Tuesday, November 18, 2008

GM Is DOA

Last Rites: General Motors Corp. is a gasping whale beached and bloodied on the sands of the economic meltdown. Life support from Congress won't do a damn thing unless GM files for reorganization and protection under Chapter 11 bankruptcy. Even then its prospects are grave. It's two buddies, Ford and Chrysler, are caught in the surf wrestling with the same impending tide. Ironic, isn't it, that America's Big Three automakers --their suppliers, their contracts with dealerships, unions, health plans and pensions -- are drowning themselves from the seines of history while the two major foreign competitors, Honda and Toyota, are manufacturing in the U.S. and doing swimmingly? Metaphors aside, it's Darwinian economics. Survival of the fittest. Crass and cruel it may sound, the Big Three are dinosaurs in the free capitalistic market system.

  • After 42 years of eroding U.S. market share (53% to 20%), GM produces eight brands of automobiles and trucks; Toyota (19% share) has three and Honda (11%) two.
  • GM has about 7,000 dealers, Toyota around 1,450 and Honda about 1,000. Dealers are protected by state law. The cost to reduce them to foreign dealership numbers would be billions and take years.
  • GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. GM will run out of bailout money paying off these obligations before it has a chance to downsize to meet market conditions now enjoyed by its competitors. Like AIG, management would ask for more. And more. And more.
Painful Reality: By reorganizing under Chapter 11, GM would be free to renegotiate its contracts and eliminate state protection from its dealerships. The feds would absorb the terminated pension plan under provisions of the Pension Benefit Guaranty Corp. Congress could extend unemployment benefits. Then Congress could offer cash infusion to retool and restart GM a thinner, meaner and greener viable competitor in the automobile manufacturing sector. At least taxpayers stand a chance of getting a few coins back on the dollar. I recall my father years ago saying I was an idiot to buy a used DeSoto. Michael E. Levine, a research scholar at New York University, in an opinion article in Tuesday's Wall Street Journal, contends bankruptcy no longer carries the negative image of damaged goods. Americans think nothing of buying homes, computers or other goods from producers undergoing bankruptcy reorganization, he says. George Will, the conservative columnist, writes in Tuesday's Washington Post: "After being restructured through bankruptcy, the Detroit Two, or One, might flourish. Let's find out. The ruinous alternative is to squander, in a doomed attempt to "save jobs," more scores of billions of dollars of scarce capital that will then be unavailable for job-creating investments in rising industries."

Point. Counterpoint: Meanwhile, Treasury Secretary Henry Paulson told Congress Tuesday he opposed the bailout even though he said a failed U.S. automaker would not be a "good thing...I don't see this as the purpose of the bailout program" which he said is intended to stabilize jittery financial markets and get lending flowing more freely again. Leading Congressional liberal Democrats led by Speaker Nancy Pelosi, Rep. Barney Frank and Sen. Carl Levin are seeking cash infusion for the automakers in this lame duck session. Even if they can't get a successful vote, they will try again with the new Congress after Jan. 20. But even then, some of the elected new Democrats are casting a cold shoulder on Detroit. According to an article Tuesday on MSNBC:

  • Bobby Bright of Montgomery, Ala., comes from a district where Hyundai operates a manufacturing plant and a number of supplier firms employing 6,500. “I don’t look favorably on it at all,” he said. “Generally I came up the hard way and no one ever bailed me out. I always had to stand on my own two feet.”
  • Michael McMahon, elected in a Republican scandal -plagued district in Brooklyn, also said he is skeptical. He warned against supplying taxpayer aid to companies “that are not taking the steps to correct themselves.” He added, “In any industry that is hanging on by its fingernails, both management and the workforce are going to have to take cuts in pay, cuts in benefits, to keep it going.”
  • Virginia’s Tom Perriello also is leery about the Big Three bailout: “I think we’ve done too much rewarding the status quo instead of rewarding innovation. I’d much rather see a stimulus package that rewards whatever company comes up with a 100 miles-per-gallon car and 40-miles-per-gallon truck first.” Could Hyundai get the prize? “I think we should do it for American companies. I think we want the auto industry in America to be reborn.”
Pelosi will have more than 255 members in her caucus as a result of the election. The margin over Republicans is large enough that Pelosi will be able to pass legislation without the support of some newly elected members of Congress, such as Bright and McMahon. By taking the remaining $350 billion from the federal bailout package and giving a portion of it to the Big Three in their current state is a deal dead on arrival.

2 comments:

matt said...

Not bailing out the three big US auto companies is probably the only smartest thing Congress did this year. Giving money to the American automakers will do nothing except bail them out from an UAW contract where many workers are highly over paid that perform remedial duties. The Japanese were smart to invest in hybrid vehicles knowing they would not make any profit for several years. They saw the writing on the wall during the Clinton Administration when millions of dollars were given to the Big-3 to explore and develop vehicles that run on alternative fuels. The foreign automakers were left out of the funding. The Big-3 developed a few electric vehilces but nothing went to full production and broke a lot of promises. Instead, they chose to build the SUVs to make the big profits; thus failing to anticipate the consumer’s need for better fuel efficient vehicles. It was a risk they elected take and now must face. If the Big-3 go under there will be some other company to step up and use a better business model.

Anonymous said...

One of the questions is what happens to GM's and Ford's foreign operations? Most of recent cash flow & profits have been coming from them whereas the US operations are burning cash. Chapter 11 is an American procedure, but the foreign subs are incorporated in China, Brazil, Mexico, and Europe. Have you read or heard anything about this point?
HLR