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.
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Should the Government Bail Out the Big U.S. Three Automakers? HuffPost Bloggers Weigh In
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.
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.
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.
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?
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.
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?"
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.
But the solution is not to privatize the profits but socialize the losses...
Michale.....
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.
Let's go with that one..
Michale....
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?
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?
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!
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.
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.
Given their track record, how can ANYONE assume that THIS time, they'll do better??
Michale....
Where do you stop??
And who gets to play god??
Michale.....