No-Fault Bailouts Posted by: McQ
on Tuesday, November 11, 2008
I continue to shake my head as the bailout fever continues to grow:
President-elect Barack Obama yesterday urged President Bush to support immediate aid for struggling automakers and back a new stimulus package, even as congressional Democrats began drafting legislation to give the Detroit automakers quick access to $25 billion by adding them to the Treasury Department's $700 billion economic rescue program.
The discussions raised the stakes for a lame-duck session of Congress that could begin next week and came as fears about General Motors' financial condition yesterday pushed the company's stock price to its lowest level in about 60 years. Obama said last week that passage of the economic stimulus package and help for American car companies are his top priorities.
"There's an urgent crisis. It's a national issue. If the administration won't act, we'll have to. But they should act," said Rep. Sander M. Levin (D-Mich.).
The entire auto industry is suffering these days, but GM has been particularly hard hit as sales have slowed and credit has tightened. Once the world's largest automaker, the company said yesterday that it was in danger of running out of cash next year. The company is taking a series of steps to conserve cash, including cutting production and laying off 5,500 more factory workers. Yet one closely followed Deutsche Bank analyst cut his forecast on GM's share price to zero, saying that even if GM manages to avert bankruptcy, "we believe that the company's future path is likely to be bankruptcy-like."
So how in the world did GM end up in this position?
You can blame it on many things, and rightfully so - bad management decisions, the economy, etc. But one of those things that has to be right up there at the top of the list is the UAW. While it is wonderful when, as a forklift operator, you can make $103,000, it might be a non-competitive wage when the average forklift operator wage in the U.S. is $26,000. Your salary may be a drain on your company.
$28 dollars an hour as a base wage isn't bad at all is it? Probably competitive with the non-union auto plants that have located in the South in right-to-work states, wouldn't you think? Well the answer is yes - if that's what was actually paid as a total. But GM says the average reaches $39.68 an hour, including base pay, cost-of-living adjustments, night-shift premiums, overtime, holiday and vacation pay.
Even at about $40 an hour, GM remains in a competitive situation. Toyota pays about $40 an hour. But for Toyota, who continues to make money, that's total compensation.
For GM, total compensation (health-care, pension and other benefits) adds another $33.58 an hour. $73.26 an hour total compensation vs. $40+ an hour in non-union automakers.
Hard to stay competitive when you're saddled with a difference like that, isn't it? And I don't know about you, but $40+ an hour in total compensation seems to qualify for a "living wage" wouldn't you say?
GM's wage situation is an almost precise mirror of what the US steel industry faced when it headed into its demise. Unions had shackled it to the point that it was no longer able to compete. Buyers could buy and transport steel from foreign suppliers cheaper than getting it from the steel mill down the street. Consequently, the steel industry here disintegrated. Interestingly we didn't consider it "too big to fail" at the time nor did we bail it out. It bottomed out, investors and entrepreneurs bought the good pieces (and let the antique and out-dated portions rust away) and got into the specialty steel business.
Apparently the auto industry never learned from that example. Yet now, we're supposed to reward their ignorant conduct, mismanagement and union greed by bailing them out?
Unfortunately, the bail-out fever is even more detrimental than we could imagine. Economic down-turns are about forcing optimization, culling the weak, inefficient, sickly and diseased companies from the ranks and giving breathing room to the healthy that made the correct choices.
Downturns are also a critical step in forcing proper alignment to exogenous risk. The focus on quarterly returns tends to induce excessive risk taking, encouraging executives to under-invest in infrastructure and process improvements that would make the corporation healthier, and instead milk it for another few quarters to ensure large bonuses. When this strategy is exposed for the fraud and excessive risk seeking behavior it represents is during downturns, when the corporations that were too stripped and under-maintained die. A generation of managers is reminded that excessive profit-taking (at the expense of critical corporate maintenance and investment) is deadly. American corporations are revitalized and anchored to sound practices.
But this dying creates room for growth for those who were better risk managers and didn’t leave their corporation too weak from their parasitic actions. Those firms who’s executives didn’t drink the life blood have new markets and opportunities to grow into.
Unfortunately, the bail-out does the most perverse of all actions: it sucks the blood out of the health, rational, risk managing firms and injects it into the parasite-infected diseased lot. GM, for instance, needs to die from the parasitism of its unions and executives, but any bailout effort will suck capital from healthy enterprises and their shareholders.
Let them die. Let GM create space for Toyota, Honda and other efficient manufacturers. Perhaps Ford will learn of GM’s errors and reform in time. Corporate socialistic redistribution practices only spreads the disease throughout the country, ensuring a total collapse of the system in time.
I have always seen the union as the core of the issues with domestic automakers. I submit that the quickets and most efficient way to get GM back in the black and on a growth pattern is to eliminate by government fiat, unions. Yes, I’m serious.
Proof? Look; The American auto-industry has been doing pretty well outside of the big three, mostly because they’re not dealing with the Unions overlarge demands on wages and bennies. I’ve been saying for bloody years, now that Unions are killing America. It suprises me not at all that things are at this pass.
Is there anyone on the planet who does not understand that the Democats... who are all over this bailout (ostensibly) for auomakers, are also, generally speaking the ones who don’t gave a rat’s bump about American industry, and they are people who have been runing against corporate America? Why would they want to bail corporate America out?
In this case, the answer is simple and direct; They’re not about bailing out the big three, they’re about bailing out the UAW, from whom they invariably get massive support... both in votes and in dollars. One could argue there’s a direct conflict of interest there, but I suspect you won’t hear anyone but me making the suggestion.
All this aside from the control the government... meaning Democrats... get to claim as shareholders.
Bithead - Good point. This IS about bailing out the UAW. As McQ’s post says, the unions have created a cost structure for the automakers that is simply not sustainable. The managements of GM, Chrysler and Ford are also to blame for not fighting back hard enough against the unions.
Let them fail. No bailout. The parts that are profitable will be bought by those better able to utilize them. The parts that aren’t profitable will be liquidated.
Part of that difference in healthcare costs is that the Japanese have a national healthcare system. I’m sure there’s payroll tax, but the majority of the burden is taken off the company’s responsiblity.
As for the current crisis. People need to read closer and sometimes between the news article retreads. Auto industry sales in america, not just us companies, were down in October by almost half over last year.
Part of it is customer fear over the economy and part of it is the credit crunch. Some buyers can’t get loans. Additionally the auto companies buy supplies on credit while dealers take delivery on credit. Companies that keep a kitty that large either end up dispersing it to shareholders (who don’t give a darn about a rainy day fund) or the company gets taken over and its kitty becomes the spoils. Case in point the Daimler acquisition of Chrysler.
So that bad thing that the financial sector bailout was suppose to stop appears to be happening anyway as the financial sector sits on the money they are suppose using to supply credit to companies, like the auto companies, to keep functioning. Despite Pelosi’s grand standing last week, he help amounted to asking Paulsen to expidite this where the auto companies were concerned.
I swear - if one Republican votes for a bailout of any more companies that make crap (CTMC), I will change my voting registration. I cannot in good conscience identify with a party that looks more like Hugo Chavez than Ronald Reagan.
That said, I anticipate that this thing will fly through the Congress, because the Dems want to suck up to their labor union thugocracy (wait until the vote on card check), while the Republicans are afraid of seeing 1 million people thrown out of work.
What Bush should do is stand tall, make no deals, and say "no bailout" until his final moments in office. Let the Dems come to power in January with their expanded majority and pass it, and let President Howdy Doody sign it. Then it is on HIS watch. The ballooning deficit will be his headache. Bush can at least leave office with his head held high that he resisted the furtherance of the socialist agenda in America.
They are in the United States because they do not want to have the Yen/Dollar situation end up with their cars being over-priced. The Yen moved up to 15% in the last 3 months. This is a huge issue for them.
They also avoid some quota and tariff fears this way by getting some political clout, but since these factories are profitable, and probably pay lower wages than in Japan, they make sense even without any political calculus.
I know many GM bashers will take exception to this, but GM actually makes fairly good vehicles, and occasionally a few great ones (Cadillac CTS, Corvette). But the UAW absolutely refuses to acknowledge what’s coming. As The Truth About Cars explained circa 2005 when GM went to the UAW with hat in hand asking to reopen its contract, the union’s response was, in effect, "F*** off. And don’t f*** with us."
If any U.S. carmaker has a shot at survival, it’s GM. But only if the union sees the light.
As The Truth About Cars explained circa 2005 when GM went to the UAW with hat in hand asking to reopen its contract, the union’s response was, in effect, "F*** off. And don’t f*** with us."
And there’s the majority of it.
However I also believe that failing business models need to fail, allowing the creativity of the market to then make something better out of the pieces.
Here again, we come to a problem, though, Bruce... the business model isn’t all GM’s, Ford, or Chryslers’s. A goodly portion of the problem is the idea that the government has over the years, invariably backed those overlarge union demands with the force of government.... in much the same manner as they pressured banks into loaning to people who couldn’t afford it. Managements of the day had little ability to resist, and given government gurantees pushing the consequences down the road a few decades, had no reason not to give in.
I say the problems the Big Three currently has can all... all... be laid at the feet of an overlarge, overtsepping government. There has to be some responsibility for this failure, that falls on government, thereby, else the whole thing happens again, whetever else happens this time.
My own take is that the fastest way to get the big three back in the black is to remove the Unions from the situation. That would, in my view repair much of the damage the government has done. Then, we can start talking about removal of CAFE standards, which is in fact the rest of the problem.
Yes, management had it’s own issues, but I would argue that those are forgivable and they’d have taken care of thosemselves, absent the Troika of government, and the unions, and the enviro-whackjobs.
Sorry, I don’t see a loser in the scenario, especially the tax payer. ... Still not seeing a downside here.
Going to back to what is asked for, that the financial bailout money find its way to the auto companies so they and their customers can get credit to keep going, I don’t see the problem here. That money is already taken from the taxpayer. And considering that money seems to be being pocketed or used to buy other banks, that would be closer to the intended use financial bailout money. To keep the economy moving.
And from a pragmatic point of view, if they are destine for failure, it is really best to have them go down while we’re the precipice of a massive economic downturn or weight a few years to see if it isn’t some undefined ’mismanagement’ but rather the credit crisis that’s responsible. At a minimum the collapse would be in better economic times and not fuel for the current downturn.
I won’t argue that - in fact I agree. However I also believe that failing business models need to fail, allowing the creativity of the market to then make something better out of the pieces.
Why would it? People need cars. That money that used to get respent into this economy from domestic makers won’t be. Most of it will be a permanent loss. The adjustment will be 1-3 million people added to the remainder of the workforce. After wages are driven down a bit, some of that unemployment might abate.
What’s wrong with the "big 2?" Or "big 1" for that matter?
Well, nothing at all, if they were able to survive. Trouble is, they’re all operating under the weight of the same busienss model, involving labor costs imposed by unions that make any chance of keeping them avile impossible. Government’s other impositions don’t help, either.