$485 Billion in Value Destroyed, and Counting

David Yermack has an awesome essay in the WSJ this weekend, encouraging Congress to just say no to spending $25-$50 billion bailing out Ford and GM.  Why?  Well, beyond the obvious moral hazard, these companies are value destruction machines of epic proportions.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.


  1. Ethan Bloch:

    I as well read this article over the weekend and found many valid points brought forth from the writer. Sometimes you just gotta let free markets work. However, it is somewhat worrisome to think about what might happen in the event of a GM bankruptcy and taking the writers projection of how this cold play out, as fact, could be dangerous.

    Furthermore I do believe there are national strategic advantages to having a domestically owned automobile industry. Not sure how much of this has to do me holding onto old ideas, as I believe there are real disadvantages in America letting go of its automobile sector.

  2. HS:

    If you look at all strong major economies of the world, they all have one thing in common - a strong manufacturing base. The center of that manufacturing base, which they all have in common, is making cars and many of them are subsidized to do so. Japan, Australia, Korea, Germany, France, Italy, UK, China, India and the US all have their own car companies. The ones that do not are left in the dust... Soviet Union, most of Europe, Middle East, Africa.

    One thing I learned is that free markets only work when all markets are free. An example from the Rockerfeller days, their needs to be fair market for free market to work. Right now, it is far from fair.