GM Update – It Really Is “Government Motors”
Greg Mankiw reminds us of this bit of fantasy:
What we are not doing — what I have no interest in doing — is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They — and not the government — will call the shots and make the decisions about how to turn this company around. – President Barack Obama
Federal support for companies such as GM, Chrysler Group LLC and Bank of America Corp. has come with baggage: Companies in hock to Washington now have the equivalent of 535 new board members — 100 U.S. senators and 435 House members.
Since the financial crisis broke, Congress has been acting like the board of USA Inc., invoking the infusion of taxpayer money to get banks to modify loans to constituents and to give more help to those in danger of foreclosure. Members have berated CEOs for their business practices and pushed for caps on executive pay. They have also pushed GM and Chrysler to reverse core decisions designed to cut costs, such as closing facilities and shuttering dealerships.
As usual with this bunch, rhetoric and reality are miles apart. Intrusion by members of Congress into the decisions of the company are many, despite the promises of President Obama that “they” will call the shots:
Lawmakers say it’s their obligation to guard the government’s investments, ensure that bailed-out firms are working in the country’s interests and protect their constituents.
Executives say congressional demands gobble up time and make a rocky business environment even more unpredictable.
Or, to put it another way, GM now becomes another “constituent service” problem for members of Congress. And they really don’t care if GM’s business model dictates certain moves to regain profitability – if it hurts a constituent or their district, they just won’t stand for it:
In May, even before the government’s ownership became official, lawmakers erupted when GM disclosed it planned to produce a new subcompact car at its factories in China. Under congressional pressure, GM dropped those plans and promised instead to retool an existing U.S. facility in Michigan, Wisconsin or Tennessee for the new model.
Lawmakers from those states demanded and received high-level meetings in Washington to quiz GM on the criteria for site selection and to tout their states. GM in the end picked a site in Michigan.
The natural reaction to the above is to say “hey, that’s good, we saved or created jobs”? But is it good for the overall profitability of the company which is in hock for over 50+ billion to the taxpayer? Wasn’t the promise to infuse it with cash and allow the company to make the decisions necessary to move it into the black? Instead GM is beaten into line to serve the interests of Congress.
Additionally, closing dealerships has been questioned by any number of Congress members with GM reversing 70 closings. And serving its Democrat special interest groups is also a part of the meddling Congress has engaged in since the takeover:
In addition to the dealership issue, lawmakers have jumped into a union fight that pits GM and Chrysler against two trucking companies that haul new cars around the country. The auto makers want to give some of the work to cheaper nonunion contractors. But that raised the ire of lawmakers who support the International Brotherhood of Teamsters.
Rep. Dale Kildee, a Democrat from Michigan, sent letters on Sept. 30 to the chief executives of both GM and Chrysler, demanding they explain their positions and advising them to stick with their unionized carriers. At least four other lawmakers sent similar letters.
Chrysler defended its plans in an Oct. 2 letter, saying it would save $31 million over three years by shifting some of the work to other carriers. GM, then in the middle of contract talks, replied in its own letter that it had “no plans to phase out unionized hauling companies” but added that it was pursuing new contracts that made the most sense for the company.
So, as it turns out, President Obama’s statement was “just words”. Not only has government intruded, it is engaged in using GM as a tool for self-serving political needs. And that delays the company’s return to profitability and its ability to pay back the money it owes taxpayers. Ford posted a 1 billion quarterly profit recently (certainly driven by “cash for clunkers” but still, a profit). Ford took none of the bailout money. Ford, then, is engaged in running a profitable company which will be competitive in the auto market.
GM and Chrysler – don’t look for any of that to happen for them as long as government and Congress see them as a useful tool to further their own power base and help ensure they remain in office. And as long as it remains useful for that, don’t expect the relationship to change – and you certainly shouldn’t expect the company to make a profit. That’s simply not a priority for Congress.