Additional Thoughts on Letting GM Die
I have gotten a lot of email on my posts about allowing GM to die. Here are a few thoughts:
- No matter what our mutual preferences, GM is not actually going to die. It will go in to chapter 11 and reorganize, and, as that law intends, will continue to operate through that reorganization. While Lehman and Enron liquidated, they were really special cases having more to do with financial than operating assets. In the last 20 years, Texaco, PG&E, Worldcom, Delta, and UAL have all passed through chapter 11, and all operated their businesses through bankruptcy. In fact, all of Enron's pipelines and other operating assets are running A-OK right now, just under new ownership. Do you remember all those news stories about massive natural gas shortages because Enron's pipelines all stopped operating when it declared bankruptcy? Yeah, neither did I.
- You are welcome to write me about how I suck because your job at GM (or retirement, or health care, or all of the above) is important to you if that helps you psychologically to manage a terrible and stressful time. But, to cause me to back off my opinion about GM and the bailout, you need to tell me why your job is more important than someone else's job. Because, unlike private enterprise, the government does not create wealth, but can only move it around (with a leaky bucket, at that). GM has wasted hundreds of billions of dollars of investment, so having the government invest money to save your job will likely cost >1 job somewhere else. Just because we don't, and may never know, who that specific person is does not make this an ethical choice.
- I too, all things being equal, value having a healthy auto industry in the US (which in fact we still have -- it just happens the headquarters of many of the companies that run the plants are over in Japan). However, if you wish to argue that the bailout is necessary to save a US auto industry, you in fact need to argue that the current set of managers/contracts/systems/performance measures/organization/etc. of GM are better able to manage the employees and assets of GM than a different owner with different managers and approaches. Because having GM fail does not make the assets or trained people disappear, it merely makes it more likely they will be managed by a different entity. So all a bailout does is save the GM entity that manages these assets and people.
ErikTheRed:
Ace has had some nice takes on this here and here.
November 24, 2008, 12:01 pmstan:
Obama is still spouting his 2.5 million jobs fantasy. Broken windows everywhere.
I was in Detroit last year for the NCAA basketball regional. Made a wrong turn and went through an area that looked like a war zone. I've never seen so many broken windows on high rise buildings. Scary.
November 24, 2008, 1:13 pmErikTheRed:
@stan - no, no, no, according to the Washington Post (emphasis mine):
"President-elect Barack Obama is developing a plan to create or preserve 2.5 million jobs over the next two years by spending billions of dollars to rebuild roads and bridges, modernize public schools, and construct wind farms and other alternative sources of energy. "
I'd snark on this, but Ace (I don't have a man-crush on him, really, I promise) snarked this nicely earlier:
"So, if I'm understanding this correctly, if Obama creates zero jobs by 2011, he has achieved his goal, as he "preserved" the 2.5 million jobs not lost.
Indeed, if he loses 2.5 million jobs, he preserved the additional 2.5 million jobs that would have been lost absent his lightworking economic policies.
Unbelievable.
And the WaPo carries this spin as a headline on page one."
November 24, 2008, 1:31 pmFred from Canuckistan . . .:
GM shouldn't have to die - but I agree Bankruptcy is the answer - once the Trustee is appointed he/she has legal god-like powers to force intransigence out of the decision making cycle - stupid, grossly overpaid management and stubborn, greedy unions get a take it or leave it option and courts will enforce the outcome of the Trustee.
GM has huge assets, make lots of good vehicles but is saddled with a business model that is unsustainable - if the vested parties can't accept that then it should die and only a bankruptcy proceeding will put the real fear into the opposing parties to get real or get out.
Go bankruptcy go . . save GM and the UAW from their self inflicted blindness and stupidity.
November 24, 2008, 3:23 pmMike:
I often hear from folks at work the repeated fallacy of GM's situation. They buy into the notion that GM is failing due to their lack of investment in fuel efficient cars. But I try to teach them some logic, to be self thinkers. Consider the following:
GM started out 2008 as the number 1 automaker. I assume this means sales, or income, I'm not sure. During 2008, Toyota surpassed them, leaving GM number 2. Now they are about to go bankrupt.
GM started out the year number 1. Now they are going bankrupt? I would think that if people weren't buying their "gas guzzlers" they would be last, NOT number 2.
I suspect their profit margin is so thin, that they CANNOT afford to be anything less than number 1. With that business model, none of the other automakers would be around for GM to have to worry about competition.
I blame the UAW.
November 24, 2008, 8:23 pmHS:
Management needs to change especially middle management. This has been mentioned for decades especially by executives that have left. When the average number of people reporting to a manager is like 4-5 while Toyota has around 20-40 each you can see we have been and still are heavy on managers. Especially in the last 20 years, the bottom has been cut while management perpetuates itself to crazy ratios. Its kinda like asking managers to fire themselves, not going to happen. Change has to be forced from the outside.
The culture of GM needs to change. Toyota's founder chose his nephew to run the company instead of his son. Hard work and dedication to company leads to promotions from within for Toyota where as in GM, politics and image are more important. Real work, hard work and dedication leads to being looked over and laid off. In addition, though GM toots its horn in terms of diversification, it is one of the most unequal opportunity companies. I am guessing Ford is no different.
"Biting the hand that feeds you" is a statement to protect managers and retirees. Yes GM hires the people, but who really feed the employees is the customer. Employees forget that and it was important that Lutz did promote some of that change though he has become more of a liability to the company than a change agent of late.
This leads me to the next point, we need unions in this country. It keeps employers in check against unethical practices. Look at our past, look at what is happening in China. Who has the money has the power and this minority faction can supress the people. At the same time, the union have become complacent and uncompetitive. Lifetime employment has become expected.
Bankruptcy is really not an option unless you call it something else to the public. Most people do not know the difference between Chapter 11 and 7; bankruptcy is bankruptcy. Also, cars are the second largest purchases next to a house for most people. Sales would drop in a bankruptcy just like it has for other car makers in the past. There has been no car company ever to come out of bankruptcy.
Next, who is going to take over? Starting a car company is not like it use to be. In todays market, it requires the backing of a government to get that type of funding while the company builds its reputation. It takes about 20-30 years before a company is viable and just like the transplants, usually requires some sort of crisis for them to enter the market.
On the next point, an auto company within a country is a symbol and sample of national strength. This is why any country that is worth a damn economically has a car company. There is alot of national pride in other countries for having one and they are consequently, subsidized. The loss of our car companies would also mean the loss of confidence in the dollar for this reason and if you haven't opened your eyes, the dollar is on the verge of collapsing as a reserve currency.
Lastly, I believe in free markets but only when it is a fair market. This can be seen in the past, just look at Rockerfeller. That is why we have anti-trust laws. But how do you enforce it over international borders? You cannot. For example, currency manipulation. For every yen gained against the dollar, Toyota loses $400 million. The US auto companies have tried to be socially responsible and against the odds of an unfair market, it is remarkable it has lasted this long. This is a battle for free market value and it has been a losing proposition of late.
November 25, 2008, 6:54 amScott:
Mike, your logic question is good, but GM was number one in vehicle sales, not revenue or profit. Toyotas sales dollars are 58% higher - they sell about the same number of cars, but for much higher average prices.
If you could slap a Cadillac nameplate on say, a Lexus, and sell it at a Caddy dealer the selling price would drop $5,000. Slap a Pontiac names on a Toyota, it drops $2,000. Can't win with GM brands.
GM management destroyed the company, not labor. Negative brand equity is created by making crappy products, doing crappy promotion, having crappy dealers and not changing. Hyundai went from a joke to a highly rated company in what, 20 years? During that time GM went from making the Pontiac Phoenix to the Pontiac Aztek. That had nothing to do with the UAW, however overpriced their labor is.
November 25, 2008, 10:11 amTim:
Here are some questions to ponder about a GM bankruptcy:
1) Who will provide debtor-in-possession financing? Without that key financing in place, GM can't continue operations, and Chapter 11 would become a Chapter 7. There's no credit available to the market.
2a) A bit of background, for those of you who are not familar with the industry. The OEM (automakers) buy completed assemblies from suppleirs (Tier 1); the Tier 1 suppliers buy sub-assemblies from Tier 2; and so on. Using a window motor as an example; GM would buy a completed window regulator from a Tier 1; and the Tier 1 would buy the motor, cable, etc. from various Tier 2 suppliers. All of this work has the fixed cost (up-front design, implmentation, tooling, etc.) which is amortized over the piece price. If GM files for protection, they don't have to pay their creditors (like the Tier 1 suppliers). How do you keep the Tier 1 supply base in business if they are expected to not get paid for parts. Alternatively, how can GM expect parts without paying for them?
2b) Tier 1 suppliers are shared among all OEMs. Tier 2 suppliers are shared among all Tier 1 suppliers. If the Tier 1 suppliers, or Tier 2 suppliers, go into chapter 11; how does the rest of the industry operate? (Remember, nobody gets up-front money.)
2c) If a GM bankruptcy were to come to pass, the Tier 1 supplier would probably be able to turn the cost model around to the OEMs. How do the other OEMs generate the cash on hand to pay for the fixed costs for parts?
3) The justification for intervention in the credit market is that one bank failure will lead to a cascade of failures because of credit default swaps. Assuming a GM bankruptcy will cause the collapse of the entire automotive sector; how do you contain the contagion to just the sector? Keep in mind that the auto industry accounts for >30% of all high-yield corporate bonds.
4a) The assumption is that a Chapter 11 filing will allow GM to abrogate their union contracts. But there is no guarantee that they can walk away from the contract without a strike or other labor action. How can they build product without an hourly work force?
4b) Does a Chapter 11 filing allow them out of their CAW contracts?
4c) Is there an assurance that a chapter 11 filing would allow them to close dealerships in the face of state franchising laws?
More fundamentally, why haven't the true conservatives and libratarians stepped up and asked for real help to save the domestic auto industry: Repealing onerous regulations like CAFE and Diesel particulate emissions? Redrafting the FMVSS to 21st century standards; or better yet, certifying EU-approved cars for North American sales? Asserting the Federal role in regulating requirements under the commerce clause? What's still good for GM is good for America; and what's good for America is still good for GM.
November 25, 2008, 2:09 pmseanooski:
"More fundamentally, why haven't the true conservatives and libratarians stepped up and asked for real help to save the domestic auto industry: Repealing onerous regulations like CAFE and Diesel particulate emissions? Redrafting the FMVSS to 21st century standards; or better yet, certifying EU-approved cars for North American sales? Asserting the Federal role in regulating requirements under the commerce clause? What's still good for GM is good for America; and what's good for America is still good for GM."
Well said and overdue. The unions have been onerous in their demands, but they learned it from their Big Brother.
November 25, 2008, 6:19 pmgadfly:
Joe Malchow over at Dartblog sums up the options:
"If I understand Todd Zywicki [Volokh Conspiracy] correctly, General Motors and its sickly brethren have two options. GM can:
1) Go on, preserving the sweetheart deals its current hangers-on enjoy—from the man who puts the wheel on the axle to the seven men who watch him do it to the c-level executives aloft. (Call this the bailout-now plan. Call it the UAW plan.)
Or 2) Go on, and be forced to redeploy its capital in a more efficient manner. (Call this the bankruptcy-then-bailout plan.)"
Option 1 will only prolong the inevitable since UAW wages and rules are economically unsustainable. Option 2 might work, but the Democrats will never vote for a bailout that beats up on the union workers.
Bankruptcy without bailout will force the unions to take substantially less pay and permit the scaling back of headcount, facilities, badges, models and dealerships.
November 25, 2008, 9:28 pmBlacquesJacquesShellacques:
"I too, all things being equal, value having a healthy auto industry in the US (which in fact we still have -- it just happens the headquarters of many of the companies that run the plants are over in Japan)"
Which reminds me that Toyota stock is available to any American who wants to turn Toyota into an American company. Currently trades at about $63.00 in New York. Market cap a mere $112B.
US government money would be better spent buying a controlling interest in Toyota than letting the Small 3 continue to piss money away.
November 26, 2008, 8:25 amBruce Hall:
Those not familiar with the domestic auto industry tend to view it through historical perspective... which is fine except that is like viewing the U.S. television manufacturing industry through historical perspective... it has no bearing on today.
A combination of factors has reshaped the U.S. industry.
1. Foreign competition has been a reality for decades and the domestic manufacturers have been constantly adjusting their "business model" in response.
2. The U.S. marketplace is long to remember problems and long to recognize change. The GM and Ford of the 1980s don't exist. By all qualitative metrics, their products are statistically equal to foreign counterparts.
3. The U.S. marketplace is not protected. Quite the contrary, states like Alabama [of Sen. Shelby fame] have offered significant economic breaks to get foreign manufacturers to locate there.
4. Asian markets are protected. In order to build or sell U.S. vehicles in Asian countries U.S. manufacturers have to "partner" with a national company or face onerous import regulations such as very expensive individual vehicle "safety" inspections [the U.S. accepts a sample of one]... plus "administrative" fees that can amount to thousands of dollars per vehicle. This provides a "safe harbor" for the Asian manufacturers where they can profitably develop and manufacture vehicles before they are introduced to the American market. ASIAN GOVERNMENTS ARE FACILITATORS FOR THEIR INDUSTRIES; THE U.S. GOVERNMENT IS AN ANTAGONIST TO U.S. MANUFACTURERS.
5. The U.S. manufacturers did have a period of unprofitability in the middle of this decade, but had reduced costs significantly and were in positions to be profitable when the U.S. government backed financial meltdown occurred. In response, the U.S. government bailed out the financial sectors [where the government-banking inbreeding program originated] on the basis that banks couldn't fail [why should Citibank not go bankrupt; why should AIG not go bankrupt?]. But the automobile manufacturers that were already bearing the brunt of U.S. government social mandates should not be given a source of financing for maintaining operations despite the fact that these financial institutions had already received billions of dollars that were supposed to be used for providing credit to companies like GM and Ford... but those financial institutions decided it would be better to hoard the cash and pay bonuses to their executives.
So, let's see... $25 billion for U.S. companies that provide hundreds of thousands of jobs and were not at fault for the financial problems... or $700 billion plus $800 billion for financial institutions that were at fault for the financial mess and have done squat to rectify the situation.
I see your logic.
November 26, 2008, 8:25 amHS:
So how come China can't buy US stocks? How come it took alot of arm twisting for a Middle Eastern to buy Citigroup? There are things that transend our common knowledge of laws and regulation and let me explain my perspective.
What is to stop other countries from doing it to us? It certainly isn't because other countries like us. Today, our dominance as the world reserve currency is our bargaining chip. Today it is our consumption that fuels the world economy. But all that is going away... A congressman just 3 weeks ago admitted to me our bargaining power is dwindling.
If I was Japan, for example, I would still be pissed after receiving two nuclear bombs that, arguably, happened even after surrendering. Payback is a bitch.
I come from a country where the money is worth less than the toilet paper I use to wipe myself because toilet paper is softer. My mom and aunt are the last survivers out of nine kids whom some have died terrible deaths. Their brother, my uncle, starved to death. My other uncle tortured and killed as he traded himself for my aunt and cousin.
I really am a constituionalist and a conservative when it comes to idealogy within our country. The US is a very stable place to live but that also fuels complacancy. People forget. When issues arise that transend international borders, I am a realist. I know the arms race has had a toll on the US and I know the US dollar can collapse. I have Russian friends who are worried they will, again, go through what the Soviet Union went through in '98.
The economy is a positive feedback loop system - consumption drives production. Where does the consumption start? The US automotive OEM and supplier employees are one of the largest consumers AND producers in this country. Ford did the country a favor by increasing the wages by like 2-3 fold. He increased consumption by doing those things. He increased consumption of the products he produced also which fueld more production (jobs). The Union also drove consumption by bargaining better disposable income. That means more deposits in banks, more customers at diners, more phones and computers bought, etc. The automotive industy helped build this country into a super power.
The US has never had trouble producing everything it consumes. When we are no longer the consumers of choice, other countries will produce for the new consumers, by-passing the US.
When we can no longer produce what we consume, the consumer here will pay higher prices.
When we no longer produce, we lose learning and innovation.
When we no longer produce, we will be less effective defending ourselves
When we no longer produce, we lose power and become more vulnerable to attack
This is bigger than free market ideology, this is the crossroads of the viability of our nation to exist.
November 26, 2008, 9:21 amDoug:
Ford has demonstrated that once freed of U.S. regulations, it CAN be competitive:
http://info.detnews.com/video/index.cfm?id=1189
November 26, 2008, 3:29 pmMesa Econoguy:
Coyote is again correct, neither GM, nor Ford will die.
Should they die is a different question, and the correct answer is probably yes.
Unlike Citi, GM doesn’t have foreign presence in 109 countries, engage in multiple lines of business, or support various economic activity. GM builds cars, and shitty cars at that. They’re mostly a healthcare/benefits company for their overcompensated union stooges.
GM, Ford, Chrysler, and the UAW will get bailouts because their team just got elected to the biggest representative majority they’ve seen in quite a while. And none of those idiots understand economics, because they have a “D†next to their names.
Most of the “R†doofuses don’t either.
November 26, 2008, 9:02 pmMesa Econoguy:
Oh, and shut up HS.
Almost everything you said above is incorrect.
November 26, 2008, 9:05 pmHS:
I would like to see them all die especially "middle men" like Citi. And in a way, I want to say I told you so, like I have a year ago with this financial crisis. Life has come a long way when we can say these things from a nice cushion chair - to a point where people are not taking all of this that seriously.
I don't think the government can stop what is going on. All this just leads to a bigger bubble and I think a depression is coming or more socialism. Another 800 billion bailout in a disguise to help the people is also a crock, the plan will change the next week. Another 800 billion of power to the Executive branch above the 2+ trillion. But even if this leads to a depression, so what, there can be good to come out of it.
A depression brings people together and puts what I think is the right perspective in life.
But having lived through collapses, I don't think most Americans are ready to face it. Against Thomas Jefferson's view, and just like F.D.R. said, the path people will turn to is a path of security over freedom. When there is nothing to eat, people will turn to the likes of Hitler as did Germany. The failure of an American industry that helped build this country is just a small first step to that path.
December 1, 2008, 6:35 am