Commence Kabuki.
With the Detroit automakers in the late stages of supplication, a predictable ritual will now take place. The CEOs of GM, Ford (F), and Chrysler will do as instructed: travel like common men from Detroit to Washington and present the government with new-and-improved restructuring plans showing that this time, they really are serious about slaughtering sacred cows and right-sizing their businesses. Members of Congress will deliver a few lashings about overpaid CEOs and overentitled union workers. Then, in the end, the feds will pony up at least $25 billion — and maybe $50 billion or more, eventually — to help stave off automotive Armageddon.
There are many routes to a Detroit bailout, however, and some go straight through Follyville. Here's how the feds could mishandle the automaker rescue package:
Treat the Detroit Three all the same. They're not, and an up-or-down vote on GM, Ford, and Chrysler as one monolith would be a clumsy way to spend taxpayer dollars. Chrysler, the smallest of the Detroit Three, appears to be in the worst financial shape, with a thin margin of cash to see it through the rest of the year. It also has the weakest lineup of cars and few announced future products — a sign that management is hunkering down and preparing for some kind of merger or maybe even liquidation.
In other words, Chrysler isn't cutting it as a stand-alone automaker. "Chrysler is the only one of the three that could go out of business without having a huge domino effect," says analyst David Silver of the research firm Wall Street Strategies. It's also owned by a private-equity firm, Cerberus Capital Management, that's run by billionaire Stephen Feinberg.
GM and Ford are both public companies committed to long-range plans, but their needs are different. GM is desperate for cash and says it needs help now. Ford is further along in its turnaround plan, and CEO Alan Mulally says it doesn't need any federal loans at the moment. An across-the-board bailout of all three would commit taxpayer money to at least one company, Ford, which might do OK without it. And it would represent another unprecedented move—the bailout of a private-equity firm—whose principals earn way more than an overpaid CEO.
Better: Establish standardized ground rules that treat each automaker according to its business prospects, not its political connections or some dubious place in American lore. If it turns out that GM is a good risk but Chrysler isn't, then let Chrysler go. The government may have to pick winners and losers.
[See one way for Chrysler to exit the scene.]
Force them to build "green vehicles." There's already a strong incentive for automakers to build hybrids and other high-mileage cars: People buy them. If the government has to "incentivize" a company to build the kinds of products that customers want, maybe it should incentivize the top executives to get lost.
Besides, Detroit isn't as backward as the lampoonery suggests. There are already a few domestic hybrids, with more on the way. The Detroit Three sell economy cars, too. They're just not as good as a Honda (HMC) Civic or Toyota (TM) Corolla. But all three say better models are on the way—because their survival depends on it. If that's the case, let them prove it.
Better: In exchange for government largess, simply set tough payback terms and deadlines that require the companies to become profitable, fast. But don't dictate the products they should sell.
[See if the Chevy Volt can survive GM.]
Pre-empt the possibility of bankruptcy. One of the best incentives for an underperforming CEO is the threat that a bankruptcy judge and team of turnaround wizards will seize control of his company and give him the boot. If the government indemnifies failing automakers against bankruptcy, it will rubber-stamp business as usual and let the automakers slow-roll their way into even deeper losses.
Better: Consider a plan to aid the automakers but only as part of a bankruptcy filing.
[See how bankruptcy would benefit GM.]
Appoint a federal car czar. Pleeeeeaaaaase, Mr. Obama: Don't let the government get into the car business! The automakers already build enough lousy cars on their own.
Better: Acknowledge that there's vast overcapacity in the car industry and that the Detroit automakers are too big. Commit to helping solve that problem—or letting it solve itself.
[See 10 cars that sank Detroit.]
Place the whole restructuring burden on Detroit. They've got plenty of their own problems, but it's not their fault that state and local laws protect inefficient dealers and weaken the automakers' ability to distribute their products as efficiently as possible. A restructuring package that orders reforms by the automakers but takes a pass on protectionist state franchise laws would be a half measure.
Better: Find a way to release the automakers from dealer obligations that don't make business sense. This could make it easier to kill overlapping divisions like Mercury, Pontiac, and Saturn, one thing many analysts feel is necessary for the Detroit Three to slim down.
[Discover Six myths about GM, Ford, and Chrysler.]
Subsidize cars. There's some talk in Congress of offering new tax breaks for certain kinds of cars (in addition to existing tax incentives for hybrids) or even a temporary tax break for buying any car. The idea is that such incentives would boost sales at the domestics and help them climb out of their hole. But that wouldn't do anything to lower fixed costs that are too high or correct other inefficiencies that would still exist after the tax subsidies expired.
Better: Gradually raise the federal gasoline tax, as a way to encourage buyers to purchase the most efficient car that meets their needs (and help the government raise badly needed revenue, today).
[See 10 cars that could salvage Detroit.]
Penalize their competitors. As the Detroit automakers have been complaining about everything that's wrong, a new Detroit has been taking root, mostly in an arc of the South that ranges from South Carolina to Texas. Virtually all of those plants belong to foreign automakers like Toyota, BMW, and Nissan (NSANY)—but they employ thousands of Americans as executives, managers, and blue-collar workers. They're also some of the most efficient auto factories in the nation, often able to switch from one model to another based on what products are most popular. And they buy lots of made-in-America parts. Any incentives or other policies that stifle demand for cars from such "transplant" factories would undermine one of the healthiest parts of the U.S. manufacturing base.
Better: Consider more incentives to lure foreign automakers to the United States, and make the New Detroit even stronger. Sooner or later, it might be the only Detroit we have left.
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This article has 16 comments:
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Chris B
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542 Comments
Dec 02 03:07 PMYou also forgot to mention that charging an interest rate so high that ROI would be impossible would also be a mistake.
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Socialism cannot compete!
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484 Comments
Dec 02 03:29 PM-
kris23
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90 Comments
My Website
Dec 02 03:38 PM-
MattyNyse
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6 Comments
Dec 02 03:39 PM-
Michigan auto wife
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1 Comment
Dec 02 05:01 PMBut after the colossal and seemingly never ending “gimme” to the banks and the absolute mess made of TARP it is unconscionable that our government find it acceptable to sit by the wayside while our manufacturing base and the millions of associated jobs- not to mention families- are abandoned at their greatest hour of need.
Why are the financial services industries, Citigroup and AIG too big to fail yet the men and women who make up the backbone of this nation are left to fend for themselves? When did manipulating the markets to make a fast buck become more important than manufacturing a quality product?
I believe the misdirected backlash against the American autos is pure political posturing that holds American manufacturers to an unreasonable performance standard that allows both the democratic and republican parties to wash their hands of any real responsibility for the economic crisis we’re currently facing. If we want American manufacturers to be competitive globally then maybe our government can do something about the unfair cost differentials (namely pension and healthcare obligations that the almighty European, Korean and Japanese car giants don’t have to worry about thanks to their own government subsidies.) If we want to actually help our national manufacturers we could recognize that “buying American” does not mean leasing a Mercedes made in Alabama, and “being green” does not mean buying a 2900 pound Toyota Prius that has to be shipped from Japan thus leaving a much larger carbon footprint than buying a Ford , GM or Chrysler product made locally. Of course we know this industry needs to do better, but it can’t shoulder the weight of every misstep, misdeed and failed U.S. economic policy in recent history!
I want someone in Washington to tell me to my face that this issue is not important enough for the government to step in at this time. I am sure I’m not the only one, I am just one face of the many that make up the American automotive industry.
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Gerald P
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1 Comment
Dec 02 06:26 PM-
thedozer
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162 Comments
Dec 02 09:05 PMwhy should you get a bailout? Sad to lose your job, yes... part of life, yes
you can't stipend/subsidize America. the UAW is largely to blame...
why are the foreign competitors still in business? I don't know...
but they are not part of a UNION
UAW $80/hour
foreign $ 30/hour
how is that math hard?
good luck, but no, I don't want to give you my money!
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The hand
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773 Comments
My Website
Dec 02 10:22 PMwith or without government loan guarantees, your chrysler has failed you. i know the feeling of pouring your heart and soul into a company to make it better only to see the actions of the executive officers destroy your work. in the case of Cerberus, these people are vultures and only intended to dismember Chrysler for profit. They did not care about your husband when they bought Chrysler, and they only care now about minimizing there losses for a mistimed business deal. the proof of my statement is their lack of development of new models - they were draining the last bit of profits before carving up the beast.
all of us have a responsibility to climb all over congress' back on the subject of automakers. no matter what is done or not done, there is unintended consequences. this a situation where all actions or inactions may lead to a bad conclusion.
the government has a responsibility to you and your family to help you. this must be true as it is important that capitalism be allowed to act unimpeded for the common good of all.
the role of government is to protect its citizens.
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Chris B
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542 Comments
Dec 03 10:14 AMYou are incorrect when you say the role of govt. is to protect its citizens. If that were true, that would lock us all in padded cells to prevent us from killing ourselves doing drugs, driving cars, eating at Hardees, etc. We would never fight wars and the govt would have surrendered to the Nazis/Japanise/Soviets to prevent our people from dying in wars.
The purpose of govt. is to protect its citizens' freedom.
It is not to protect citizens' lives, jobs, or investments. That misconception is the problem.
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fran
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236 Comments
Dec 03 10:57 AMchange the scenario slightly--
should HONDA, TOYOTA, NISSAN, VW, HUNDAI, BMW [the american companies, solely] be granted bailout help in the future by the USA tax payer should they encounter some form of business difficulty? all the reasons cited[many ariculated justifiably by you] would/could be true for them. what of our oter key industries?[HPQ, IBM,DNA, etc]. where and why does the bailout end?
are we near the slippery slope of SOCIALISM or something worse?
it is not clear we yet know what circumstance has been loosed by all the gov't actions of the recent months. as citizens/taxpayers/par... we'd better think this through for ourselves and our prodginy. you know you can't trust POLITICIANS/GOV'T--tha... track record got us here!
On Dec 02 05:01 PM Michigan auto wife wrote:
> I am writing to share my story, or at least my thoughts. Not because
> I’m special or different, I do though consider myself very lucky
> these days to have a job and to have a home and for the time being
> my husband is an engineer with Chrysler. The auto industry has been
> very good to us up to this point- it has not been an especially easy
> industry to be married to but my husband has been with the company
> for sixteen years and with any luck he will stay there for many more.
> My husband leaves the house every morning at 6am and goes to work
> with an unwavering belief that there is a future for this industry.
> His loyalty is infuriating and awe inspiring at the same time, and
> it is his loyalty to the people he works with (not a corporate logo,
> or a balance sheet) that allowed him to make the difficult decision
> not to take the buyout and to stick with the autos, and more importantly
> to stick with Detroit. My husband whole heartedly believes that he
> can be part of the solution, that he can be a part of a turnaround
> for the American manufacturers.
>
> But after the colossal and seemingly never ending “gimme” to the
> banks and the absolute mess made of TARP it is unconscionable that
> our government find it acceptable to sit by the wayside while our
> manufacturing base and the millions of associated jobs- not to mention
> families- are abandoned at their greatest hour of need.
>
> Why are the financial services industries, Citigroup and AIG too
> big to fail yet the men and women who make up the backbone of this
> nation are left to fend for themselves? When did manipulating the
> markets to make a fast buck become more important than manufacturing
> a quality product?
>
> I believe the misdirected backlash against the American autos is
> pure political posturing that holds American manufacturers to an
> unreasonable performance standard that allows both the democratic
> and republican parties to wash their hands of any real responsibility
> for the economic crisis we’re currently facing. If we want American
> manufacturers to be competitive globally then maybe our government
> can do something about the unfair cost differentials (namely pension
> and healthcare obligations that the almighty European, Korean and
> Japanese car giants don’t have to worry about thanks to their own
> government subsidies.) If we want to actually help our national manufacturers
> we could recognize that “buying American” does not mean leasing a
> Mercedes made in Alabama, and “being green” does not mean buying
> a 2900 pound Toyota Prius that has to be shipped from Japan thus
> leaving a much larger carbon footprint than buying a Ford , GM or
> Chrysler product made locally. Of course we know this industry needs
> to do better, but it can’t shoulder the weight of every misstep,
> misdeed and failed U.S. economic policy in recent history!
>
> I want someone in Washington to tell me to my face that this issue
> is not important enough for the government to step in at this time.
> I am sure I’m not the only one, I am just one face of the many that
> make up the American automotive industry.
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sumosama
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237 Comments
Dec 03 12:57 PMOn Dec 02 03:29 PM Socialism cannot compete! wrote:
> Let's say this, at a minimum: Chrysler should NOT receive any American
> taxpayer money -- it is NO LONGER an American company!! It is owned
> by Daimler. Let the Germans save or sell it.
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bobbobwhite
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119 Comments
Dec 03 01:06 PMAll car makers must join together in a project that takes one foreign car from three general sales categories, e.g., a Honda Civic, and a Honda Accord or Toyota Camry, and a Lexus, Acura or Infiniti high end model, then have qualified OUTSIDE engineers tear them down to ind'l parts and inspect IN DETAIL how these cars were engineered, made, and form what materials and processes ..... all of these issues must be detailed down to the tiniest point possible. From the mass of information derived from these OUTSIDE sources, Detroit then must determine IF Detroit can make a car as good or better than each one they examined and also be able to make a profit on them and then try as hard as it can to do so.
If Detroit cannot do this, then it must ride off into the sunset and not expect taxpayers to support or bailout its inferior and non-competitive products. It's as simple as that, but confusing the issue has had its great beneifts for Detroit in Washington DC over the years. That time is dead and gone and can no longer be tolerated.
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Socialism cannot compete!
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484 Comments
Dec 03 04:02 PMJobs or investments...no. The government is precisely NOT responsible for securing our means of eating or a place for us to sleep.
> The purpose of govt. is to protect its citizens' freedom.
>
> It is not to protect citizens' lives, jobs, or investments. That
> misconception is the problem.
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Socialism cannot compete!
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484 Comments
Dec 03 04:58 PMOn Dec 03 12:57 PM sumosama wrote:
> it is 80% owned by Cerberus, a US investment firm.
>
>
> On Dec 02 03:29 PM Socialism cannot compete! wrote:
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Unrepresented Taxpayer (the oth...
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4 Comments
Dec 03 07:07 PMAs far as this consumer is concerned, the Big 3 have been on a party for the last 3-4 decades and have been unable to learn from their foreign competition. Even when their competitors build cars in this country they still can't see their flaws. They think the "Buy American" logo will save them with inferior products and lack of market foresight.
Companies like that fail in all industries. So now they have religion---I doubt it. But even if the Big 3 and UAW did see the error of their ways it may still be too late. Bailouts just throw good money after bad and don't cure the long growing cancer. Their only long-term chance is radical surgery and a total revision of most they have steadily held holy. Furthermore the market is over-sold and overwhelmed with to much vehicle manufacturing for too many products. Major shake out is due, and only the strong survive. Too bad the Big 3 and UAW didn't start worrying about that 10-20 years ago when they still had a chance to turn it all around.
Sorry folks, the party is over. I feel for the people who will get hurt and hope we can minimize their pain. But I fear their future was written many mistakes ago.
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k45
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62 Comments
Dec 03 09:30 PMThe biggest problem today (besides retiree costs) is overcapacity. There is NO MARKET for additional cars. Detroit already "sold forward" the next couple of years of demand with their rebates and low cost financing. Detroit already cannibalized their future sales. Subsidizing purchases will just stretch out the pain. Detroit needs to downsize. Yes, it will be painful, but dragging it out longer will only hurt Detroit and the nation even longer.
Instead of plans to keep the plants producing unneeded automobiles, put our tax money to work retraining laid off employees AND FIND NEW INDUSTRIES to occupy the empty plants.