Tag Archives: BadIdea

The GM/Ford/Chrysler Bailout

The Senate is discussing a $25 billion or so bailout for the 3 three automakers. Like the $700 billion bailout to financial companies, and the $300 billion or so for AIG, Freddie, and Fanny, this bailout rewards reckless management.

Senator Feinstein of California believes a loan should not be made unless the industry agrees to produce more competitive, fuel efficient cars. However, the American auto industry has had years to compete with the Japanese on reliability and fuel efficiency and with the Germans on performance and they have failed miserably. Their short sighted management refused to deal with the increase in the price of oil. Instead they continued to produce gas hogs for short term profit. Management has made unsustainable agreements with unions that has added to the their inability to compete. Management has chosen to produce cars that are far less reliable than their Japanese counterparts. They refused to innovate in the hybrid electric market until the Prius was flying off of Toyota’s lots. Loaning these completely ineffective companies money doesn’t change the fundamentals a stitch and simply postpones the inevitable.

I also don’t believe that a symbolic replacement of management will be able to transform the auto industry’s culture of mediocrity – although it will help the politicians look like they’re playing hard ball, even though the move is unlikely to have any real impact.

The best thing for the industry is bankruptcy. Yes, the shareholders and management will lose their entire investments, lenders will lose some of their investment, and union contract will be renegotiated (probably a net loss for union workers). However, this is the best option for restructuring the American auto industry. It doesn’t use tax payer money to pay for it (assuming congress doesn’t make some asinine move like bailout the UAW pension plan). It is the most sustainable long term for making America globally competitive and keeping manufacturing jobs here.