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November 25, 2008
The Bailout Debate: Against the Rescue
Bailing out the Big Three automakers would only reward failure, preserve chronic overcapacity and harm the U.S. auto industry as a whole, critics of the government rescue argue. Besides, there's no guarantee the $25 billion cash infusion would even work.
The banging of the anti-bailout drums is growing louder, with critics saying the three once-proud titans of American manufacturing do not deserve the financial lifeline.
Nearly half of Americans prefer that Detroit's Big Three automakers go out of business rather than rescue the sputtering car companies with taxpayer dollars, according to a new poll from Rasmussen Reports. The survey found that 48 percent said it is better for the Big Three to fail rather than give them public subsidies. Only 35 percent said it's better to subsidize the firms' continued existence, and another 17 percent said they were unsure.
Indeed, even among the industry's supporters, the idea of a government bailout of General Motors Corp., Ford Motor Co. and Chrysler LLC, hasn't been sitting too well.
In a televised appearance last week, former Massachusetts governor — and the son of a man who once ran American Motors Corporation — Mitt Romney said that he doesn't want to see the carmakers go out of business, "but we don't want them to continue business as usual."
At a Senate Banking Committee hearing on the auto industry's future last week, most senators seemed to agree that the companies had brought many of their problems on themselves. The need for Detroit to produce more fuel-efficient vehicles, and to streamline their business operations, has long been evident, said panel chairman Sen. Christopher Dodd (D-Conn.).
Sen. Mike Enzi (R-Wyo.) agreed, saying the larger financial crisis "is not the only reason why the domestic auto industry is in trouble." He went on to cite "inefficient production" and "costly labor agreements" as having put the United States automakers at a disadvantage to foreign companies.
In fact, sales by the U.S. automakers account for only 47 percent of domestic sales this year, according to sales tracker Autodata.
"For years the Big Three have relied heavily on and became complacent with the sale of trucks and SUV's, because that's where the money was. Consequently, their innovation, quality and development of passenger cars suffered," Greg Chaney, manager at Chacon Autos, Dallas-based owner of eight automotive dealerships, told Inc.com this week. "Now that people want passenger cars because of lower prices and better fuel economy, the Big Three are caught off guard.
"Additionally," Chaney continued, "their cost structures are terrible. With so many expenses under the previous union contracts, retirement health care and other labor costs, I think it is a miracle they have been able to make it this far."
"No one can say they didn't see this coming," said Senator Dodd.
And government money won't be able to fix the industry's problems, say critics.
It is also clear that "[m]any members of Congress worry that Detroit has not changed its big-spending, gas-guzzling habits, and that company executives will be back in a few months asking for billions of dollars more to stay afloat," according to the Los Angeles Times.
In that context, some see bankruptcy as necessary, with Detroit having to reorganize and restructure drastically.
"How about this," proposes no-nonsense business guru Jack Welch, former chairman and CEO of General Electric Co., along with his wife Suzy at BusinessWeek: "The boards of Chrysler and General Motors put their companies into bankruptcy with the clear intent of reorganization and merger. As radical as that sounds, it's the best road we can see to a viable future for the industry."
John Gapper of the Financial Times makes the case for why bankruptcy is the best bet for Detroit:
- It provides a plausible path forward — Even supporters of the bailout could not justify the immediate infusion of government aid, "faced with companies that could not explain how it would help in the long-term."
- Bankruptcy would force necessary reorganization — Chapter 11, if properly planned, "would create the conditions for both a financial and an industrial restructuring to make Detroit smaller and leaner." It would allow the companies to keep going and keep their suppliers going.
- There'd be a better chance of return — "The government would stand a decent chance of getting its money back," according to Gapper. "Instead of just handing over $25 billion for the Detroit companies to burn through, it would guarantee financing to see them through these Chapter 11 restructurings, in return for equity or warrants in the new companies."
Ex-governor Romney told CBS he believes bankruptcy filings or an out-of-court settlement might be the best answer to "get these companies into a competitive position so that they can stay, grow and add jobs."
"If you write a check, you're going to see these companies go out of bounds ultimately," The former Republican presidential candidate told CBS's "The Early Show" on Thursday. "Instead, we have to help these companies restructure — stay in business, but restructure. Shed the unnecessary costs, make them competitive with the transplants and the foreign cars and by virtue of doing that, make sure they stay in business long-term."
Earlier in the week, Romney penned a New York Times op-ed piece in which he argued that while the "American auto industry is vital to our national interest," bailing out the Big Three would "virtually guarantee" their demise.
The inevitable heavy job losses, should even one of the Detroit automakers cease to exist, is the heart of the argument for a bailout. No doubt, the concerned panic is very real. However, this is also being met with skepticism, even in Michigan where some residents point to the October $700 billion aid package for financial institutions and note that almost nothing has changed for the better.
Plus, the numbers might not be as high as have been toted recently. Supporters of a bailout have frequently cited a statistic that the industry supports "one in 10 jobs" in the country, which, according to the New York Times, "is a large figure" that "most likely overestimates the effect a collapse of one or more carmakers would have on the economy."
Moreover, if Detroit falls, the South could rise.
"As Detroit's automakers seek a government bailout, the resilience of their foreign rivals could vault the South to the forefront of the U.S. car industry," says the Wall Street Journal: "Foreign makers have been lured to South Carolina, Alabama and other Southern states over the past decade by generous tax benefits and laws that make it easier to build a largely nonunion work force." That labor "flexibility" has allowed the likes of BMW and Toyota to quickly downsize when necessary in a way the Big Three could only dream of doing.
Hard-line opponents of an auto industry bailout have branded the industry a "dinosaur" whose "day of reckoning is near." A bailout, they say, will simply postpone the inevitable.
For the divergent view on the subject, check out today's The Bailout Debate: For the Rescue.
Resources
GM Seeks $10 Billion-$12 Billion Of $25 Billion Loan Plan; Ford Seeks $7 Billion-$8 Billion
by Siobhan Hughes
Dow Jones Newswires, Nov. 18, 2008
Paulson Rules Out Aid to Carmakers Under Rescue Plan
Agence France-Presse, Nov. 12, 2008
White House Wants Auto Industry to Use Available Aid Funds
Agence France-Presse, Nov. 17, 2008
Big 3 Carmakers Beg for $25B, Warn of Catastrophe
The Associated Press, Nov. 19, 2008
Showdown Looming in Congress over Automaker Rescue
The Associated Press, Nov. 16, 2008
Auto Aid Could Get Second Chance
by Justin Hyde
Detroit Free Press, Nov. 20, 2008
Senate's Reid Says No Deal Yet on Bailout for Big Three
by Robert Schroeder
MarketWatch, Nov. 20, 2008
Auto industry survival in hands of Congress
by Todd Spangler and Justin Hyde
Detroit Free Press, Nov. 16, 2008
Ford: Half of U.S. states would lose 3,000-plus jobs in auto collapse
by Sarah A. Webster
Detroit Free Press, Nov. 17, 2008
Auto bailout: Showdown
by Chris Isidore
CNNMoney.com, last updated Nov. 24, 2008
Clout Has Plunged for Automakers and Union, Too
by Micheline Maynard
The New York Times, Nov. 17, 2008
CAR Research Memorandum: The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers
by David Cole, Sean McAlinden, Kristin Dziczek and Debra Maranger Menk
Center for Automotive Research, Nov. 4, 2008
An Estimate of Car Jobs in Jeopardy Is Dubious
by Catherine Rampell
The New York Times, Nov. 18, 2008
South Could Gain as Detroit Struggles
by Paulo Prada and Dan Fitzpatrick
The Wall Street Journal, Nov. 20, 2008
Back on Capitol Hill (video)
Automotive News, Nov. 19, 2008
Advantage of Corporate Bankruptcy Is Dwindling
by Jonathan D. Glater
The New York Times, Nov. 18, 2008
Come on and Save Me
by Daniel Politi
Slate, Nov. 19, 2008
Let Detroit Go Bankrupt
by Mitt Romney
The New York Times, Nov. 18, 2008
Invidious Comparisons
by Megan McArdle
The Atlantic, Nov. 11, 2008
How to fix the Big Three
by Chris Isidore
CNNMoney.com, Nov. 17, 2008
Auto Execs Fly Corporate Jets to D.C., Tin Cups in Hand
by Dana Milbank
The Washington Post, Nov. 20, 2008
Big 3 Fail to Close Deal on Bailout
by Jim Puzzanghera and Richard Simon
Los Angeles Times, Nov. 20, 2008
Earn the Bailout, Detroit
by Douglas Olin
Los Angeles Times, Nov. 12, 2008
How to Fix a Flat
by Thomas L. Friedman
The New York Times, Nov. 11, 2008
House Auto Legislation Will Protect American Jobs While Demanding Long-Term Restructuring of Auto Industry for Viability and Energy Independence
House Committee on Financial Services, Nov. 17, 2008
Is Detroit Worth Saving?
by Joseph Romm
Salon.com, Nov. 12, 2008
Facing a Slowdown, China's Auto Industry Presses for a Bailout From Beijing
by Keith Bradsher
The New York Times, Nov. 18, 2008
EU Considers Aid for Auto Makers
by Gabriele Parussini and Andrea Thomas
The Wall Street Journal - Europe, Nov. 18, 2008
Detroit on the Defensive
by Tim Jones
The Chicago Tribune, Nov. 23, 2008
Democrats to Automakers: Prove You Can Repay $25 Billion
by Justin Hyde
Detroit Free Press, Nov. 22, 2008
Romney Adamantly Against Auto Industry Bailout
The Associated Press, Nov. 20, 2008
Mulally Defends Ford's Actions
The Associated Press, Nov. 18, 2008
Auto Industry Survey
Peter D. Hart Research Associates, Inc., Nov. 11-12, 2008
48% Say Failure of GM Best for the Economy
Rasmussen Reports, Nov. 20, 2008
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Comment
4 CommentsThe US auto industry did this to itself by overpricing it's cars and overpaying it's workers. I know this firsthand. My father spent almost 39 years working at Ford Motor Company. When he retired, they were paying him over $20/hr. to sit in a chair and watch a machine run. Meanwhile, cars like the Mustang GT have become so expensive that only the upper-middle class and above can afford one. The idea behind the original Mustang was to make a sporty, attractive car that anyone could afford.
Seems the automakers have lost focus. They do not deserve to be saved by the government (or more realistically, the taxpayers and consumers they are already screwing).
November 25, 2008 2:10 PMThe arguement of creditability as a reason for Not taking bankrupcy is absurd. Bankruptcy would allow them to restructure more quickly than negoiations would. They should end with much better results. The Taxpayer's money would go alot further and would then give the Auto makers creditability at the same time. This creditability has been demonstrated in the past.
November 25, 2008 2:53 PMYou would think the more producers (competition) would be better for the general public and keep prices down. Hasn't worked for the auto industry. Their thinking is way off track and too short-ranged.
Now their ads and design of some of their monster beast trucks have had a negative influence on the Toyota Tundra. (Just change the grill and it is a RAM truck). The Toyota still has better quality.
I cannot remember ever seeing a survey asking me what features I NEED in a vehicle or what features I would LIKE to HAVE.
There has been too much importance placed on 'lets load this up with everything', 'can it run nearly vertically up a rock face?', 'can it entertain my kids with DVD players, guitar inputs, MP3s?', 'how long can I party in this?'
Crank up the NOISE in the ads Dodge, the people in the middle of the desert cannot hear you. TOO much HYPE. You are appealing to the redneck morons who need a truck to run over rocks. To the "I just have to have something better than the Jones." NOT to the real needs of the population.
Bet the payments lasted longer than the party and the gas and repairs still cost an arm and a leg.
My '98 Toyota cost just over $14K in '98 and is somewhat small only once in a while, and has been very reliable and fuel efficient. Compare the quality of a U.S. made trucks of the same size, they are falling apart and rarely get the stated mpg. Compare that to the expensive beast that are being pushed by the big 3, cost too much to buy and fuel, have way too much room 90% of the time and was only built big to carry the big egos of the buyers. Seems like a big waste of space to me.
If my company was in trouble, I would not be paying anyone a bonus or a parachute payout. I would be willing to cut back on expenses and my salary to save it. What is their excuse?
The party is over, time to pay up.
November 25, 2008 4:02 PMInstead of taking that 25 million and giving it to the auto companies - the government should give it to the people. That money would help the working man get out of dept and the funds would go to the banks, mortgage companies, car makers, credit card companies, etc., thus helping their bottom line also.
