell did you wait so long? If you are so stupid that you did not realize that you need to restructure earlier, why on earth should we believe you are gong to do it right now? We bailed out one of them just a few decades ago, and yet they are back again.  What the hell is that?

 If we go, so will two million other jobs which are related to the auto industry

This is just pure scaremongering.  First off, if the government let things take their natural course, I highly doubt that all three of the car companies would go under.  In fact, if one were allowed to fail, it would actually strengthen the other two since more consumers would buy cars from the other three.  Also, do you really want me to believe that not as many industries are tied to real estate and finance.  Several large companies, like Lehman Brothers, have gone bankrupt. Financial companies affect all parts of the economy.  Real estate employs all sorts of workers from carpenters, contractors, and machine operators.  These industries have seen total collapses in their markets, and yet we haven't reached Armageddon yet.  Why is the auto industry special?

It's the economy!

I love this one.  Time and again, the CEOs used everyone's favorite excuse, it's the economy!  Yea, so what?  I've said it before and I will say it again, if you cannot run your business without being able to weather an economic downturn, you should not be running your business.  Everyone knows there are economic cycles.  CEOs know this better than anyone else.  Every single person is affected by this economy.  I know my industry is.  We are heavily dependent on ad revenue, which declines sharply when the economy goes south.  Should my company be able to ask for a hand out?  No.  It is up to plan for it, tighten our belt when it happens, and figure out to succeed in any environment.  We have to do it, so should the car makers.

The bottom line is that there is no way we are seeing this money back if we give it to the automakers.  Seriously.  If these guys actually had a legitimate plan, they would have no problem raising capital to  fund their plans.  They could go to any bank or investor, show them their plan, and people would be jumping in to invest.  The fact is that they don't have a real plan, they are just waiting for some miracle to save them.  Unfortunately for us, I think this miracle will materialize in the form of the US government.  It probably won't happen in the next month, but it wil before it is all said and done.


  1. NPR did a historical piece on the bailout of Chrysler in the late 70s/early 80s. The parallels to today were amazing (exception being the competency of the government). Chrysler built their entire business model on high profit, huge, gas guzzling cars. A huge rise in gas prices killed all demand for their product. (Sound familiar?)

    In the ensuing bailout by the government, there was a pretty strict plan put in place. Essentially, it was to provide money to Chrysler to get them through the restructuring/retooling to build small competitive cars. I'm hazy on the exact details, but the government acted as investors would and required detailed business plans, loaned money at a favorable interest rate, recieved some sort of preferred shares or debt, and built in guarantees to be paid back before everybody else.

    The outcome
    - Chrysler invented the K-car and the mini-van, which were revolutionary designs and hits with consumers. (concerns about stifling innovation
    - The government had the loans paid back in a couple of years vs. the 10 they originally planned.
    - The government made significant money when it sold off the stake that it aquired as part of the bailout.

    It's up in the air whether today's situation is the same as 30 years ago. However, with the current congress and incoming adminstration, I predict that we're going to see a similar bailout.

  2. Great Comment Sachin. It is a very good point that Chrysler, when given a bridge, turned that chance into something very good.

    But I think it is different this time. The problems are systemic to the industry. It has been building up for years. You can't get over the lack of demand, the higher quality cars from foreign competition, and the gap in cost per vehicle that is endemic to the American auto industry. Giving them money fixes none of these issues.

  3. I live in Michigan and the 2 million job loss probably is not that far off. Just in the 3 counties around Detroit have seen huge losses. You have to account for the car plants, the suppliers, your local bartender, barber, waitress, nurses, police officers, etc. Without the revenue the Big 3 bring in all of jobs will be gone.

    I blame all of this on poor leadership from the Big 3 execs and the UAW. All of them wanted to get rich while not focusing on what they were doing. My dad worked for Ford for 38 years and took the buyout last year. Good thing he did because now they are offereing half as much. Even he says the majority of employess were over paid. There were janitors making over $25 an hour just because they were a UAW employee. The legacy costs are killing them.

  4. [...] get money from the government for free?  More and more companies are going to start coming with their hands out asking for a bailout.   We will see at least a few more industries claiming they are crucial to the economy and that [...]