Why NOT to bail out the US auto manufacturers…

2008/12/03 in Tumblr blog imports

My arguments for not supporting the government bailout for the Auto Industry goes as follows:

  1. Bankruptcy protection would allow the car companies to restructure (much as airlines have previously done)
  2. American-made cars will continue to be sold even if the car companies file for Chapter 11 protection from creditors.
  3. US manufacturers should benefit from restructuring
  4. Why should workers that don’t have health insurance fund a tax-payer bailout to protect the health package of union workers in the car industry?
  5. US is suffering from over capacity and in ability to adjust to lower demand.
  6. But, most importantly, I argue that the slowdown in the Auto industry is the result of a global slump, and is not just focused here in the USA.  all global manufacturers are suffering.  So, US markers wont lose market share by entering chapter 11

US government protection of the US auto industry doesn’t make sense.  Not right now.  Not in the middle of this GLOBAL financial and economic crisis. Tax-payer dollars should be focused on fixing the global financial problem (the root cause of the trouble), and not on saving a manufacturing industry (no matter how strategically important).  The troubles in the financial system are systematic (effecting everybody).   The troubles in the auto industry are localized (and only effect workers of those companies).

Also, I fear that getting government involved in protecting US jobs will only push the global economy further toward a movement of “protectionism”, which we can not afford.  If the US government money goes to protect the US auto industry, they are surely going to stipulate that the money must be spent on “made in America” car parts, and not used to fund operations / sourcing overseas.  But this is a slippery slope to go down, and especially slippery since we are just beginning a serious economic downturn.   Our government needs to resist temptation to enact protectionist barriers in futile attempt to protect American workers.

The car industry slump is a GLOBAL problem with falling demand for products worldwide, a lack of credit for consumers, and an over supply of production capacity. This financial and economic crisis is effecting all manufacturers from all countries:

  • Japanese Car makers are suffering:  In recent news, I read that Toyota, Honda and Nissan are all with sales down approximately 30%.
  • Indian car makers are suffering:  Tata motors is in trouble, and is seeking direct funding from the public in a strange consumer-deposit scheme.
  • European car makers are suffering as Europeans also cut back on Auto purchases
  • Korean car makers are suffering as export markets stagnate due to a lack of global demand

Because the slowdown is global, and because all global auto companies are suffering due to the lack of consumer appetite for their products (and a lack of credit to purchase them), then it makes less sense to bailout the US auto makers.

That will just encourage other countries to also bailout their respective auto industries, and encourage other nations to spend (waste) money reciprocating US policies.  If all car companies are suffering from the same global problem…that means that the US “big3″ wont loose significant market share by going into bankruptcy protection.

If the situation were different globally, and if the relative position of the US makers were to fall as a result of a unique US economic trouble, then perhaps I would see the bailout in a different light.  But, with a global economic slump on the horizon, I believe that all global auto makers are facing difficult times, and perhaps a US restructuring in this environment is exactly what the US industry needs.

Counter-arguments

The counter-arguments against bankruptcy (and hence the argument for the bailout) are two-pronged.  First of all there is the assumption that consumers would stop purchasing cars from auto makers that are bankrupt because of fear that the warranty wouldn’t be honored, or that repairs wouldn’t be covered.   The second argument is that bankruptcy would some how accelerate job losses in Detroit.  Only this second argument is valid but should not be used as justification to prop-up the US based manufacturers.

“Chapter 11″ wont scare away customers:

Its not “chapter 11″ that will scare away customers, its the global credit crisis.  Its the fear of loosing their jobs.  Its the lack of credit.  Its the better options for automobile offered by global competitors (many of which are made right here in the USA).

As long as the company is still in business, consumers continue to shop.  This is seen in examples such as Circuit City that just went into chapter 11, but is still operating, and still selling electronics.   This is also seen in examples of the many US airlines that entered chapter 11, and continued to see customers fill their airplanes, only to later re-emerge as stronger companies (after renegotiating labor and pension contracts).

To allay warranty concerns, there are ways to design third party warranty systems to limit consumer fears.

Consumers will continue purchasing cars from US manufacturers in approximately the same percentage as in the past because its not just the US car makers that are in trouble.   As long as there is confidence that the US manufacturers will eventually reemerge from bankruptcy healthier, the consumers will continue purchasing their cars.

But, then there is the problem of job losses…

For manufacturers:  If production were to shift from GM to Honda (or Toyota, Nissan), there is the possibility that fewer people will have jobs.  Why?  Because these transplants are more efficient in making cars (needing fewer people to make a car).  Everyone knows this.  It is exactly the reason why GM (and Ford, Chrysler) are falling behind.  It is not a valid reason for the government to step in and protect those jobs.

For suppliers: The argument that job losses will be extended to suppliers and dealers doesnt hold much merit.  Suppliers in the US are diversified and supply Honda and Toyota just as much as they supply Ford and GM.  If you assume that Americans will still want to purchase the same fixed amount of cars next year, and that most of those cars will be made in the USA, then I dont see why bankrupcty protection would lead to job losses at suppliers.

For auto dealers: The argument that auto dealers will be forced to close all across the USA if GM (Ford,Chrysler) go bankrupt is also not valid.    If Americans will purchase the same amount of cars whether or not the Big 3 are in bankruptcy protection, then there is the same need for the same number of auto dealers.  Perhaps that number is considerably less than currently exists, but thats for the market to decide, and not for government bureaucrats.

US manufacturers may indeed see accelerated job losses in bankruptcy , but hats the point of “re-organization”; to significantly re-structure the business that has been failing, and have them exit bankruptcy at a later date as leaner, meaner and more profitable.

Losing jobs to save the industry …

Any attempt to “save” jobs today will be futile, just as it has been in the past.  Detroit is filled with stories of workers paid $100,000 or more to put tires or windshields on cars as they move down the assembly line.  Then there are the stories of workers that GM or Ford tried to lay off, but instead pays to sit at home and not come to work.

In an economic downturn of this magnitude there should be job losses at auto manufacturers (just as there have been massive job losses in the financial industry).   Simple economics dictates that there is a massive over supply of production capacity in the US as compared to the quantity of automobiles demanded by consumers.  The annual capacity of the industry is 17 million cars; sales in 2008 dropped to an annual rate of only 10 million vehicles.   According to Peter Morici, the Big3′s projection of over 15 million cars as a sustainable production figure are unrealistic.  In an open hearing to congress he expressed that the fundamental problem with the car industry in the USA was that the market for sales was shrinking, but the number of producers and production capacity was still too elevated (with US based producers of GM, Ford, Chrysler, Honda, Toyota, Nissan, BMW, etc.)

I grew up in Michigan, and used to work both as a supplier of auto parts to the Big 3, and then later as a purchasing manager at Honda, based in Ohio.  So, I deeply understand the importance of the manufacturing base in the Midwest.  I believe wholeheartedly that keeping a strong manufacturing base is deeply important to the future long-term economic development of the USA.

But, this is an industry that badly needs to rid itself of structural problems created over the past half century.  Losing jobs is not the same thing as losing a company.  If Ford, GM and Chrysler are forced into bankruptcy, the companies will not disappear.  They will continue to exist in the safe protection from creditors.  Yes, some jobs may be lost, but if thats the cost to save the companies, then its what the US needs to do.   Choosing to try and fight against the massive economic downturn will only be money wasted by the US tax payers.

For further information, Ive attached two videos below…

U.S. Auto Makers Come Back for More
General Motors Corp., Ford Motor Co. and Chrysler LLC return to Washington, D.C., this time asking Congress for even more money — $34 billion — and it looks like they will get what they came for.

GM ‘Bares Its Soul’ for Bailout
In seeking money from Congress, GM acknowledged its mistakes and candidly explained how close they are to collapse. WSJ’s Jeff McCracken and Dennis Berman discuss GM’s bailout request. (Dec. 2)


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