Auto bailout a mistake
November 24, 2008
Filed under Money/Health
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Unless you’ve been living under a rock for the past several months, you’re probably aware that General Motors, Ford and Chrysler are all on the verge of bankruptcy. Within a few months, three former titans of industry will more than likely go the way of the Dodo bird, Enron and ‘N Sync.
The CEOs of the Detroit Three went begging this week, asking Congress to fill their tin cups with $25 billion in loans. They didn’t do a good job, either. Instead of getting the money, they were told to come back later with a solid business plan. Personally, I think Congress wants to see more groveling, but that’s just me.
The truth is that without additional cash, GM and Chrysler will run out of money very soon. General Motors CEO Rick Wagoner stated that GM was burning through $5 billion per month. Although Wagoner said he thought GM could hang in through 2008, he admitted the company would collapse early next year without a bailout.
Although the demise of domestic auto manufacturing would be damaging to the economy, it is wrong to think that a federal bailout of domestic automobile manufacturers would solve anything.
Since early 2005, General Motors has lost about $70 billion. In the second quarter of 2008, GM lost $15.5 billion. Ford has been losing money off and on since 2001, losing $12 billion in 2006 and $2.7 billion in 2007. Chrysler, which was spun off from its German parent Daimler and is now owned by a hedge fund, is also losing money.
These numbers are sobering, but they show how ineffectual a bailout would be. If GM gets its $15 billion share of bailout pie, the company will blow through it in three months. Then we’ll be right back where we started, except we’ll be out $25 billion.
The Detroit Three have problems that run deeper than the current recession. They are hamstrung by UAW labor agreements, have a reputation for poor reliability, fail to match the fuel economy of other manufacturers, and have more dealers and greater overhead costs. Their market share has been declining since 1950, when most of the world was still digging out from under the rubble of World War II.
For example, because of past promises to employees and retirees, GM spends $1600 more per car on labor costs than their foreign competitors. That is money that could be spent on improving interior materials or reliability. While new agreements with the UAW allow domestic manufacturers to hire new employees at lower rates, there are still a lot of higher-paid employees on the payroll.
Also, even though the reliability of domestic cars has improved, they generally lag behind mainstream Japanese brands such as Toyota and Honda. If you have heard recent ads by Ford that boast of quality equal to Toyota, you’ll notice that the comparison only involves new vehicles surveyed in the first three months of ownership.
Fuel economy is another problem. While some people do need SUVs, people that buy small cars generally do so because they can’t afford much and want to save money. Small cars sold by domestic manufacturers get worse gas mileage than their Japanese counterparts. The Chevy Aveo, GM’s smallest car, actually gets worse mileage than the larger Chevy Cobalt. Both pale in comparison to something like the Honda Civic.
Domestic manufacturers also incur more costs. GM sells as many cars as Toyota, but has eight brands to Toyota’s three, and four times the number of dealers. More money is spent on advertising, administration and engineering. For example, GM sells three different versions of the same car. That means GM had to pay to restyle the car twice and stamp out different body panels. All of that costs money, which is why GM finds itself in its current situation.
A bailout won’t force domestic auto manufacturers to mend their ways, and it would only prolong the inevitable day of reckoning. The only way to cut brands, dealers, and UAW contracts is through a bankruptcy filing. Even though Rick Wagoner likes to say that bankruptcy isn’t an option, it’s going to be forced on him when GM runs out of cash.
So long, Detroit. I’ll miss the Corvette.
Woell is a senior accounting major and columnist for The Spectator. This column appears biweekly.