Now that we have given even more money to save AIG and the rest of the financial industry, should we listen to those calling for us to save GM from bankruptcy? To hear the arguments, GM is too big to fail. If they fail, they take the whole economy with it. By some estimates, GM is responsible for a few million jobs. Let them fall and all the ancillary industries like car dealerships and car part makers will go with them. This causes a domino effect that will bring down the rest of the country with it.
What a load of crap. There is no company too big to fail. Do we really have so little faith in the rest of the American population to think that these resources couldn't be redeployed into something more useful? Give me a break. GM failing does not mean people will stop buying cars. A lack of supply does not mean demand just evaporates. These buyers will find other cars to buy. The better parts maker will find a way to retool and provide parts to either service the cars out there now or to whatever company replaces the cars that GM would have sold.
No matter what the bailout entails, it can't do one key thing. It can't make people want to buy GM cars. This is the heart of the problem. Nothing else matters. GM is failing not because of a bad economy; they are failing because not enough people want to buy their product at the price they are offering it. GM is a failed business model and proves it over and over again. Any company that can't survive an economic downturn, does not deserve to be in existence. It is exactly in these circumstances that the strongest companies rise to the top while those who are weak fall into bankruptcy. Without this cycle, horrible inefficiencies, like GM, are allowed to persist.
Of course, the automobile lobby is a strong one. They will convince those in Washington how crucial they are to the entire economy. They will convince them that they should be allowed to make crappy products that too few people want at prices that can't compete with their better competition. Of course, that will mean that America will continue to deploy resources in an industry it is not suited to win. Forget trying to deploy these resources in things that America actually does have a competitive advantage in like software development, medical research, and alternative energy engineering. Let's try and prop up old and dying industries that have no chance of winning in a global marketplace. Is that not the best way to run a business? Do not most business invest their capital in projects that have the lowest return? When resources are tight, is it not best to forget where your strengths are instead be more inefficient and focus on the things you have no chance of succeeding in?
If we are going to give them money I would like a few things answered. Let us treat it like venture capital.
- What are your prospects for success?
- What is the likely return on investment?
- What is your business plan to get you to profitability?
- Why are you likely to succeed vs. your competition?
- Why should I give you the money rather than directly investing in the people and business that will be hurt if I let you fail?
All should be fairly simple to answer. I suspect none of the answers would likely satisfy anybody actually looking to invest in the company.
I agree with you... no matter what happens now - bankruptcy or bailout - customer sentiment toward GM's vehicles will not be very positive (if it is not sour already).ReplyDelete
I also agree that business cycles are good and necessary things that clean markets of inefficiencies and GM, like you said, has horrible inefficiencies. However, I would want to look at the reaches the company has in the commercial paper and financing markets before I would argue they are or are not too big to fail.
I still can't believe GM has the nerve to ask for a handout. This company has been in a lot of trouble for a while now, long before the mortgage fiasco. Like you said, if no one's buying GM car, pouring more money into this company will not amount to anything. Let's say they get the bailout, what will they do now that will suddenly turn this company around?ReplyDelete
[...] of course this plan has its problems as well. And, like the GM situation it comes down to one fundamental problem. You can not, over the long haul, create demand for a [...]ReplyDelete
I am torn about bailing out GM. On one hand, our government has spent too much money on bail outs in general (I am sure more money will be needed too). On the other, I feel sorry for the thousands of people who would lose their jobs when GM goes down.ReplyDelete
You cannot stop the inevitable. If few people are buying GM cars, there's no sense in throwing more money into a company that will produce more cars that no one will buy.ReplyDelete
[...] While I am certain something could probably still be worked out, I am a little surprised with the administration taking a hard tone here. I was honestly expecting the administration to bend over backwards and say any proposal, no matter how lame, was acceptable. No way I thought they might actually asks them to answer the tough questions or that they might actually consider a scenario that would let GM declare bankruptcy. [...]ReplyDelete