The "Other" Bailout, Part 4

Over the past several weeks we've taken the "Detroit 3" auto companies to task for requesting taxpayer bailouts (sorry... "loans") to be used to supposedly help them compete and create high efficiency vehicles.  Remember, these are the same comapanies and politicos that complain they can't compete with foreign companies thanks to government-sponsored "subsidies."  Go figure.

Well the "loan" program was approved by Congress over the past weekend, obviously dwarfed by that other slightly larger bailout program.    Both basically remove accountability for past leadership failures.  But today let's tackle, perhaps for the last time, the Detroit 3 bailout.

First, there was a great letter to the editor a week ago that described my feelings exactly.

Please tell me it's not true that Congress is considering legislation to loan at a low-interest rate up to $50 billion to General Motors, Ford and Chrysler. Talk about a moral hazard, bailout and an entitlement mentality. Why don't they sell more stock in the marketplace or find more private equity?

Why do they need $50 billion, when Boeing can design and build from self-generated funds a whole new airplane for $10 billion?

For over two decades, Toyota and Honda have designed and built automobiles to give dependable service for 150,000 to 200,000 miles. Toyota is even reported to consider exporting some of their U.S.-assembled automobiles overseas. This is why they are eating Detroit's lunch. Detroit has had ample opportunity to observe this and to compete, but has chosen not to. Should this behavior be rewarded on the backs of the U.S. taxpayers?

Of course it shouldn't be rewarded.  But it is, with taxpayer dollars.  At least Congress heard some of the complaints and put some restrictions on the loans.  And the Detroit 3had the gall to complain.

That bill says the money can only be used to overhaul plants that are at least 20 years old and will be upgraded to make vehicles that offer about a 25% improvement in fuel economy over similar models in their class.

Auto makers want the rules loosened to allow more leeway on how they can use the money.  "We have to have the rules written in a broad enough fashion so that we can get to energy independence," Chrysler LLC Chieve Executive Robert Nardelli told reporters.  Mr. Nardelli suggested that Chrysler may have to cut jobs if it doesn't get access to loans from the government.  "We'll have to make some tough decisions," he said.

Then it would be about time they made some tough decisions.  The easy decision is to cut jobs; the tough decision is to focus long-term instead of on short-term profits.  The current mentality, or lack of leadership vision, is what lead to the bizarrity of new truck models coming on line just when demand for trucks fell off a cliff.

Ford CEO Mulally, who should know better after his supposed lean days at Boeing, weighed in with similar nonsense.

Government loans awarded to three major US automakers are justified as they need them to meet new environmental regulations, Ford chief executive Alan Mulally said Thursday. "This is not about a bailout," the Ford chief executive told AFP in an interview at the Paris auto show.

Yeah, right. But he goes on.

The former Boeing chief executive rejected the argument that Ford had focused too heavily on larger, gas-guzzling vehicles and failed to anticipate the developing trend towards smaller cars. "We weren't pushing these larger vehicles, we were just building what our customers wanted," Mulally said. Although SUVs and larger cars are less fuel-efficient, they carry bigger profit margins that can significantly boost an automaker's bottom line.

"Building what the customers wanted?" Perhaps "building what the customers wanted yesterday" would be more accurate. And exactly how big are those profit margins when the trucks sit on dealer lots, forelornly hoping to be sold after huge incentives? Obviously since market change was something that no one could predict, and the "loans" are offered to any company with factories in the U.S., then even the Japanese companies with U.S. operations should want access to the taxpayer's dollars too, right?

While the three big US companies have requested government cash, Japanese automakers Nissan, Honda and Toyota have said they would not seek to access funds from the 25 billion dollar package.

Oops. Perhaps there was a vision and leadership issue after all. On Monday Joseph White really nailed it.

The U.S. government is about to offer billions to an industry that spent much of the past decade indulging itself in short-term strategies to boost profits and avoid reckoning with harsh reality.

Still, the Detroit auto industry has only itself to blame for clinging to an approach to business that was in deep trouble 20 years ago, and has been obviously doomed since early in this decade.

And perhaps these "loans" can force some changes.

But the companies that make it to the other side of the current slump won't look much like the companies we've known for the past 100 years -- from the vehicles they offer to consumers to their business structure and possibly ownership they will be radically changed.

If America's taxpayers lend a helping hand to the Detroit Three, in the form of subsidized loans, the auto makers will face enormous pressure not to squander the opportunity by using the money to do business as usual.

I'm not so confident.  You would think that twenty years of eroding market share, perception of quality, and customer value would be "enormous pressure," but it wasn't.

GM and Ford won't follow the same exact path. But if these 100-year-old companies want to celebrate 125th anniversaries they will need to put the status quo where it belongs: on the ash heap of history. Otherwise, the government could wind up wasting your tax money by helping them out.

Again.  And again.

Comments

[Gary Mintchell]

You shouldn't let consumers completely off the hook. Indeed, they did want big gas guzzling vehicles. I've talked with many. They didn't care until they had to pay much more at the pump. Much like consumers wanting something for nothing helped drive the mortgage frenzy, consumers buying into the big powerful man toy or soccer mom status bus stuff helped drive this frenzy. Discipline from bankers would have helped the former crisis. Vision from car manufacturers (from design to agility-the ability to switch from product to product more quickly) would have helped them. Boeing had the vision of building the right new plane for the right time. Unfortunately it chose the wrong method of manufacture. But it clearly is on the right path.

[Mike Gardner]

Kevin, have you been to Michigan lately? Have you seen Flint in the past ten years? How about Wixom now that the Ford plant has closed? It is too easy for us to say that the American auto companies deserve what they get, but the fact is that there is a domino effect when companies of this size fail. The evidence of that is already all over Michigan. I am not arguing that the old Big 3 screwed up, but for the sake of those who worked hard and did their best within a bad system we (the taxpayers) should give them a fighting chance to survive. They should not have access to unlimited funds or be able to keep going back for more bailouts, but it seems money well spent to me if it gives these companies another year or so to get their act together. And really, what is 25 billion? The cost of a couple of aircraft carriers or a dozen B2 bombers? This "bailout" loan seems like a bargain to me.

[Kevin]

Mike- actually, yes. I have a factory in Michigan and my father in-law worked for a GM/Delphi plant in Michigan. I get there fairly often.

I hear what you're saying, but I'm a firm believer that cushions and support lead to an expectation of more cushions and support. At some point you need to deconstruct in order to create something truly better, truly competitive. Otherwise you end up in a vicious cycle that is increasingly difficult to break out of. Case in point are the sugar subsidies we've had for over a hundred years. Think those are ever going away now? How has that distorted the competitive landscape?

I'm not against investment. I would much rather use that $25 billion to retrain those workers (but not pay them to sit at home!), develop new industries (as I mentioned last week, why does the next fuel-efficient car have to come from the Detroit Three, or even a car company?). I might even be willing to allow for investment in factory re-tooling... if the same "leadership" wasn't in place.

But simply saying "we know you screwed up, here's $25 billion, please don't screw up again" is a mismanagement of taxpayer money in my opinion.

[david foster]

If the objective is to save Detroit (the city), then maybe the subsidy program should be geographically-specific rather than company-specific.

A job for an unemployed autoworker is still a job if it comes from Toyota or Tesla instead of a Big-3 company; indeed, it would be more likely to be sustainable.

[Jeff Holloway]

It is difficult for any company, not just the Detroit auto makers, to focus on long term plans instead of short term profit when following the long term path is not viewed favorably by the greedy stock manipulators on Wall Street.

The truck and SUV market was where the profit was. Even Honda, Toyota and Nissan started introducing large pick up trucks over the last few years. The transplants also have the advantage of not having to overcome years of concessions to the greed of the UAW. Can any company be profitable when it has to pay 95% salary to laid off workers in a "jobs bank"?

[Gary Gathen]

I haven't heard or read any comments on an important issue with the "smaller," $26B bailout.
Being in the tool and die industry, my question is simply this: The Detroit 3 loans or bailout is supposedly for retooling cars--how much of that retooling money will be spent here in the US so domestic tooling suppliers (tools, dies, fixtures, etc.) can be helped too?
Furthermore, will the Detroit 3 level the playing field by first, adding the freight and other costs of off-shoring to the foreign quoted price (by perhaps comparing actual costs of FOB point of use), and second, will they give US die shops the same payment terms (progress payments and full payment prior to shipment)?
It's hard enough competing with $2 per hour labor as it is. We don't need the added burden of inequitable price comparisons. Toyota and Honda HELP their suppliers reduce costs, whereas the Detroiters just FORCE the price down.