To bail or not to bail, that seems to be the primo question around Washington these days. But no longer are lawmaker’s concerns limited to the financial district. Joining the line of eager Olivers, hands stretched out, asking, “please sir, I’d like some more”, is the auto industry. And they present another frustrating case to the tax payer.
The problem is that approximately one in 10 jobs in the United States is connected to the industry. This includes direct employment–through factories and dealerships, etc–but also includes jobs in automobile financing and in sectors that provide crucial raw materials to the auto industry (i.e. steel manufacturers). Translation: If the industry goes belly up, millions of Americans on Main Street would be adversely affected.
Obviously everyone in Washington, Wall Street and Main Street want to see the auto industry–long the symbol of American innovation and dominance–succeed. The issue at hand concerns which strategy to choose and there are several options being weighed.
Some background info: The “Big Three” (GM, Chrysler and Ford) were granted a $25 Billion loan package from Congress earlier this year to help them retool their plants and products, and assist the companies in regaining competitive status in the global markets. The package has some money allocated for aiding with liquidity issues, but is structured to be used mostly for environmental upgrading. It is scheduled to be distributed within six to 18 months, but with GM stock trading near $3/share and the company burning through $2.5 billion a month (and the others scarcely better off) they need cash quickly in order to avoid filing for bankruptcy and there are numerous contingencies attached to the package that will delay any checks being cut.
GM, in particular, desperately wants to stay out of Chapter 11 status, but others contend that a pre-planned bankruptcy could help them sort out their organization, up efficiency levels and come out stronger. Supporters of allowing at least one of the Big Three to file bankruptcy (most likely GM, as it has stated it only has enough cash to get through the next few months) base their optimism for such a plan on the airline industry’s experience with bankruptcy. My concern with using the airline industry’s experience as precedent is that travel and buying automobiles are entirely different things. Flying is the only available option to travel expediently (I mean have you ever taken a train or bus? Waiting in security lines pales in comparison to stopping every 20 minutes at each podunk town between destinations. It took me almost seven hours to get from Charlotte to Atlanta on Amtrack when I could have driven it in three and a half). That means people will suck it up and pay higher prices, because the service provided is worth it. And that’s why the major airlines were able to survive bankruptcy while still operating as contenders in the market.
But the auto industry is different. There is fierce competition between American and foreign auto makers (which is the root of the American auto maker’s problems; they can’t compete any longer against Honda and Toyota doing business as usual). If GM and/or Ford and Chrysler go into bankruptcy, people are just going to look to foreign options even more than they already are. Couple this with the fact that fewer Americans will be buying automobiles overall and it doesn’t look like filing for bankruptcy is the best plan.
Still–does that mean GM, Ford and Chrysler should get a piece of the $700 billion pie we’ve grudgingly made for the financial industry? Secretary Paulson says no. The legislative branch says maybe.
My vote goes for a seperate small (if anything with the figure “billion” in it can be considered small) package of loans that will help GM get through 2009 and into 2010, when they’ll see substaintial cost cuts due to the switchover of their retired employee health-care plans to the United Auto Workers Union. The cash will also help Ford and Chrysler brave the recession and come out in tact.
It’s clear that something must be done and quickly.The American economy simply cannot sustain a collapse of this critical industry right now. If GM goes down, Ford and Chrysler will most likely follow. But just as important as helping the industry, is also requiring substantial change in behavior through strict provisions that force the hand of Detroit to upgrade their product and system in terms of environmental impact (i.e. lessening it) and efficiency.
For 30 years, U.S. auto makers have dilly-dallied around pushing these upgrades in performance in lieu producing of flashy, ostentaitious status symbols with atrocious (embarrassing, really, considering the technology available) gas mileage (One word: Hummer). And now, their indulgence in excess has come back to bite them in the ass. Unstable gas prices, strong signs of global warming’s impending unpleasantries and fiercly competitive foreign counterparts are just as much to blame for the ailments at the Big Three as the current downturn in the U.S. economy. If additional aid is made available, one thing must be made crystal clear to leaders in Detroit: The only chance for a deal and longterm survival alike involves sucking it up and bearing the pain of overhauling their entire archaic system.
This likely won’t make the CEOs of Ford, GM and Chrysler happy, but it’s a deal they need to make in order to save their companies–and more importantly the American economy. It’s not all about them, but unfortunately it (i.e. A successful turnaround of the U.S. economy) has to include them and depends on the choices they make.
So add another inefficient, poorly run, delusional industry to the list of Bailout Baffoons caught up in this Black Swan event. All the cool kids are doing it. I’m just wondering whether we’d have been better off aligning ourselves with the geeks?