Monday, November 17, 2008

Responses from Readers: Auto Industry Bailout

Chevy Suburban

Last week we posed a simple question to readers of some of the new discussion boards on LinkedIn:

Do you think funds from TARP (Troubled Asset Relief Program) should be used to help the U.S. automotive industry? How about other troubled industries, like retail?

Readers from the Strategic Business and Competitive Intelligence board had the least sympathy for the industry. Eric Garland's first post favored the market-oriented approach:
If we really believe business is about innovation, then having businesses "too big to fail" is likely incompatible with future success. Plus, as a U.S. taxpayer, this is starting to get maddeningly expensive. Break them up, or let them fail.
Jorge Buhler-Vidal added a few populist licks:
I am generally not sympathetic to a bailout to an industry led by people that have consistently ignored trends towards better quality, higher fuel efficiency and safety, while collecting high bonuses and keeping their golden parachutes.

Some cited the high cost of U.S. health care and the generous U.S. auto industry benefits packages as factors that reduced American competitiveness.
The US does not have "socialized" health care, the costs are directly in the vehicles. For Europe and Japan, the health care costs are a bit removed and spread out in the form of higher taxes for their national health care. - Bryan Gavini

The cost structure of health in the U.S. is strangling the nation's ability to compete. Once we lose a few vital industries, corporate executives will be crying out for some form of social net that doesn't sit on their balance sheets. - Eric Garland

Until the Big 3 can at least shed the legacy costs saddling them from the UAW, I don't see why they should get relief from us. - Anders Bjork

Responses to the University of Michigan Alumni board tended to show greater concern for the welfare of workers and pay less heed to free market thinking.
I would support a bailout if the funds were used to lessen/deplete the legacy costs (retiree benefits) alone. We're going to pay to support the retirees if the companies go under anyway. We're also going to pay a ton to support the 3 million unemployed. If we could remove the legacy costs from the balance sheets, re-negotiate the UAW contracts and fix our trade agreements, maybe we could pull out of it. -Jennifer Ray

The financial bailout has done nothing to help credit markets as of now. No credit markets have been thawed and the banks are being admonished for not lending the money. This has led to the further spiral of the auto industry because customers with good credit are being turned away because they cannot qualify for a loan.
I am disturbed by anyone who invokes the "free market" as if we are a purely capitalistic society. We are not. There is no such thing as a pure capitalistic society because each and every system has some sort of government control to either prevent catastrophic success (i.e., a monopoly) or catastrophic failure (what is going on now). The US did not emerge from the Great Depression by letting the free market have its way. -Jon Liu

Guy Powell on the Executive Decision board wondered how best to manage our way out of the crisis.
If the auto industry goes bankrupt, then it takes money out of the banks. Will this then ripple over to the banking market again causing another higher bailout of the banks. It would seem that 'in for a penny, in for a pound.'

Respondents to our board, A Management Consultant @ Large, took a long-term view.
The longer term fix is to retool that work in Michigan to cars that fit a better vision of low energy usage and elimination of emissions. -Rudy Westervelt

Consolidation appears inevitable, given the ferocious international competition and sustained overcapacity in the industry -- so why not have two (or even all three) of the Big Three merge together as part of the bailout? -Ben Petree

What if GM & Ford could "draft" assets from Chrysler--would they take any? How about people? -Joe McKinney

The US auto industry (as distinct from the auto industry in the US) reminds me of the UK situation 40 years ago. Government bailouts failed. The lesson learned is that the best government involvement is that which greases the skids of change, and not that which just delays the change. Tax policy can be used as an incentive for value-added entrepreneur progress, and for humane retraining. -Robert Munro

A collection of posts about the US Economy is maintained here.

To learn more about our work in consulting, please see our Profile, download a brochure about our Practice, or check out our Case Studies.

Contact JP Farrell & Associates, Inc.

A Management Consultant @ Large

↑ Grab this Headline Animator

Print this post


Authentic Connecticut Republican said...

It looks like the folks in DC are hell-bent to give the stimulus package another try seeing as the first one didn't have any real effect.

This time it's the car industry.

While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let's target unemployment, create AMERICAN jobs and pump up the economy all at one time.

Consider the following:

Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that's not all direct but due to suppliers. GM alone has over 1300 suppliers. (That's a lot of jobs!)

1 in 10 Americans makes all or part of their income due to the automobile industry.

Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers.
(This isn't magic, it's simply how the economy works.)

Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.

Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov't. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.

Make no mistake; it’s no surprise that once again government has been a major part of the problem.

Here's the solution.

Instead of either shipping cases of cash off to car makers; or sending us all another check:

Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that's domestic. (Civic = 70% Ford Explorer=80%)

Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.

This would bail out the car industry without giving them a dime directly
Further it would reduce the overall age of the nation’s cars which would in turn;
increase overall fuel economy
& decrease pollution.

Strengthen the dollar!

Since vehicles with a higher domestic content would be moving better this would reduce our imports, strengthening our dollar which would in turn further reduce what we pay for anything imported gas!


Instead of simply bailing out a few big companies, this would cause such a run that it would create employment throughout the industry affecting over 1300 suppliers and their workers.
That would give the economy good swift kick right where it needs one!

Pays for itself!

Since money turns over 5 times, and the vouchers are only good for the domestic content of the vehicle, every dime would be spent in the United States creating taxable income.
What is the income tax on 65,000 anyway?
(Remember? 20K manufacturing cost = $13,500 W-2 income x 5 = $65,000)

Another Stimulus Package?

I'm sure you'll agree that this makes more sense than simply sending out checks; many of which will be used to buy new flat screen TV's usually made in Malaysia or some such place.

Eric Weiss said...

Ben Petree echoed the comment I posted on LinkedIn, that rather than bailing out one or more individual automakers, the Detroit 3 should be merged into one, their lines retooled to build energy-efficient, low-TCO cars, and the new company follow the leads of Toyota and other Asian carmakers in establishing a foothold in the US market. There is no longer justification on grounds of competition or anti-trust to maintain three competing entities. And the US, rather than simply bailing these companies out, should act as a VC angel for the merged company, recovering the taxpayers' investment in an IPO.

Kaushal Amin said...

Many creative ideas suggested here for how Detroit can be saved using bail out money. So why haven't Detroit done all of these? Why do they need bail out money in order to take actions? Why did they not use their own profits for the past 20 years to take these actions? The consolidation of product lines as well as investing to build better cars is a common sense solution. If the leadership have not already done this, they deserve to go out of business for being incompetent.