Let GM Fail

In 1950, when GM signed a contract with the UAW, the Big Three's share of America's domestic auto market was about 95 percent. The economies of Japan and Germany were still ravaged by World War II and were not a threat. The Big Three and their workers' union were certain their oligopoly was secure.

But now, GM is a huge healthcare and pension liability, with a small and struggling car business attached. GM simply cannot compete with that albatross of obligations around its neck.

The president of the United Auto Workers union recently claimed the parlous state of the three U.S. auto makers is the result of the spike in gas prices and the credit crisis, rather than mismanagement or high labor costs. But that is clearly wrong. GM's problem is not a short-term liquidity crisis that needs a temporary bridge loan. It is a fundamental lack of ability to compete in a global economy. Their troubles have been building up for decades. And while the unions are bestowed with lavish benefits and above-market compensation, the auto business has changed and can no longer support those embedded costs.

And this is the worst time to be strained, because while in America's saturated market, there is almost one car for every person of driving age, in China there are three for every 100, and fewer than that in India. As Chinese and Indians are moving into the middle class, they will be buying more cars. And the GM brands have a special allure overseas.

Yet GM's stock is trading at but a tiny fraction of its peak. For all practical purposes, GM has already failed. It should now be allowed to do so formally.

We must not be afraid of the bankruptcy process. Bankruptcy does not mean liquidation. The process will help the company, not eliminate it. It would give GM the cover to do what it absolutely must: close plants, eliminate unprofitable brands and dealerships, and shed its bloated cost structure. It will enable GM to wipe the slate clean and emerge stronger. Going forward it will be able to compete again, without the inspissating heavy burden of past obligations.

Subsidizing the industry is not going to solve the root of the problem, but will simply mean perpetuating an unproductive structure, which will almost guarantee bigger problems later on. Why should we transfer capital from the successful businesses to the doomed? Throwing taxpayers' good money into that sink hole called the US auto industry will be tantamount to a transfer of wealth from tax payers to GM employees. The capital that will be consumed by GM is needed elsewhere, perhaps for re-training people to make them more employable, and could be used more efficiently if not allocated by Congress or the bureaucrats at Treasury.

In capitalism, the consequences of failing to compete are that you vanish, making way for more efficient organizations. That is how the economy rejuvenates itself.

Let GM fail.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.

Read More:

Should the Government Bail Out the Big U.S. Three Automakers? HuffPost Bloggers Weigh In

Comments

[Jp2]

To say the autoworker makes $75.00 an hour is a lie.That figure represents their hourly wage, pension healthcare,the pension and healthcare of 0ne million retirees.My dad retired from G.M. thirty years ago at a pension of $ 698.00 a month. Untill the time he died his pension thirty years later was $698.00 a month.Did you know that over thirty five percent of retired members of congress make more on their pension than they did the last year they were in office.Thats because they recieve C.O.L.A. on their pensions.To lay the blame on union autoworkers is asinine.The auto companies have payed well over 100 billion dollars in unfunded mandates from Congress.For all you out their who say let them fail we can buy Japenese cars built here.That is another lie.NO FOREIGN CARS ARE BUILT HERE.Foreign cars are assembled here 90% of the parts and sheet metal are imported.All profits go back to Japan.If you think cities and states can survive with everyone making $8.00-$10.00 an hour there's no use even trying to explain what the middle class of this country is!!!!!!

[Glacial]

I love fools who propose that a car company can operate out of bankruptcy.

If I'm looking to buy a car, I'm not going to buy it from a company in Chapter 11. I'll walk across the street to a dealership for a SOLVENT company, which is more likely to be able to honor the warranty.

Bankruptcy would kill any car company. We've been through this with Chrysler in `79.

[KillTheMessenger]

Did you notice that nobody really wants GM? The most positive responses here are based on the notion that it's too large to let fail. So if it goes into bankruptcy, why does it have to emerge again at the other side? Nobody cares and the other car companies can buy the pieces they want, scrap the rest.

[jimpomer]

Geez, If we should let the auto industry fail, we should have surely let the financial
district collapse.There is much more at stake with the auto industry, roughly 3 million jobs. How many affected people would that equate to. How many small businesses(parts dealers) would go under. This is much more far reaching than anything that wall street could project because of their demise.

[KillTheMessenger]

The 3 million jobs are a made up number without any root in reality. People will still need cars and cars will still be made in the US. Just not by the big three. If you don't get that, you understand nothing about economics.

[SShaw490]

If you think a whole new American car company is going to magically rise out of nothing in an economy like this, you know nothing about either economics or running a business.

General Motors is the world leader in car sales, and has been so every year for 77 consecutive years. It was the first company in America to have a billion dollar profit year. It has its problems, like any old company does, but those who take some kind of lunatic glee in its failure are not only dumb, they are bad people. I'm convinced that the overwhelming majority of them are simply seething with hatred for unions, and are willing to see America go into a serious depression only to see unions suffer. This kind of mindset is the result of Rush Limbaugh and those of his ilk getting on the radio and TV every day and spending the whole day telling their audience that the rest of the world is lazy, the rest of the world is ignorant, the rest of the world is on the take, the rest of the world is immoral, the rest of the world is a threat to their way of life, the rest of the world is human trash and should be wiped from the face of the earth. Rush Limbaugh has done what Jim Jones could never have imagined in his wildest dreams - he's brainwashed millions of people with a radio.

[swtmix]

Recent surveys have shown that 80% of the public would NOT purchase a vehicle from a car company in bankruptcy. Any car company going into bankruptcy would not come out of it. So you are looking at all of the employees of that company losing their jobs. Then the parts suppliers would start shutting down. It's not like they can start selling their parts to another car company (try putting a Chevy bumper on a Toyota). Then the raw material suppliers start to shut down (with one of the car companies gone there would be an oversupply of materials). Then the service companies, temporary help companies, janitors, gardeners, repair people. Then the dealers shut down, which affects everyone they buy supplies and services from, from janitors to local restaurants. The money given to local non-profits and charities would disappear. The money all of the employees would have spent at local businesses would no longer be there. The local businesses would start to lay off people and close. The ripple effect would continue to spread farther and farther. I could easily see 3 million jobs lost just from GM going bankrupt. Add in Ford and Chrysler and it could easily reach 8-10 million.

[The1Chiller]

The Big 3, are nothing more than the Big, Fat, Cats....the 3 of them! Obviously, their CEO's have no common sense whatsoever. When begging the US Government for money, to bail you out of a situation that you're the face of, how about not showing up in a G-4 company jet? $20,000 round trip? I wonder how much a receptionist at one of your plants makes in a year? Hell, it's probably a third of her salary, because the UAW is also a bleed on the auto industry. Overpaid management + overpaid workers, times years of lazy ideas + lack of motivation = FREE FALL. Let them fail. They'll be forced to cut the fat, get the union in line, and reestablish each brand domestically and overseas. The only people that this is hard to, are the people that shouldn't be there in the first place.

[BigGuy]

The Big 3 are vital to our nation's defense. No other firms have their manufacturing capacity and management knowhow. That value is not priced in the marketplace at all.

Assuming all three go into bankruptcy and subsequent liquidation, how would we replicate the manufacturing capacity of the Big 3 in the event of a large conventional war? Will we nationalize the American auto plants of Japanese firms?

[Endora]

We have a mega trillion dollar debt funded by foreigners. We can't afford to fight. Those days are going to be over, too. The problems with the Big 3 are just a symptom of our overall failed economy. This is like the end of a video game where it speeds up, and it is hopeless to win. We are going to live in "interesting times".

[KeepMeLearning]

Bankruptcy is not necessarily liquidation. And this is a very different world--and economy--than it was 60 years ago.

We have a lot of talented and experienced entrepreneurs in this country. To shore up this losing proposition of the Big 3 means the possibility of taking funding away from the very people who might be able to save us in the long run with more innovative and flexible businesses.

[SShaw490]

GM has been the world leader in sales for 77 consecutive years. In 2007, GM sold 9.4 million vehicles. Through the 3rd quarter, they were doing OK - not great, but OK. Then, the bottom just dropped out. Auto makers are high burn rate, low margin businesses and they can't tolerate very many bad months - GM is in trouble sooner because they're bigger. But the EU just gave European car manufacturers $56 billion to keep their heads above water, Honda and Nissan have said they're going to be asking for money soon, and Toyota lowered their earnings estimate for this year by 70%. But somehow, Americans want GM to die.

Any other country in the world thinks their industies have value. Americans think their industries are just collections of lazy, stupid workers and are run by incompetent nincompoops. Americans literally want their own industries to die. It's remarkable - one of these days, historians are going to look at this and say, "They gave banks 700 billion and then let their industries all die? What were they thinking?"

[Baltotoast]

Geeezzz folks. Get off your talking points and listen. Bankruptcy does not mean liquidation. Give these turkeys time to get their cost structures in order so they can actually function as viable companies. 7,000 dealers when Toyota (who sells virtually the same number of vehicles) has around 1,000. A union contract that restricts work force from efficient utilization. Give these guys time (and the hammer) to restructure.

[SShaw490]

GM will never go Chapter 11. First, they'd need around 30 billion dollars in DIP financing, and nobody in the private sector would even discuss that. GM doesn't have anything like enough hard asset collateral for a loan like that. Second, even if by some miracle they got it, nobody is going to buy a GM car knowing that GM has at least a 50/50 chance of going out of business. That's a long term investment for most people, and the fear of getting stuck with an Edsel would push a buyer (a dying breed to begin with) toward ANY other alternative.

I doubt they'd even try Chapter 11. They'd do better to just go Chapter 7 and avoid all the legal and consultant fees.

[jotunloki]

The dealers are not part of GM - they are independent merchants. The union contracts have nothing to do with GM's problems - the German automakers have much stronger unions and seem to have no such problems.

[philosopherkingtomas]

FORGET ABOUT THE FAMILIES AND THE OTHERS HURT HUH???

[Michale32086]

Life is rough and many times unfair..

But the solution is not to privatize the profits but socialize the losses...

Michale.....

[Beamreach]

Okay, I'd like to hear back from you when 3 million jobs are lost from this sector and we are sitting in the middle of a big stinking global depression. You might find yourself without a job too and life might seem a little rougher and more unfair than you'd planned.

The unemployment, food stamps, health care costs associated with those job losses are less than the auto companies are asking for. The industry has been inefficient for sure, but it is not the industry I'm concerned about, it is the entire economy.

This is a loan, not a bailout. The losses are not being socialized.

[Waubay]

If everyone is so concerned about the auto workers liquidate the auto companies and have the government buy up the good assets and hire back the auto workers as government employees. Sell the vehicles at cost in the US and for a profit overseas. Good for everyone except the executives, stock holders, bond holders, foreign car companies, Americans who work for foreign car companies, dealerships, etc

[Michale32086]

Good plan...

Let's go with that one..

Michale....

[Henry]

Marxists, eh?

[SShaw490]

Anywhere else in the world, that's called nationalism and it's a socialist trait. Is that OK with you?

[momof3inGA]

The Chinese want to buy GM, and if we let them slide into bankruptcy, they'll be able to do just that.

Shame on America if we shell out free money to Wall Street (which the author of this article represents) with no strings attached, yet refuse to LOAN 25 billion in funds that will help American Automakers.
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POSTSCRIPT: The Auto Industry is the #1 buyer of U.S. Steel. The number of contracts that the Steel Industry has for 2009? ZERO. That's over 1 million jobs alone. The fact that this is even being debated is disgusting. Since when do we stand idly by and watch our own die a miserable death?

[jotunloki]

Then they can build their own American tanks and personnel carriers.

[garcohsf]

I'm not certain whether the loan/bailout is the right answer. I do know that it is foolishness to come up with a solution based on who is to "blame." We need to be thinking about what is best for the employees and for the economy.

To say that a bailout amounts to taxpayers subsidizing GM's workers is very shortsighted. If they all lose their jobs, we will be paying them unemployment, we will have to pick up the cost of their health care after their employers aren't doing it any more.

And sure, labor costs are lower in, say, China--but do we want to have the standard of living China's workers have?

[SShaw490]

That's the best post I've read in a heck of a long time. Well done.

[sposton]

I am really surprised how many people are wishing American auto makers to go out of business. What are the larger ramifications of such an action? Isn't that the question that was always asked of all us to continue dumping billions into a useless war? We can waste $$ for wars but cannot lend $$ to people who, however flawed, actually manufacture something in this country.

And where are all those SUV drivers who may not have a dealer to go to to service their moronic Escalades? Is it all auto makers' fault for us buying those gas guzzlers, like they put a gun on our heads? All these financial types advocating bankruptcy want to buy parts and pieces, like hyenas, of what is left over for peanuts and they will be doing it with your own money from the $700 billion bailout! Have you thought about that?

We should not listen to any advice from any financial types until they tell us what has happened in their wonderfully functioning business sector!

[jhNY]

Theoretical failures and symbolic tough love are attractive rhetorical stances to those frustrated by complexity and interdependence, but actual flesh-and-blood people may starve or go without adequate health care to satisfy the quasi-Darwinian business model on view here. The outpouring of love in the form of capital to investment bankers has evidently sated all desire in the author for a more general application, who can at best be applauded for his forthrightness, but not for his heart, if any.

[MadDog]

I was for the bailout before I was against it.

I have to say I agree with the author. Providing a "bridge loan" or whatever they want to call it, is not going to change the management or direction overnight. I took a long time, and they never got a clue. The Big 3 made miserable decisions and executed poorly, while the Japanese have been superb.

At this point, it would be best to let them go Chap. 11 and FORCE them to actually do something dramatic. Sr. Mgmt. at all 3 need to go. It's unfortunate that the workers will have to pay for management's mistakes, but that's life. Bailing them out is only delaying the inevitable. They'll be forced into bankruptcy anyway. Better now than later.

[Waubay]

Lots of short-sighted emotional posts here. Let's look even 6 months down the line. GM is burning has been burning through $2 billion a month for the last quarter and last quarter was just the beginning of the downturn. So it is reasonable to assume they will be burning through quite a bit more than that during the next two quarters. I would wager that this $25 billion will be gone with nothing to show for it by the end of next summer. There is no light at the end of the tunnel for GM in its current form. There are no indicators out there that show people will be showing up in any numbers to purchase new cars. The credit market is frozen which is the only way most people buy a new car. GM in its current form will not just need this bailout, they will need bailouts of this size or larger every few months for years.

[CaptainVideo]

O.K. Mr. financial wizard. Learn from what happened when Secretary of the Treasury Paulson foolishly decided that Lehman Brothers was not too big to fail. The financial markets were struggling and in difficulty already, but it was after Lehman Brothers failed that the credit markets froze. A lot of financial firms had lent them money and lost it and suddenly stopped lending. It was only after this blunder that Paulson determined that a $700B bailout for the financial system was needed. If Lehman Brothers had not been allowed to fail, this would probably never have been needed. Note that the financial system was not willing to wait for Lehman Brothers to emerge from Chapter 11. It immediately froze.

Letting the auto makers fail will do the same thing for the auto industry, not just the manufacturers, but for the many other firms that depend on this industry.

[Michale32086]

The problem is, giving them their bailout won't guarantee that they won't fail ANYWAYS...

Given their track record, how can ANYONE assume that THIS time, they'll do better??

Michale....

[Waubay]

So you are saying we need to bail out everyone?

[Michale32086]

That's a point I made a week or so ago...

Where do you stop??

And who gets to play god??

Michale.....