Yes, Failure is an Option

The post earlier this week on the proposed additional bailout of the Detroit Three generated the usual couple of emails suggesting I was a "right winger" or "corporatist."  I don't quite get that, as I'm actually advocating that perhaps GM, Ford, and Chrysler should be allowed to fail.  Regular readers know that I'm that conundrum of fiscal conservative free market social liberal, therefore with no major party to identify with.  Supporting the bailout seems to be more "corporatist" as it would be throwing more money at companies their excessively-paid management.  Which is why it's surprising which party is pushing for it.

There have been a flurry of great articles and letters in the Wall Street Journal (and most top tier periodicals for that matter) debating the proposed bailout, and from the tone of yesterday's paper it appears the tide may be turning against throwing good money after bad.  Daniel Mitchell of the Cato Institute penned a great article for CNN that really hits the nail on the head, and I'm not just saying that as someone who has supported Cato for many years.

Let's start with just the muda of lobbying for the bailout in the first place.

General Motors, Ford, Chrysler and the United Auto Workers union are pouring millions of dollars into a lobbying campaign for a taxpayer bailout. The money devoted to influence peddling in Washington would be better spent on improving quality and finding ways to reduce a bloated cost structure, but both management and UAW have decided that fleecing taxpayers is a better option.

Imagine if millions were poured into a real lean manufacturing program.  It might help change the course of the leadership failure of the past few... decades.

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made the synonymous with inflexible and anti-competitive work rules.

I don't blame the unions themselves (am I actually a "left winger"?), as I've always believed that the need for unions arises from a failure of management to recognize the value of people.  But the union bosses did negotiate terms that made their symbiotic partner uncompetitive.

Perhaps most important, though, is that a bailout would be bad for the long-term health of the American auto industry. It would discriminate against the 113,000 Americans who have highly-coveted jobs building cars for Nissan, BMW and other auto companies that happen to be headquartered in other nations. These companies demonstrate that it is possible to build cars in America and make money. Putting them at a competitive disadvantage with handouts for the U.S.-headquartered companies would be highly unjust.

Just which leadership model is sustainable and best for our future?  One that refuses to make the hard decisions and has no long-term vision while continually battling employees and suppliers?  Or one that leverages the value of employees to design and build high quality vehicles that the public wants?

Is this in effect a form of reverse redistribution?

Bailouts are a particularly bizarre form of redistribution, however, because the corporate bureaucrats at the Big Three are among the very richest Americans. The union bosses make extravagant salaries, as well, and even regular union workers make an average of approximately $70 per hour, far higher than the average American.

The government should not be in the business of giving unearned wealth to any group of citizens, but surely liberals and conservatives both can agree that politicians should not be taking money from middle class taxpayers and giving it to upper-middle class and rich taxpayers.

Tough times sometimes require tough medicine, especially when the illness is your own fault.

But Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity - under court supervision - to reduce costs and streamline operations. Bankruptcy would not be popular in some quarters, to be sure. The bloated management structure would be streamlined and many overpaid executives would be unhappy about having to find new jobs.

The UAW would be equally upset, particularly since bankruptcy might force an end to extravagant benefits and inefficient workplace practices. But bankruptcy is akin to getting an alcoholic to put down the bottle. There clearly will be short-term discomfort, but compassionate people recognize that this is the best approach.

Finally, this may be only the beginning.  First banks, then insurance, then the auto companies, then even cities like Philadelphia.  The taxpayer trough has been opened up, and the line is forming.

America is on a dangerous path. The Wall Street bailout was a mistake. It transferred a huge amount of money from the productive sector of the economy to the government, and also exacerbated "moral hazard" by rewarding companies and executives who made dumb decisions. But this may be the tip of the iceberg.

Accountability to pathetic leadership decisions has been virtually eliminated.  Where will it end?

Comments

[Greg Glockner]

Kevin: Last time I checked, the Detroit auto makers had finally caught up with the Japanese in terms of quality, and have surpassed many European brands. (This CNN article confirms it, but it's a bit old: http://money.cnn.com/2006/01/23/Autos/american_cars/index.htm). And I think that Detroit has made enough strides in their manufacturing process that this isn't their main problem. I think the real problem is that Detroit is not making the cars that people want.

Most of Detroit's recent profits came from trucks and SUVs. But problems in the economy, fuel prices and competition all reduced sales of these models. And the Detroit Three have little else to fill the void.

Put another way: if Detroit actually made cars that people wanted to buy, I don't think they'd be in the mess they're in today.

Meantime, I think your "conundrum of fiscal conservative free market social liberal" makes you a libertarian. Though the Libertarian Party is definitely not a major party...

[Jason Grijzen]

Even if domestic auto manufacturers are producing vehicles at a quality level comparable to several Japanese manufacturers. (I say several because you can't paint all Japanese auto manufacturers with such a wide brush. Between various manufacturers, and even between individual models produced by a single manufacturer you get variation in terms of quality.) This by no means makes them profitable. Several Japanese manufacturers have in the past produced what many customers perceived was a very high quality product. Nissan for example in 1999 was the number 2 manufacturer in Japan and was (and still is) producing what are some of the highest quality vehicles in they world. But at that point they had about 21 billion dollars in debt. The economic climate at the time caused banks to reign in credit, and the rest is history, 40% of Nissan is owned by Renault. American auto manufacturers are in the same hot water today.

As far as their quality and their skill in manufacturing, in my opinion I'd take the words of a business reporter with a grain of salt. No matter what businessweek, CNN, or JD Powers says, the United States has a long way to go before they will ever reach the quality level/productivity of say a Toyota or Honda plant, even a Toyota/Honda plant located in North America. If you don't believe me tour a GM plant and then tour a Toyota plant (or one of their suppliers even).

Locally we have several domestic OEM suppliers as well as a Toyota wheel plant. I've toured a few of the domestic plants and although they are usually clean and fancy with expensive ERP systems and tight limits in regards to quality (DPMO of 50 or lower in some cases) they are missing so many of the basic’s in a quality foundation. The parts leaving the plant are of good quality, but the number of parts rejected internally is high. They tend to pick out the bad parts from the good, as opposed to using the stop and fix it mentality that Japanese manufacturers tend to use. They also still seem to have a hard time breaking away from batch and queue. I've seen examples where they try to move to one piece flow. But they do it in bursts, only to pile up batches in pools thus defeating allot of the gains that they make. The biggest problem is they don't seem to change what they are doing.

The Toyota wheel plant I've toured 3 times over the past 10 years. The change over that time has been so dramatic that I almost didn't recognize it each time I visited. It's now highly automated, BUT, they still produce wheel's one at a time and oddly enough they still signal operations using a series of PVC tubes and coloured golf balls (no big expensive software, no machinery that isn't necessary). Almost all of the employees are now working in a maintenance role as the system is so refined it seems to be operating on its own.

To untrained eyes the two plants might seem the same. Both are clean, both are impressive with lot's of automation, and both have parts leaving the door at a very low defect rate. But what a reporter won't be able to see is how much a plant spent on trying to set up this system, the equipment, the tooling etc, and then how much of it was thrown out, or shelved. They won’t know how the employees contribute to sustaining the system or the equipment, or how many breakdowns occur and what effect they have. They won't know what the RTY is and how much money is being flushed due to waste. They also won’t see the value of the products being produced. How the customers see value.

Also, I find JD powers ratings are always a bit skewed. They list customer failure numbers, but what they don’t list is the severity of those failures and their percentage share of the reported numbers . I owned a Chrysler which went through several transmissions under warranty but otherwise was a decent vehicle. I currently drive a Subaru that rattles and sounds like it’s made of tin. The clock doesn’t work and the radio buttons have broken, but the engine and transmission have 180,000 km on them and have yet to leak oil. I’ve had more problems with the Subaru but it’s all been fluff items. The transmission failures were a huge deal.

And yes, most domestics are kinda ugly, but I do like the new Challenger (my dad was a Mopar guy).

[mike]

I see article after article about how a the detroit auto industry going bankrupt would cost the govt 150-200 billion and a bailout would be much cheaper. None of them seem to realize that a bailout without a real plan to return to profitablity might buy a few year an then they'lle need more bailouts or go bankrupt anyways.

Do you think that individual customers should be stuck up the river without warrantees should these car companies fail since the customers bought cars from bad companies , or do you think there should be government assistance available for people to buy new warrantees from other companies should theirs dissapear?

[Lester Sutherland]

I agree that the auto companies who cannot make money need to go into bankruptcy. You have obviously hit a nerve with this issue based on the strident responses. Bankruptcy will not necessarily mean they will never build a car again, only that they have to reorganize into a company that has a chance of making money. The high paid executives want to make it seem like an all or nothing proposition, which it is not. The companies will waste the money we give them now, continue to lose market share, and then keep coming back to the trough later. If they cannot reorganize and then make a profit, so be it. Oh, and maybe they should look at top management compensation while they are reorganizing, not just hourly worker pay and benefits….

[matt mcknight]

The politicization of whether to give billions and billions of dollars of our money to these car companies is completely insane. Why not give the money to Honda, Nissan, and Toyota to keep the useful plants running? Still the precedent is set with years of agricultural subsidies and the TARP.

It's the same issue as the mortgage bailout proposal from the FDIC which would have me paying for the idiot down the street who got a ridiculous loan. This bailout makes the automobile companies that happen to have been acting responsibly pay the way of the ones who haven't.

Didn't anyone else read Aesop's "Ant and the Grasshopper"? I don't care if I have to side with the "heartless conservatives" on this issue. NPR was grilling Sheila Baird on the FDIC plan yesterday- liberals think it's stupid too. Money grubbing politicians on the other hand aren't allowed to accept campaign contributions from foreign companies and won't get much from non-unionized shops.

[Agustin Castellanos]

As an 'outsider' watching the US economy unfurl this situations are as interesting as they are unnerving. Especially when it comes to inequality. I agree with Daniel Mitchell when he talks about taking from the middle class to give to the upper class. It is not the business of the government. Hopefully articles and blogs like this inspire more than a few and these bills are shut down.

We can all talk about what has gone wrong with the big three and I’m sure we’ll find many things to fix. After all we wouldn’t be in these blogs if we weren’t interested in finding better ways of doing things. What’s clear is that the solution is not to perpetuate the same practices that have ended them in this conundrum (always refer back to the engineering’s definition of insanity).

As an avid follower of manufacturing and an Industrial Engineer. Talking about the big three crumbling down goes straight to the beginnings of manufacturing and ‘core industries’ … big stuff. But it’s, on my view, what they need to wake up and ‘live’ what Toyota and other had to internalize to become much more efficient, better and in the end, profitable.