12 November 2008

Economy and Politics: Bailing out Detroit?

With the election over and the bank bailout no longer really news, the persistent mutter in the media now is about the desperation of GM, Ford, and Cerberus (the private owners of Chrysler). It's a little hard to believe, I think, that the Big Three, who for so long were synonymous with American industry, could be this close to death, and yet, the facts are actually pretty much there for anyone to see:

  • Big Three profitability, particularly for GM and Ford, has been tied for over a decade to trucks and SUVs. It's not that they weren't selling cars, mind you. They even sold a few good cars, believe it or not. It's that they weren't selling cars at a profit.
  • Much like the mortgage debacle, the Big Three inflated their sales numbers, if not their actual profits, through cheap credit and easy leases. 
  • Big Three labor costs are very high.This is part of the reason they can't make an ordinary car at a profit.
  • When the price of gas spiked, automobile buyers quit trucks and SUVs cold turkey. US manufacturers were caught flat-footed by this, but worse, even if they hadn't, it's not really clear what they could have done about it, when they can't make a car at a profit!
  • With lots full of trucks they couldn't give away, let alone sell, dealers found themselves needing to borrow to obtain vehicles that would sell, only to find they couldn't get credit.
  • Making this worse, lots of trucks and SUVs were leased, not sold, in the last three years. In past years, these were easy to sell, "pre-owned", at a profit when they came back, a great deal if it works, because they got both the lease money and an eventual profitable sale. Now, instead, they've got lots full of used trucks they can't sell alongside all the new trucks they can't sell.
  • Once dealers started to get credit again, customers couldn't, so even customers who wanted to buy, couldn't.
So now, Detroit is saying, "Help us!" And some people are saying, "Yes, for heaven's sake, help them! Help them now!" and others are saying, "Why should we pay to save their short-sighted asses?"

Unfortunately, the answer to that question is simple. It's the only simple answer, really, in this whole mess. We need to at least consider a government bailout, because there are roughly three million jobs associated with the Big Three. If any one of them, especially the largest, GM, were to fail, that would be monumental hit to the broader economy. 

Michigan would take the biggest hit, of course, but there are automobile and truck plants scattered throughout the country in all sorts of odd places. Senate Minority Leader Mitch McConnell (R-KY), for example, has a vested interest in seeing some sort of bail-out happen, because there's a plant in Kentucky. Here in Saint Paul, there's a Ford plant that's probably going to close in the next few years no matter what happens, but if Ford were to suddenly hit the wall, the controlled, mitigated shutdown that Ford planned would become a sudden closure that would put hundreds on the dole queue all at once.

Exacerbating this situation is a belligerent United Auto Workers leadership. Their feeling is that this crisis is entirely management's fault, and therefore their membership shouldn't have to concede a single penny or in any way suffer the consequences. They are, however, wrong. UAW intransigence is one of the reasons Detroit can't make money on a small, inexpensive, efficient car and instead had to predicate their profits entirely on gas-guzzling monstrosities. 

As brave as they're feeling right now, with GM on the ropes, they're going to feel pretty stupid if, three months from now, there is no GM, and all of their GM-based members are out on the street. They're also going to be pretty angry at President-elect Obama, who right now really does have the worst job in the world: almost-President. He can't actually do a damned thing right now, but he's under a lot of pressure to save the world. There's 70 days 'til he's actually President, and GM might well fail before that.

One argument I don't buy, by the way, is that Detroit could have avoided this by going green much earlier, like Toyota did. This is too simplistic an argument. The Prius--my personal favorite automobile, hands down, and the one I drive--is not a cheap car by any stretch of the imagination, but it also doesn't make Toyota much money. It was expensive to develop, is expensive to build, and because of issues getting enough good batteries, for a long time was in extremely short supply. I think they're currently making a profit off of them, but for a long time, they weren't.

The Prius is not why Toyota is standing, albeit a bit wobbly, while GM is battered, bruised, and crawling on broken limbs to the phone to dial 911 with its broken nose. It doesn't hurt, but it's not the reason. The reason is that Toyota's overall business model and practices ensures that they can actually make money off their cars as well as their trucks. Some of this is that they made efforts to make their entire product line, even non-hybrids, at least a little more efficient; and also have a reputation for making solid, reliable cars. People are willing to pay a little more for that, if they can, so Toyota can sell their cars for a little more than GM et al. can. Some of it is that they're not burdened with the same labor costs. 

From the outside, it appears that Toyota's management actually thought in terms of long-term sustainability, while GM, Ford and Chrysler all focused on immediate profitability. They might well have had contingency plans for the day when oil started to rise and demand for the guzzlers slackened, but they were all expecting it to be gradual. They didn't foresee or plan for a sudden spike putting the fear of G-d into the market, and they certainly didn't foresee or plan for the possibility that such a spike would coincide with a general, world-wide collapse of the financial system.

Like the bank bailout--which, by the way, will now officially not happen the way it was originally advertised; there will be no government buy-out of toxic assets, after all--I'm not really happy with the idea of throwing good money after bad companies. But I shudder to imagine what will happen if a million or more workers are tossed out into the cold at once.


Doc_Kinne said...

I'll prepend this by again noting that I'm still furious.

Still not ready to go Socialist on me, Mikey? Well, its honestly beginning to look to me as if Capitalism has utterly failed, and the nation is being forced into Socialism whether it likes it or not.

Did everyone with a "Masters" of Business Administration get it out of one of the spammer's paper mills? Anyone with an "M"BA will have to prove otherwise to me.

How stupid do you have to be to continually sell your product at a loss? Did none of these "smart" people learn the last time a major force in the economy collapsed because they were selling things that didn't exist? Well, I guess not!

And then we have...Paulson. "I need $700bn to save the nation! Now! Now! I must have it now! Trust me. I know what I'm doing." Now its, "Well, no I don't think that's going to work. But now that I have the money we'll try something else." He doesn't know what he's doing any better that my nephew would.

Given all that, I agree that we need to somehow stabilize the car industry. But I want butts, Michael! I want more than butts! I want the CEOs and officers of these failed corporations arrested and all of their assets confiscated and distributed to their workers. Oh yea, they each may get $5 each, but it'll be more than they have now.

So we find out that the banking industry is a bunch of greedy morons, then the auto industry. Who does it end with?

Let's just say it would probably be dangerous for me to meet the President of M&T. "But they gave you a mortgage!" some people would say. Yea, I got an $85k mortgage from them. They wanted to give me a $175k mortgage, but apparently I'm easily smarter than anyone who runs a damn bank.

And you know, I'm pretty proud of how I held back on this post. :-)

Uncle Mikey said...

I fail to see how socialism would solve any of these problems. Most of this disaster occurred with full collusion of the government. A centrally planned kleptocracy is no better nor worse than a laissez-faire one. Kleptocrats will still find their way into government to help their friends steal.

The whole point of incorporation is the limitation of liability. Remove that through confiscation and redistribution, and you truly destroy whatever is left of our economy. Nobody--nobody--will every take a risk or innovate in any way, ever again.