Like anything in life, if you are not allowed to fail you can never truly succeed. My own successes in life are built on the many lessons I have learned and the understandings I have gleaned from the times I’ve failed. So true is this simple fact of life, that it translates to simple economics. If an individual business or industry is to succeed, they must be allowed to fail. Business entities and industries in a truly free marketplace use the lessons of failure to build a more competitive marketplace, product and services.
Free markets behave like the natural laws of physics. Take water for example, water always seeks the lowest level. The pull of gravity on a liquid is enormous and forever. Try to dam the river, the forces of gravity are so constant and strong that over time the dam will fail, always has and always will. Call it what ever you want, but trying to shore up, bail out, or subsidize ailing US auto manufacturers is like damming the river, the forces of inefficiency, government regulation, horrendous labor contracts with the United Auto Workers Union, and executive level management greed will be so great that over time they will fail. Subsidizing, propping up, and bailing out any business or industry almost certainly guarantees inefficiency, lower productivity, higher prices, shortages, reduced quality and sub par services.
So, with this I say let them fail or succeed on the basis of free market economics. Failure would allow them the reorganize under Chapter 11 of the US bankruptcy code. A bankruptcy filing allows them to restructure their debt, union contracts and executive compensation packages. I say this with the caveat that the US auto industry is not solely at fault here. Our US Congress and the EPA have single handedly continually changed and added new regulations that place an overwhelming burden and hurdles for these companies to overcome. As far as an Obama presidency, I can only see him maintaining and expanding these oppressive regulations. My hope is that in the future, the people of this country will elect a conservative congress that will see and understand the damage these oppressive regulations forced on these manufacturers and repeal or attempt to restrict themselves from further damaging this industry. With free market economics, the big three will emerge as lean, technology driven, productive manufactures of high quality, highly demanded US automobiles. Why, they may even emerge as the big two or even the big one!
http://blog.myautoloan.com/
By: Dan Weil
The auto industry sees other industries getting government bailouts, and wonders why not? Others hear the pleas of the Big Three carmakers and wonder, why?
Democratic leaders in Congress crafted a plan to fork over $25 billion to Detroit, above and beyond the $25 billion in loans the government already committed to help the Big Three make more fuel-efficient cars.
But a majority in Congress, along with the Bush administration, balked at the idea. Critics of the bailout plan argue that the real problem for General Motors, Ford, and Chrysler is that their cost structures are bloated, their management doesnʼt work, and they canʼt make cars of high enough quality to attract American buyers.
Throwing money at the same people who couldnʼt get it right wouldn’t solve any of that.
Following are 10 top reasons why a bailout is not a good idea:
1. A bailout would provide money only for short-term survival. It wouldn’t alter carmakers’ flawed business models. GM is running through cash at the rate of $2 billion a month. So $10 billion from the government would give it only five monthsʼ breathing room. Can they turn over their business practices in that period? Please. The temptation would be simply to come back to taxpayers for more.
2. A government handout would allow the Big Three to avoid necessary cost cutting. Because of a strong union, the average GM employee received $70 an hour in combined pay and benefits last year. And itʼs not just line workers who are making too much. GM chief executive Richard Wagoner garnered about $24 million a year in 2006 and 2007, while leading his company toward oblivion.
3. Bankruptcy isnʼt all bad. It doesnʼt mean liquidation. It means taking the painful steps the companies have been unwilling to contemplate to date. The real losers in such a deal are carmakers, equity shareholders and creditors. Bankruptcy would give the automakers the chance to throw out existing employee contracts with their onerous health and pension systems. The unions would be forced to temper their demands if they want the car companies to survive. In the case of GM, it could also dump some of its uncompetitive product lines such as Pontiac and Saturn. Discontinuing five of GMʼs eight domestic brands would save the company $5 billion annually.
4. Taxpayer money wonʼt change the fact that many foreign cars are made better than their U.S. counterparts. Kelley Blue Book announced its top 10 brands for resale value this week, and not one of the Big Three was on the list. Chryslers, for example, keep only 24.2 percent of their sticker price on average after five years. By contrast, Hondas retain 44.5 percent of their value.
5. Bailout funds would help automakers continue their outsourcing of auto jobs to foreign countries, where costs are lower. All of the Big Three have increased the percentage of manufacturing and assembly done overseas in the past year, especially in China and Mexico. In May, Ford agreed to build $3 billion auto plant in suburban Mexico City and upgrade two other Mexican plants, the largest foreign investment in Mexican history.
6. Big Three bankruptcies wouldnʼt mean the end of auto industry in the United States. Foreign companies, which already have plants here, could pick up the slack and open new factories. Some 78,000 Americans already work for foreign carmakers, a number likely to rise in the wake of any U.S. automaker demise. The depressed South could benefit particularly from increased production of foreign auto companies.
7. Other industries have survived bankruptcy just fine. Most of the major airlines have spent time in bankruptcy, including United, Continental, Delta, Northwest, and US Airways. Their predicament looked particularly dire after 9/11. But the major carriers made it through. And to the extent that they suffered, low-fare competitors such as Southwest and JetBlue picked up the slack, often offering superior service in addition to cheaper prices.
8. Bailing out the auto industry would only encourage other sectors to beg for government handouts. Remember that the $750 Billion Troubled Assets Relief Program was designed only to assist banks, but now insurance companies and even credit card giant American Express are trying to get in on the action. Homebuilders, who arguably are as strapped as the automakers, could lobby for some of the action.
9. Stockholders deserve no mercy. Some argue that they should be compensated for the fact that GM and Fordʼs share prices have hit their lowest levels in decades. But in a free market, stock prices go down as well as up. The automakersʼ problems have been clear for years, so investors had plenty of time to get out. As for Chrysler, itʼs owned by private equity firm Cerberus, no innocent victim itself.
10. Bailouts have been tried in the auto industry, and they donʼt work. In the 1970s, Britainʼs Leyland hit the skids, hurt by slipping quality in its vehicles and imports from Germany and Japan. Sound familiar? Leyland, which made MGs, Jaguars and mass-market cars, accounted for 36 percent of the UK market. So the government sunk in $16.5 billion to keep it afloat. The result? Unless youʼre a car buff, youʼve probably never heard of Leyland, because it no longer exists.
Greg and Michael,
I have total respect for your comments on the Big 3 and I agree with you! More interesting, I have been following 3 major newspapers nationwide for the last week in regards to the BIG 3. What I found, is the opinion of the general public tax payers is to have the BIG 3 file BK.
Kathleen……agreed – it’s a hard pill to swallow but it’s the cure!
Lets not forgot that Chapter 11 will suspend all access to capital funds…which is how these organizations run for all of their purchasing, payroll, etc. Where are they to acquire the capital to continue to operate and invest in emmerging technologies so that they can regain the prominance they once had?
Secondly, how many lenders are going to do a floor plan lending for a dealership who manufacturer has just declared Chapter 11. They are so more logistics to how Detroit operates, their back end financing and cash flows, to be simply wrapped up with the phrase “Free Market.”