Thursday, November 13, 2008

Treading Water



The big news this week is the potential government bail-out of the "Big Three" Detroit car manufacturers (General Motors, Ford, Chrysler). In complete opposition to my blog mantra, I don't think I take a very moderate viewpoint towards this entire debacle. I disagreed with the $700 billion bail-out dealt out for the sinking financial markets, but I will also admit that my understanding of the situation doesn't warrant me adding my voice to the din. When it comes to the Detroit automakers, I can understand the situation from living in Michigan for a long time and from the fact that understanding the financial mumbo-jumbo with AIG, Fannie Mae, Freddie Mac, etc. is impossible for the layman.

At the most basic level, the "Big Three" do not deserve a bail-out of any form. These companies having been hemorrhaging money for years and have clearly lost their ability to innovate at a competitive pace. For the past decade, these automakers have fattened themselves on truck sales while barely paying lip service to the market for fuel-efficient vehicles. For every published success of a Detroit car company, they gloated. Whenever Toyota or Honda was mentioned in a positive story, they patted themselves on the back and tried to figure out how to do it better.

I honestly doubt that a bail-out of the "Big Three" will ignite innovation or even save them from bankruptcy. In fact, if the government decides to prop-up these industrial dinosaurs, they will be stifling innovation from competitors like Toyota, Honda or even Tesla Motors. Today, many of the airlines that declared bankruptcy in the post-9/11 airline bloodletting are in better shape than they were before. Perhaps the same will happen for the "Big Three," if not, I won't shed a tear for the companies.

However, the real danger from letting these companies hit rock bottom is the effect on the massive supply infrastructure. If the "Big Three" bottom-out, then auto parts suppliers, machining shops, dealerships, mechanics, employees and pensioners will suffer. This chain of companies and people that rely on the success of the "Big Three" are not the ones responsible for a sagging industry. A government bail-out should protect the chain while the car manufacturers stumble, not the other way around.

Amidst all the noise generated over the Detroit automakers, we can easily lose sight of the fact that this economic downturn does not merely damage U.S. companies, but foreign brands as well. Toyota employs over 36,000 people in 13 facilities in the U.S. and Honda employs more than 25,000 people across 25 facilities. The recession within the automotive industry is not limited to the "Big Three," they are just being hit harder because the management has lost the ability to run a business. If Toyota or Honda fell on hard times, I somehow doubt they would get the attention that GM, Ford and Chrysler are getting.

What upsets me the most about this situation is that these stagnant car companies are going to get their money. A truly epic political lobby is fighting for the bail-out and anyone with a sane perspective can't get a word in. Governor Granholm, the United Auto Workers union and nearly every major representative of Michigan in Washington, D.C. lobbies heavily in favor of "Big Three" bailouts and limp fuel mileage restrictions. I really like Senator Carl Levin when it comes to foreign affairs and matters of state, but I wish he would shut-up when it comes to dealing with the "Big Three." Former Republican Presidential candidate Mitt Romney came into Michigan during the nomination campaign and spouted lofty rhetoric pandering to the auto companies and workers. John McCain came to Michigan and offered some of his "straight-talk" (back when he was still "straight-talking") and lost the Michigan primary by a mile. I think President-elect Obama made a mistake in inviting Governor Granholm to his provisional economic committee and he would make a huge mistake in giving her a cabinet position. In my eyes, she has done very little to improve the economy in Michigan and holds no credibility whatsoever in economic matters.

The Detroit car manufacturers and their lobby are well overdue for a rude awakening.

A few months ago, I visited the Ford Rouge plant in Detroit. The facility is really amazing. Ford has gone to great lengths to create an eco-friendly building, and, hopefully, it becomes a model for all future industrial sites. Then the great ironic tragedy of Ford appears. The Rouge plant is used to make the popular, gas-guzzling F-150 pick-up truck. Even worse, the facility was shutdown (it was not the weekend) and the tour guides said that the shutdown was on indefinite terms.

If the bail-out is inevitable, then what can be done to strong-arm the "Big Three" to innovate? Three things: strict gas mileage restrictions, purge the management and protect the aforementioned chain. Again, I want to reiterate that American-flavored innovation has rarely been done through governmental strong-arm tactics. Great American innovators like Henry Ford, Orville and Wilbur Wright, and Thomas Edison created new ideas and things without governmental interference. What would Henry Ford say if he were still around today? Hopefully, he would tell his descendant to sell the Lions to an owner that actually cared about the franchise.

For those of you seeking another, parallel perspective: Thomas Friedman to the rescue!!!

With all this silly talk of bailing out sinking motor vehicle companies, I felt the need for a more uplifting message to close this out.



In the face of all this doom and gloom, remember that happiness is just one Yakety Sax video away.

13 comments:

Unknown said...

Your absolutely right. I'm terrified of the Big Three failing due to the horrible cost that will be paid by the workers who rely on that industry for a livelihood (and dare I say it hard-earned pensions). However, I'm even more scared of the hellish doom that would follow from a government-run automotive industry. Here's the problem, GM a private company has lost it's will to live. The answer from them will not be found in a government bail-out.
I do wonder though, if foreign car companies (or domestic start-ups) could make a move on the shattered pieces of a huge infrastructure. Lord knows the price would be right. Could a Toyota or BMW immediately double the number of domestic plants by only buying the cream of the crop from the failed three - like the one you talk about in your article? I don't know, but I doubt we will be allowed to see what miracle the private sector would work in this case. Sad, sad days.

Unknown said...

You're

Unknown said...

Why doesn't blogger let you edit your own comments?

Dan Jenkins said...

Under normal circumstances, I am sure that another major car maker, foreign or domestic, would merge or buyout some of the major facilities of the Big Three. Sometimes I underestimate the global nature of the current economic recession, but declining revenues across the board and lack of accessible credit doesn't make the free market work very well (that's what CNN tells me at least). Some sort of gov't bailout or loan seems like an inevitable outcome. I only hope that the gov't has the balls to attach some strings to the money to force "green" innovation.

The lack of comment editing also sucks. I have to watch my "your/you're" and "their/there/they're" usage like a hawk.

Jackson said...

Yeah, I mean it's easy it be against any bailout until you think of what would actually happen if GM died. You're talking hundreds of thousands of jobs, tens of thousands in Michigan alone and of course the associated hit to distributors, contractors etc. Is it government's job to safeguard its citizens' lives or to punish bad management?

Also, I think you guys are way too harsh on GM. If they hadn't sold what was selling over the last ten years (SUVs) and instead had put it into R&D, would they be in better or worse shape right now? I would guess worse, since no one is buying cars, period, and there's no guaranteed return on R&D. They built up profits when they could, and until the market really took a dive into history-making depths, it looked like the money they had amassed from trucks and SUVs would be enough to get them through a downturn. Furthermore, they HAVE spent enormous effort developing and marketing the Volt which is only a year or two from production, along with hybrid versions of cars (and SUVs and trucks). Why would you let them die now when it seems they finally are heading where they should be?

And last, GM is the #1 foreign company in China. Buick seems to be every 3rd car on the Beijing ring roads. You'd be killing the chance for a global GM resurgence built on their popularity in the biggest emerging market in history, and a place where they have succeeded with virtually nobody buying SUVs.

So yeah, I'd be willing to grant them at least one more condition-laden bailout.

Dan Jenkins said...

I do give GM credit for pushing the Volt forward, but they vastly overshot the price point that would make it competitive with the Prius. With the Prius going for around $20k and a Volt supposedly going for $35-40k, I don't see the Volt being as popular for the average American. It just seems like GM and friends are so behind the curve that I feel very little pity for the brand.

The puzzling thing is how Ford offers so many cool, fuel-efficient vehicles for Europe, but these models never cross the pond. Sad...

Alb said...

I can understand your sentiment, but like Jackson said, there'd be an awful lot of jobs lost if the Big Three suddenly disappeared.

I know that Michigan is trying to develop the life sciences industry here, which has been touted as "recession-proof" because everyone needs medicine and research on that stuff. There is some headway, but progress is slow to be realized by the general public.

The irony is, and both you and Jackson mentioned this, is how these auto companies are doing so much better abroad (and they're "green-er"). I think the fact of the matter is that abroad there's maybe a greater awareness and demand for environmentally-friendly cars and such, whereas in the US we SAY we want greener cars and such, but it comes at a higher price and we're not willing to pay. We SAY we want fuel-efficiency and complain how gas prices are high, yet we still drive trucks and SUVs.

I think, in part, we the consumers are partly to blame. If we demanded more of the auto companies, in terms of innovation and green technology, and are willing to pay a little more upfront but that will translate to less costs down the road, things might've been different. And the Big Three have huge lobbying powers, and that needs to be matched by an equally large lobbying effort that I haven't seen.

I know when my parents are looking to buy a new car, the first thing they look at is fuel-efficiency. And you know what? Very few of those kinds of cars are made by the Big Three. Hmmm . . .

I mean, Detroit doesn't even have an effective mass public transit that I'm aware of (I could be wrong, but that's my impression).

Jackson said...

Alb: No, the People Mover doesn't really count as effective mass transit. But also remember that the actual city of Detroit has only 900,000 people now. It's not really on a scale where it requires mass urban transit in the downtown area.

On the other hand, there's been lots of talk about what's really needed, which are easy links between suburbs where the money lives, as far out as Ann Arbor, the downtown area and the airport. Still no results.

Dan: Yeah, the Volt is looking expensive. Do you think it's worth the proposed $10,000 subsidy per car to get some on the road and start building infrastructure to support them? Because if we wait for the free market, some hybrids seem to be all we're likely to get until oil goes back to crisis level prices and the problem never gets solves.

The trouble with going all Lehman Brothers on GM is that, as we've seen, letting the free market work its magic can destroy entire sectors on scales we don't expect. I'd rather have government propping up a functioning economy with occasional bailouts than be ideologically pure and live in the poorest state in the US. At least then I know what use my tax dollars are going to.

Jackson said...

Sorry one more comment. Quoting from Bob Herbert.

"It’s easy to demonize the American auto industry. It has behaved with the foresight of a crack addict for years. But even when people set their own houses on fire, we still dial 9-1-1, hoping to save lives, salvage what we can and protect the rest of the neighborhood."

http://www.nytimes.com/2008/11/15/opinion/15herbert.html?hp

It's not that I love the idea of bailouts or think that the big three are particularly great, but this is a solveable problem and an opportunity. Not a time to say "oh well" as another million jobs are lost in one stroke.

Alb said...

Hahaha, People Mover. I didn't realize Detroit was so . . . unpopulated.

The transit to and from the suburbs and surrounding areas reminds me of the BART trains around San Francisco. So there's an example of an idea that's already working very well, why don't we utilize that? Is it because MI doesn't have nearly the amount of money as CA, or is it because MI doesn't quite have the will?

Dan Jenkins said...

From an ideological point-of-view, I am against the level of governmental intervention that we are seeing today. However, I also realize that the best solutions to some problems requires compromise. I wasn't a big fan of the $700 billion financial bailout, but I knew that something had to be done before the ship went down. The same dynamic applies to the GM bailout. Any money given to these ailing car companies needs to have some strings attached or else nothing will be accomplished.

On the Volt, I think a subsidy would be a great idea, but then Toyota will likely complain loudly and justly so.

Jackson said...

Alb: I think we don't have that in part because of lobbying by auto companies against public transport, in part because of lack of demand, in part because of lack of money in the state. But that's just guesses. Again, there is currently Federal money allocated to doing prelim work on such a system, guess we'll see if anything happens.

Dan: Two more links.

Economist thinks bankruptcy would be good for GM. Since we are all (or at least I have been) talking as though GM would just disappear, this is useful. I'm certainly receptive to what they're saying.

http://www.economist.com/opinion/displaystory.cfm?story_id=12601932

Politico reports that the bailout such as it is appears to be moving in a strings-attached direction.

http://www.politico.com/blogs/thecrypt/1108/Dems_attach_strings_to_auto_bailout.html

Dan Jenkins said...

I actually saw both of those articles last night and thought about adding the links to the comment thread, but you beat me to the punch. :P

The article from the Economist was no big surprise. I expected that the opinion department of the Economist would take that position. I was glad to hear what Politico reported. If the bail-out is going to go through, it will have to go through with strings attached or else the Republicans will "bail-out" on the bail-out.