Why we shouldn't bailout GM, Ford and Chrysler

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without bailout domestics will fail but that doesnt mean they will disappear. chapter 11 or mergers will force them to make the changes they should have made when they will making huge profits on suv's 10 years ago. jobs will be lost with or without bailout so i say that money is better put elsewhere to help the economy. gm, ford, chrysler were circling the drain way before the credit crisis of september.

 

Sobering reality:

Hourly wage for average GM employee: $78.00
Hourly wage for average Toyota employee: $35.00
(source - Fox Business News)

Amount of total GM car price dedicated to employee health benefits: $1,500.00
Amount of total Toyota car price dedicated to employee health benefits: $100.00
(source - Fox News)

So - right off the bat, the American companies are at a SEVERE disadvantage with respect to keeping costs low. They can't compete...Mitt Romney has a great Op-Ed in the NYT about this. They need significant re-organization, because a bailout is delaying the inevitable.

Your analogy to British-Leyland is spot on - classic example of too much Government leading to negative results.

 

Don't forget the HUGE pensions the unions helped the workers get. Unions have had a big hand in helping destory the car companies as much as the big wigs.

And I for one am so tired of hearing people complain about the quality/reliability of cars that people have never ever owned. American cars can last just as long as any other car out there, and Honda's, Toyota's, whatever can/have produced lemons as well.

Bankruptcy may be the best thing so that it will severe the union contracts. The Union's are just as greedy as they big wigs. Unions no longer serve the purpose they originally were founded for.

 

Yep - spot on. I agree with you on all points. Recently had the chance to drive a Chevy Malibu and I was quite impressed. Felt solid, gaps in the seams were tight - well done. Unfortunately, as you point out, the unions have helped make the cost structure unwieldy for the US auto industry.

I am also put off when pundits say that the Big 3 focused too much on trucks - that's because the trucks were the most profitable products and the best way to keep funding the growing cost base. IMHO - restructuring, which would force renegotiation of said union contracts - is the best way to go. In fact, I'd support giving them some money on the condition they declare Chp. 11.

 

In demand? Your inflection is based on intuition that is simply not supported by the facts. So far in 2008, ALL hybrids make up 2.6% of all vehicles SOLD. Another 6% are flex-fuel vehicles, while over 90% of those vehicles have never filled up with E85.

The 25B is already appropriated for retooling costs. The industry is asking the money be used for more than just that. Additionally, meanwhile, foreign automakers building plants in the US have been given tax incentives, loans, and free money to do just that; while the domestics are giving nothing. Also, we have the Japanese government subsidizing much of Toyota itself in Toyota City. The people of japan paid entirely for the development of the Prius. The domestics have entirely been required to develop everything on their own accord. Finally, we are not given the same equal playing ground on foreign land against their competition. Like for Like markets should exist.

Again, you are going on your intuition, and not the reality. The Domestic industry were doing quite well up until the beginning of the credit crunch started hitting home (earlier than the rest of the country).

never spent enough in R+D? Surely you jest. Yet again, you have intuition that is far and away from the reality of the situation. The domestics have the highest level of technology in the world. Guess where the worlds auto makers, and race teams come for talent, innovation, and expertise? Michigan. Why did Diamler merge with Chrysler? Chrysler had the highest tech. facilities in the world to bring Mercedes into the 21st century. When Mercedes transferred the cash to Germany; and brought that technology "home"; they left. The amount of forward thinking happening at GM, and Ford... and cutting build cost at Chrysler are simply staggering. All while giving fantastic wages to the people who assemble the cars. Drunk with greed? Maybe, just maybe... they were bringing everybody up. The 4$ / gallon price was nothing more than a bubble. The market reacted, and reacted quickly.

The level of R+D in the domestics is extreme. Just for example, to bring a car to market takes 4 - 5 years. Much of this is due to regulation. EPA, CAFE, Kalifornia's own independant smog/ global warming laws; DOT crash standards, etc. etc. etc. .... and the union's blocking way to kill existing cars, and start new lines.

Averaging $30k WTF. Pull another number out of your ass, it will be more accurate. 50% of all vehicle sales are trucks on the domestic side, and trucks are still the no. 1 selling vehicle in the world. After incentives, based F150 Fx4's are about 20,000$ ... perhaps less. And they are still pulling a profit. The no. 1 selling car (excluding trucks) right now is the Lincoln MKS; not a Toyota, not a Honda.

Average cost/car in the Domestic industry = $30,000 LOL. Puhhhhhhhlease. Keep in mind the volume of Focus/ Cobalts/ Saturns/ Stratus/ etc. etc. that sell for 10k or less. Competing right against the POS korean cars; with better build quality (at least in GM and Ford).

The number of unemployed people if the smallest of the Three fails is nearing 2,000,000 ... Just Chrysler, and increase that when including suppliers, dealers, private repair shops, fleet companies, etc. etc. Today, 1/5 people in the US have a job related to the Auto Industry. AIG employed 100,000 worldwide; and received no conditions of the bailout. The Banking company also received no conditions. Back in 2002, the Airline industry received no conditions; and was much smaller.

As we increase regulation, force Unionizing, we will be a service economy serving the new 1st world... China/ India which have no such regulations... Japan is taking losses too; but the Gov. already subsidizes most of their mfr. industry already in Japan. Why are we not so "proud" to buy American based on principal? Especially now as we have equal, and better vehicles than they do. GM offers more 30+ mpg vehicles than any other company in the WORLD. Additionally, 30 US MPG = 37.5 UK MPG.

Some people say that. They have limited comprehension of the Automotive and Manufacturing world. If the credit markets hadn't imploded, they would have borrowed in the private sector if necessary... as proved by past actions. The biggest issues is that there is almost no domestic solution for raw goods anymore thanks to Clinton era EPA edicts. The general move is to eradicate Manufacturing from the US altogether; diminishing our ability to excersize our freedom. That does scare me.

British Layland proved that the Gov. should not be consulted when building cars for consumers.

Ahem. It was their inability to build cars that people wanted. You are just hammering in points that seem like they are intuitive; but they are nowhere near the reality. You are short-sighted, and unable to accept that the company was top-heavy with it's gov. control over what was built... group think, cross platforms that were equally crap. If they built good cars that people wanted, they would exist today... stronger than ever.

Gov. control fails, and so do companies that fail to build cars people want... all the while, during that era, new gov. controls nearly destroyed the auto industries WORLDWIDE. The same thing happened in the 2007 legislation in the US to up CAFE as happened 33 years ago. And guess what, it is causing the same issues all over again. Is it any guess?

You are missing such a big part of the picture with your analysis, it would be funny if times weren't so dire. I fear too many people think along the same lines you do.

Again, you are showing a short-sighted view that I fear too many Americans have. The plant's have value, the machinery has value, the brand has value. But after buying a firesale of all this material, who will pay the necessary R+D to bring either a new vehicle to market, or bring an existing vehicle up to EPA/ DOT/ CA SMOG etc. standards and certifications? Who will pay 100,000,000 to do that? A single line alone cannot survive alone.

You must not have heard; Porsche own over 80% of VW now.

Strong competitor? LOL not based on market share, or competing vehicles. Mitsu have been building low-quality and low reliability for longer than I've been alive. They've been competing with Nissan and the French for poorly made cars for the last 20 years.

Ford have far more cash than BMW. People forget how much of the company is owned privately. Nobody has credit today. Another shortsighted statement. BMW have had quality issues since the beginning of the Bangle era. They are on the forefront of automotive design. They don't have enough market share, or profits to buy a major company...

Sore? Again, short sighted, and "intuitive" thoughts. Chrysler had $36 BILLION in cash when they "merged" and left only enough to cover legacy costs when they sold to Cerberus. Mercedes have a TON of money, and technology out of the merger. They lost nothing. Locally, we call Diamler "Crimeler" do to their treachery.

The Chinese are more likely to make the high offer.

Their profit margins come from cheap labor, and raw material prices in sweat shops; not from the domestic sales/ servicing/ manufacturing. These companies are happy to take a loss on the US side with plants; and happy to take our talent in their tech centers. But don't kid yourself; the profits come from obsessively cheap labor with little legacy costs.

WTF are you talking about? Much of that would not happen until bankruptcy. Buying a company cannot force the unions down. Diamler couldn't, Cerberus couldn't. China can't, and neither can the Koreans. Only bankruptcy can. Obviously you seem to have missed a lot of the announcements. Amid the current market, GM have announced they are postponing truck based SUV's indefinitely. A self proclaimed analyst who doesn't know freely available information such as this scares me that you have a "voice" on the web as an expert, or that people are

your thoughts truly scare me.

I see it the failure of the American government, and education process that allow somebody like you to chop it up to the industry failing. They didn't fail in the 70's, they didn't fail in the 21st century. The government has even more then the unions.

The Germans have no interest in the Big 3, and Ford is in no place to consider selling an option. The only thing that the Asians would do is steal the technology to build better cars, and leave the US "high and dry" forcing the manufacturing industry to be a tiny facsimile of itself.

The cop out statement that says "hey, we aren't the experts!!!" that the little people will overlook. 100 years to get the mess we're in? No, it's taken 100 years for the Government to try to kill it.

I'm not entirely "for" the bailout, but not entirely against it. If they were serious about it, the 2007 CAFE legislation, and DOT crash reg. would be suspended until the industry is ready to meet the next challenge properly.

I hope you take responsibility for your article, and put my challenges to it in your next issue.

 

All very good points. The day of the union passed long ago. 100 years ago unions were needed to ensure fair wages and a safe work place. Today, unions rape industry by doing less work for more money. The United Auto Workers union shoulders much of the blame here. $78 an hour average for someone to sit on an assembly line - totally outrageous!! No wonder the Big 3 are not profitable.

I say, let the Big 3 fail and take the UAW with you. What an opportunity for a startup who has not been corrupted and pressured by the UAW and their political lobbyists.

 

good write up and good followup debates.

BUT

here is a question: What of our vehicles in the Military, or other needed areas? Are we to purchase them from Japanese, Koreans, other?

we need to keep some of this business here in our home market.
r

 

These "evil union" wages are what keep the US with a better standard of living than the rest of the world.
If our wages are reduced to be the same as is paid to workers in China or India, our standard of living will soon match theirs.

Without the unions, we will drift back toward: 80 hour work weeks, no minimum wage laws, no health care insurance, no 401 K plans, no paid holidays, and child labor.

Be careful what you wish for.

 

I really hope the Govt would help them,
.. i guess if the Govt does bail them out, there should be something about wage cuts etc, or even having its factories relocated to Mexico, south america or India. I guess damage control would be good, and restructuring them well.
The chinese, if they purchase would makes things worst, imho.

 

The union wage isn't the issue IMHO. We have always been on the forefront of making our workers being able to live a very good life since the first Ford Assy. lines.

The issue with the unions is there are other arbitrary union agreements that penalize the industry from moving forward. It takes the asian competitors less than 2 years to bring a vehicle to market. It takes the domestics 4-5 years due significnatly to union agreements to what cars can be built when and where, and by whom. Other things like the "Jobs Bank" are ridiculous... the health care... The wages are not. Pensions are another story. Perhaps the pension was "too good" for too long. But I don't believe that even with Chap. 11, that pensioners should be left high and dry... but their health care, definitely.

There is also that there is no like-for like terrifs on the Asian imports. Every doller of a US built Toyota, nearly 10% of it goes back to Japan. Pride first!

 

$78 ? Are you sure that is the average UAW member? I think that is the average top-down.

 

The $78 includes the labor buy outs which is included in the total labor cost accounting.

 

No bailout. Let them file Chapter 11 and get out of all their outrageous union and vendor contracts and start over...

 

There is going to be pain and a loss of jobs either way. The question is whether it would be cheaper overall for the US to let them fail (thus incurring more costs of public assistance for unemployed workers), or propping them up with billions now and billions in six months, billions in a year, etc.

The unions are not budging with concessions, their leaders are just as out of touch with reality as the CEO's who flew to DC yesterday in their private jets. The leadership on both sides should be shown the door, and management and labor work together to come up with a plan, forgetting the past. Probably only Chapter 11 will accomplish this. Maybe declare bankruptcy and have a union group buy the company so that their members (workers) actually would give a damn about whether the company is making money as opposed to only getting theirs?

The problem is that would you buy a car from GM if they were in bankruptcy? I wouldn't either because I don't have faith in either side to pull their collective heads out and actually work out a viable plan.

Regardless of what happens in the near-term, I see the UAW as we know it defunct by the next election cycle.

 

That doesn't surprise me at all. My father-in-law reitred from Chrysler at 50 with a nice pension and outrageous benefits. My m-i-l had breast cancer, chemo, mastectomy, and reconstruction. Total cost for them out of pocket? $360.

 

Right - that's my understanding. I didn't believe it just based on my own salary...so I checked that and it includes buy outs and what not.

 

IIRC, a worker on the assembly line over here gets around 25€ / hour, and the unions are quite powerful in Germany.

 

The hearings have been pretty painful. They've laid off the UAW guy but he really comes across as poorly spoken and in it for himself. Of course these guys fly private but it was still very awkward. If you fly private or have an affinity for really expensive travel it's best to pay for it yourself and charge the company back at first class. Could they have been surprised by something like that? It wasn't exactly a black swan event.

 

Interesting article sammyb, but heres a thought.

Isn't it good to have GM making crappy little cars (I'm cool with the trucks), so that people are driven to go get imports?

Just my opinion.

PS I work for a GM dealer in service! haha

Chris

 

There is no easy solution here BUT just throwing money at it won't solve anything. It only delays the inevitable as the big three are doomed to be destroyed by foreign competitors who have too many advantages over them.

Going Chapter 11 will allow GM at least get past some of the legal and finacial hurdles to being to level the playing field. It can cut it's bloated dealer network which it can't do because it is restricted right now by many state laws. After chapter 11, they can do what they want. Toyota has 1/5 the dealers that GM has. More dealers are wasteful as Toyota can build larger, more efficient systems to cut costs ontraining, repair, transportation, communication, real estate costs, advertising, etc, etc.

Here's some other Chapter 11 advantages for GM:

GM would be able to get rid of the union "ghost workers" who don't work but get paid none the same.

GM could send it's pension obligations to the government.

GM could finally get rid of wasted brands like Hummer, Pontiac, Saab, and Buick. These only eat up resources. The reason they don't is because they've been through the pain and agony of killing Oldsmobile. Hundreds of Dealers would sue and demand compensation if they closed dealers without the advantage of Chapter 11.

GM could renegotiate with the unions to get labor costs back in line with it's competitors.

GM could sell off property and unprofitable plants without endless lawsuits or interference from local politicians.

GM could renegotiate from scratch it's entire health care policies.

GM could dissolve it's board and bring in fresh new blood and an entirely new compensation plan.

Would there be pain? You bet... and a lot of it. But, in the end, the result would be less of a 1930's business dinosaur and more of a 21st century business model. Throwing more money at a dinosaur only prolongs the pain without any real hope for a solution. In the end, the dinosaurs will still die off and be replaced with something better.

To those that say "it's not GM's fault that they are in this situation -- its the economy, stupid!". Well, yes and no. There is no question that the recent downturn put these already shaky organizations at risk. But, if they HAD followed market trends better, if they HAD worked harder to reduce costs, if they HAD made the tough choices instead of the politically correct, if they HAD been bolder in developing their product lines and styling, if the unions knew that their demands WOULD lead to bankrupcy, then maybe they might be thumbing their nose at Toyota right now instead of the other way around.

How long have they been talking about the Volt and still it won't be here for another 3 years -- maybe? Ford is coming out with it's second generation Mustang and the Camaro still isn't here. Tell me where their answer is to the thousands of Prius's I see everyday that sell at a the same price USED as NEW right now? In all the years of looking at the Camry take over where cars like the Olds Cutlass used to reign supreme, they couldn't find a way to beat it or at least compete head to head?

Yet, they come out with a Hummer pick up (with a bed so small that it's good only for transporting a potted plant) and the Cadillac XLR and Pontiac Soltice -- low production sports cars???? How much money, time, and wasted resources where used for these projects? And, who made these decisions? It certainly wasn't the guy working on the production line.

Come on. It didn't take a genius to look at what's going on and figure out that their product lines are being created from one dimensional thinking.

Ok, I'm being a little cruel here but these are cruel times. Call it tough love.

 

Let's keep in mind that automakers are facing a "law of diminishing returns" where the products being newly built do not meet the needs of the people across the board. They are facing competition from their own cars on the used market, which have been rapidly declining in prices. Unless the cars are differentiated from the rest of the pack ( green cars), the demand for cars will significantly weaken due to the law of diminishing returns. There are simply too many alternatives in the market at better prices.

There is a saying that in every niche market there is only room for 2 of the top players. It is inevitable that the super competitive auto industry will start to centralize.

If times were good, I would not be in support of the bailout. However, to not bailout these companies in this economy would be a VERY Bad move. Bail them out now... and hopefully when the economy improves in 2-5 years.... then we can slowly watch the big three drop one by one.

 

++++++++++1

 

up until the US has almost zero manufacturing capability when the time it needs one arises. When WWIII happens, will we have the ability to defend ourselves? If there was something I'd actually complain about CEO's "greed" is that in search of profits, we've sent manufacturing to China; and the level of quality has gone down the toilet quite obtusely. Tools that used to be made in UK, Germany and the US that are pre 2000 are almost all still working, while I've had to replace many other tools with the "made in China" stamp.

These things are essential to America as a whole, be it hippie, or chest thumping American. Both want to live free; but is it going to be at the expense of becoming country-wide Service industry; with no ability to self sustain like it was 50 years ago.

For that reason, there MUST be some form of gov. intervention.

Your reasoning for saying the 2007 CAFE is a good thing is a farce at best. Suspended. Better, more efficient engines is the way of things over time; but the time frame created by politicians is beyond obtuse. While the imports may have been unable to sell cars in California due to being unable to meet the restrictions initially; the reailty is it nearly killed the domestic industry itself.

Additionally, we should not let foreign entities from the east gain control of the technologies from companies like GM. We should be "best" and we should pay "best" as a statement of national pride, as well as national defense.