If you listen to the 'Big 3' guys, the world is going to end if they don't get the $25 billion bailout:
Detroit's Big Three automakers pleaded with a reluctant Congress Tuesday for a $25 billion lifeline to save the once-proud titans of U.S. industry, pointedly warning of a national economic catastrophe should they collapse. Millions of layoffs would follow their demise, they said, as damaging effects rippled across an already-faltering economy.
There are a couple key arguments here: what caused the problem, and whether or not the bailout will fix the problem. The 'Big 3' insist that it is market conditions that are hurting their business, and while that's certainly a contributing factor it's not the root problem. The root is that they made deals with the unions that were long-term company-killers, things like excessively high salaries and benefits, stupid rules that inhibit profitability, and paying people who no longer contribute to the productivity of the company. With these things in place, it is impossible for any company to remain competitive.
The reality is that, although going into bankruptcy would be painful for these companies and many people, it is far less painful than if the federal government goes down the road of nationalizing industry after industry. If that happens, the government will control everything, which always results in lower quality and higher costs. Think of how the government used to run DMV offices years ago (before they were privatized) - lines were long and the people working there were incompetent and unfriendly. Renewing a license was more painful than minor surgery. Do you want that kind of experience when you fly an airplane? buy a car? dispute a credit card charge?
Bankruptcy doesn't necessarily mean the company goes away. As I understand it, Chapter 11 bankruptcy can actually be a good thing, giving the company an opportunity to cut the fat out, re-negotiate agreements with the unions to establish something sustainable, and retain as many jobs as possible. All of those things need to happen anyway, don't they? And, keep in mind the fact that even if these companies get bailed out, no one -- not even the 'Big 3' themselves -- suggest that their current profitability problems will be solved by this bailout for more than a year or so.
Most disturbing of all is the long-term result of these bailouts. Logic and common sense tell us quite plainly that once the government begins bailing out private companies, there is no limit to the private companies that will line up for a bailout. We've already seen this happening, and now even states and cities are lining up for handouts. What happens when the government runs out of taxpayer money? The entire economic system collapses.
Now, you tell me which is worse: bankruptcy, thousands of lost jobs, and a re-structuring of the company to make it profitable in the long-term, or a radical socialization of numerous industries across the country and an eventual collapse of the economic system?
Right. Its a no-brainer.
Now, interestingly, these CEOs flew to Washington on private jets to beg for taxpayer money:
The CEOs of the big three automakers flew to the nation's capital yesterday in private luxurious jets to make their case to Washington that the auto industry is running out of cash and needs $25 billion in taxpayer money to avoid bankruptcy.
Clearly, they're concerned about cutting costs wherever possible, huh?The CEOs of GM, Ford and Chrysler may have told Congress that they will likely go out of business without a bailout yet that has not stopped them from traveling in style, not even First Class is good enough.
All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.
Finally, here's a very interesting opinion from Mitt Romney, a man who knows this industry, big business, and politics very well. Read the whole thing:
IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won't go overnight, but its demise will be virtually guaranteed.
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit's automakers.
First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.
That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota's Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.
Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.
The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, "Getting more and more pay for less and less work is a dead-end street."
You don't have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.
The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.
Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.
Just as important to the future of American carmakers is the sales force. When sales are down, you don't want to lose the only people who can get them to grow. So don't fire the best dealers, and don't crush them with new financial or performance demands they can't meet.
It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.
But don't ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.
The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.
In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.
Video here.
Bailouts are bad, period. Congress needs to return to a sense of fiscal sanity and responsibility, and bailouts are a great place to start.
And, don't forget another key component of this industry: oil. It seems fairly obvious that at least part of their sales problems over the past year are the result of the skyrocketing oil and gas prices that happened over the summer. People got smacked across the cheek, and now they realize it could happen again. They're more cautious about their driving and buying habits, and that's driving down the auto industry even now as the price of gas has dropped well below $2/gallon (at least in Missouri). This only serves to underscore the urgent need for a plentiful, secure, domestic supply of energy, especially in oil. This needs to be one of the top priorities of the GOP when the new session begins. We need to lay the groundwork for greatly increased energy production -- the all-of-the-above plan the House Reps pushed over the summer -- before we enter into another time of crisis. The liberal Left is going to want to increase taxes on oil and gas to manipulate behavior and to recoup some of that 'lost' revenue, probably by looking at this past year and see when the panic began -- at about $4/gallon -- and shoot for taxes that would put gas at about $3.50/gallon. That's the wrong answer. What we need is more energy production, not more taxes.
This is going to be a very difficult battle given the next administration and Congress, but it is a battle that must be fought, and won.
There's my two cents.
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