Fuck Detroit

Earlier this month, General Motors startled financial analysts by admitting that it was burning through $2 billion per month. It has lost $70 billion since 2004 while consistently losing market share for decades. GM, Ford, and Chrysler are currently launching an effort to gain access to the $700 billion TARP fund to prop up their companies in the midst of the historic financial crisis the world is in.

The companies were recently approved for $25 billion to retool factories in order to produce more fuel-efficient vehicles – a measure taken when oil was in the $160 / barrel range. Now the companies say that they will need more after a collapse in vehicle sales and credit markets. I am predicting that they, and specifically the most beleaguered GM, will not receive the bailout funds they are seeking as currently proposed.

There are many different takes on how the American automakers have come to their current situation. Popular culprits include union labor costs, poor management, and the current economic crisis. All of these play a part.

Denying the negative effect of the UAW on the American auto industry is ignoring the obvious. In researching a case study I did in 2007, I found there was a $30 / hour average difference in labor costs between American manufacturers and Japanese manufacturers.

Average cost of labor, Detroit Big Three = $75 / hour
Average cost of labor, Japanese Big Three = $45 / hour

The $75 figure for Detroit includes retiree pension and health benefits. It doesn't take an MBA to understand that you can't compete with variable costs 67% higher than the competition's and market a similar product (the word "similar" is arguable given perception towards American auto quality). It's plain to see that labor costs are a major contributing factor to American auto manufacturers' lack of competitiveness and financial woes. If labor costs didn't play a part, then why are all of the American companies in trouble while none of the foreign companies need help? *the 2008 Newsweek article below puts the figures at $71 and $47

The American companies reportedly gained sweeping concessions from the UAW negotiations in 2007, but savings aren't expected to be realized until 2010. Plus, those concessions still don't come close to bringing them in line with the competition.

The greatest failure in these companies' management was that they bet too heavily on light trucks and SUVs since the late nineties. Because the American companies made the best trucks and SUVs, they were able to command high prices and reap big profits. Their truck business subsidized the rest of the companies' operations. And since each American company had relatively the same deal from the UAW (from pattern bargaining), there was no competition between each other in labor costs. There was no competition from foreign companies in this category because Toyota trucks weren't in demand like the F-150, the Dodge Caravan, the Chevy Blazer, the Ford Explorer, and so on. In a particularly despicable chapter of business working with politics, the companies lobbied heavily and defeated legislation to increase fuel-efficiency standards so they could continue to sell these vehicles. Before the Japanese could develop better trucks at lower prices, the price of oil soared and the bottom dropped out on the truck market. This wiped out the little profitability the American firms had.

The price of oil has since plunged as the credit crisis gripped the world. While expensive gas will not prevent consumers from buying trucks in the near future, the inability to borrow will. As all the banks are tightening their belts due to their own mismanagement, millions of ordinary consumers who might have bought cars can't get the financing they would need in order to buy them.

That is the very short story of how GM and Detroit went from, as little as six months ago, touting their turnaround strategies as making progress to currently begging for billions from the federal government to stay alive. Would their turnaround strategies have worked if the economy hadn't tanked? Who knows?

The argument for the bailout is made in the name of preventing economic catastrophe. Not only does GM employ hundreds of thousands, but parts suppliers also employ hundreds of thousands. These companies are dependent on the manufacturers and they could also go under if GM did. In addition, there are over 10,000 dealerships around the country which depend on the Big Three for their livelihoods as well. Between the dealerships, the suppliers, and the manufacturers themselves, the Center for Automotive Research estimates that up to 3 million jobs could be lost (it should be noted that the Center for Automotive Research is heavily funded by the Big Three and that this figure is disputed). The argument's idea is that a government loan will keep GM and the others liquid for enough time to fully realize their turnaround strategies, therefore saving millions of jobs and preserving the primary component of the American manufacturing sector.

The argument against the bailout is winning. I first noticed yesterday that a vast majority of the users in newspaper comment forums opposed a deal. I can find articles detailing the arguments for and against a bailout, and I can find editorials against (especially in business and economics publications), but I could hardly find a strong editorial in favor of the bailout. To give an illusion of balance below, I had to go to the Detroit Free Press to cite an editorial in favor. There is a Newsweek article that is mildly in favor. Of all places, I found two of the more convincing arguments against a bailout from the New York Times.

Besides being a generally center-right country committed to free-market principles, most people just don't think the money will save the companies. It seems the more the public researches the industry and the companies, the more it believes that the bailout wouldn't solve their problems. The money would be burnt up and the companies would be in the exact same situation as before. Thirty years ago, the federal government bailed out Chrysler. What was it worth? Below is a link to an article detailing the British government's bailout of British Leyland, a case study with striking similarities to General Motors.

Bailout opponents contend that only under Chapter 11 bankruptcy protection will General Motors be able to make the drastic changes needed to become a viable company. GM would be able to rewrite union contracts. Laws throughout the country that protect redundant dealerships (preventing GM from shedding brands) would be voided. These changes won't happen with a simple cash infusion. Free-market champions contend that, even if General Motors were to suffer Chapter 7 liquidation - the worst-case scenario - other manufacturers would buy the factories, employ the experienced workers, buy parts from suppliers, and open more dealerships. After all, Americans will still buy cars.

It is probably obvious that I oppose any government aid to the Big Three that does not include Chapter 11 bankruptcy protection. But moving past the arguments for and against, these are the reasons why I deem the bailout (as is) as 'not-gonna-happen':

1. As stated before, there is considerable opposition to a bailout among the public.
2. There is considerable opposition on the editorial pages of all the major newspapers (except the Detroit Free Press).
3. In the face of demands to overhaul executive management, General Motors CEO Richard Wagoner has stated that he doesn't feel the company would need a change in leadership if it were to receive government money. Current management would stay in place.
4. Under mounting criticism of the labor unions' role, UAW President Ron Gettelfinger has said that his workers would not make any more concessions past the 2007 negotiations. They have given up enough.
5. As the Big Three mounted their offensive on Washington, a coalition of parts suppliers was formed and joined the beggars' party. They feel they are also entitled to TARP funds.
6. While the Democrats - who mostly favor a bailout deal - just won a landslide victory in November, Obama and the new Congress don't take office until late January. General Motors probably can't last that long. The Bush administration opposes using TARP funds for the auto companies and the current Senate probably does not have the votes to pass the legislation in the face of stiff opposition. And by the time the Democrats take office with their larger majority, the public will have had two more months to look into the matter. And, as I stated earlier, the more people learn about the companies and the industry, the more they realize that a bailout is futile.
7. Democrat Representative Barney Frank is drafting the bailout legislation with stipulations for the companies receiving aid. His bill includes pointless symbolism like a no-golden-parachutes clause and also a clause that would, in my opinion, completely tie the companies' hands in making sweeping change. There would be a government oversight on company operations (an auto czar, if you will) with veto power of any ventures(!).

"A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11" (New York Times)

"A British Lesson on Auto Bailouts" (New York Times)

"How to Bail Out General Motors" (Newsweek)

"Saving Detroit" (The Economist)

"Time runs short to save an industry" (Detroit Free Press)

"Why Bankruptcy is the Best Option for G.M." (Wall Street Journal)