On (Not) Bailing Out the Big Three

The Senate Republicans torpedoed whatever hope there was for the Big Three (why are they still called that even though they continue to shrink?) to receive a bailout from Congress.  Now the survival of GM and Chrysler apparently rests on the whims of the White House.

I hope Bush takes a stand and say no.  If there’s one industry that has shown itself to be most unworthy of a bailout, it’s the automobile industry.

Consider:  when I first moved to the United States, General Motors alone constituted half of the cars sold in the United States.  Today, Ford, GM, and Chrysler combined don’t even crack half.  Toyota, once the fourth largest car maker in the United States, first overtook Chrysler, then leaped over Ford, and is now right behind GM to become the largest automobile manufacturer in the U.S. and the world.  The changing of the guard is a matter of time.

The days of my grandfather when cars meant GM is long gone.  The American automobile industry has mismanaged its way into irrelevancy.  Starting with the 70s, the Big Three sought relief from the government and the American people every decade as Japanese car companies slowly, gradually, and methodically ate into their market share with smaller cars, better productivity, and competent management.  In the 70s, Congress extended a helping hand by bailing out Chrysler.  In the 80s, Congress showed sympathy by smashing Japanese cars on the Hills of Congress.  In the 90s, the White House showed toughness by threatening a trade embargo.  In the 21st century, the love has finally been lost, with prominent senators and congressmen actively calling for the Big Three’s bankruptcy.

And rightfully so, because $15 billion or $30 billion or even $100 billion (which they would come back to seek) won’t be enough to save the Big Three.  These companies are the same ones that, in the 80s, saw the Japanese succeed with small cars, promised to reorganize, yet took no action for two decades while masking their problems with their reliance on SUVs  as oil prices tumbled in the mid to late 90s.  When oil prices skyrocketed, not a soul was surprised that they lacked fuel efficient cars to sell while Japanese automobile manufacturers were selling out Preuses and other alike.  GM’s announcement earlier this year that it would be closing four plants that manufactured SUVs and trucks and concentrate on fuel efficient cars was shocking only in its untimeliness and not in the extraordinary number of factories dedicated to the production of gas hoggers.

The Big Three are not alone in feeling the consequences of the lowest auto sales in more than a decade.  Toyota, Honda and Nissan are all experiencing double digit drops in sales as well as significant needs for restructuring.  But they’re not running to Washington for a helping hand.  The most damning rebuke of the Big Three during the current crises has come from the deafening silence of the foreign manufacturers.  Sometimes, silence speak louder than words.  The current crises has crystallized what was obvious to many:  not all automobile manufacturers stand (and fall) alike.

Americans will no longer aide the Big Three simply because they’re American.  That affection is long gone, their good will squandered by two decades of continuous mismanagement and replaced by Japanese manufacturers who fostered their own good will in the South.  Rather, if they are to be saved, it would be because of that ever perverse economic logic, “They’re too big too fail.”  Moral hazard and fairness to the small(er) be damned.  Consequences of permitting not only one giant but three to fail would be catastrophic.

If the argument ever had weight, it would be in the context of the Big Three.  Bankruptcies by GM and Chrysler would turn the whole Mid-West into one large ghost town and send ripple effects to the supply manufacturers and dealers located in every state of the country.  The unemployment rate is expected to top 10% if that were to happen.  The job losses America is experiencing now would seem like peanuts once the Big Three goes under.

Notwithstanding, any interim bailout must be denied because of the bigger picture at stake.  Yes, the consequences of a failure to rescue would be devastating, but the fact is, the city of Detroit had been experiencing a one city recession for years prior to the current crises because the Big Three was aggressively cutting payroll.  And injecting $15 billion at a behemoth running out of cash wouldn’t make the slightest of difference unless we are committed to continuously throwing good money after the bad.

Because let’s not kid ourselves:  the Big Three will fail sooner or later, whether the government helps them today or in a decade.  Neither their past record their nor current attitude provides any hope that the Big Three can continue to operate in its current form.

The question we must ask ourselves shouldn’t be whether the Big Three should be allowed the fail.  Rather, the question ought to be whether the Big Three should fail with or without our help.  There is likely a future for the Big Three in a pre-packaged, planned bankruptcy which would permit the companies to drastically change who they are and become competitive once again.  Such bankruptcy would require the government to guarantee financing so a bankruptcy reorganization would not turn into a bankruptcy liquidation.  But if neither the Big Three nor the government prefers to take this sensible, long-term approach, then let the Big Three fail and let the market take its course.  Americans still need cars and Toyota, Honda and others would be more than happy to manufacture them hiring the old employees of GM and Chrysler in their old factories.

Will the process be painful?  For sure, and it’s most unfair to the employees who share very little blame for the instant crises.  But by taking courageous action today, we’d be spared the agony of watching the Big Three repeatedly return to Congress asking for help that they don’t deserve and they haven’t earned while they continue to tumble into obscurity.


10 Responses to “On (Not) Bailing Out the Big Three”

  1. 1 Chris Schroeck December 13, 2008 at 2:19 pm

    I agree, this whole “bankruptcy is not an option” business is BS. GM needs a good prepackaged bankruptcy. Chrysler needs to be liquidated, it’s dead. Ford, I think, may not need either. Ford has quite a few models that people still want to buy, and is not in nearly as much trouble. Notably, GM is starting to build some better cars as well.

    But bailing them out would just put off bankruptcy for Chrysler and GM until March. I have a lot of sympathy for the people of the midwest and American auto workers in general. My dad made parts for Ford for over 20 years, but the union deal was a little bit too good and they ended up moving his plant to Mexico.

    A good prepackaged bankruptcy plan would maintain a lot of those jobs, though.

    This crisis is actually making me consider buying an American car. They’re practically giving them away at this point. I could get one of the better Chrysler models for a steal, and sell it later on when it starts to break down.

    I’ll probably just buy a Honda, though.

    • 2 joesas December 14, 2008 at 5:02 pm

      You know, like you said, if American car companies made better cars, most of their problems will be solved. And it’s a problem that they haven’t solved in decades and a problem $15 billion in aide won’t solve. Time to cut them off, I think.

      In many ways, I think the UAW is getting an unfair blunt of the criticism. Sure they may be receiving a nice compensation package, but as the NY Times pointed out, Japanese companies are paying only slightly less. Besides, when the company gets into financial trouble every 7 years, at some point, it’s the executives to blame, not the employees.

      I am also seriously considering buying an American car, but that has nothing to do with the crises. Neither GM nor Chrysler will get sympathies from me and that they’re likely not going to get one from people like you (your father worked for a car maker, after all) is a true change of times.

  2. 3 Tristan December 15, 2008 at 1:10 pm

    I’m not quite sure what to think about this yet. You’re right in that the car companies have spent all the goodwill they ever had, I think if we weren’t in the throes of a major recession there would be no question about cutting them off. Moreover, if what Chris says about a managed bankruptcy is true, people would still have jobs despite GM going bankrupt (though I can’t see a judge giving Chrysler any option but liquidation.)

    The car companies keep saying that a bankruptcy would force liquidation though. And it’s a terrible time to dump so many people out onto the street, especially the streets of Detroit. I don’t see this becoming part of a longer chain of government rescues. The logic for it (and the political will) will end with the recession. It seems a small price to pay to keep them in business for another few months.

    • 4 joesas December 15, 2008 at 4:38 pm


      I think that if the government is willing to step in and offer debtor-in-possession financing, the company will emerge out of bankruptcy. In fact, the companies should go in with what is called a pre-packaged bankruptcy, with a plan and an agreement among creditors to emerge out of bankruptcy even before filing one. That not only assures survival, but also a much shorter bankruptcy.

      I understand your point about times being rough, and I see that as the only thing going in favor of the automakers. But I suspect that it won’t be long before the companies ask for another $100 billion or so, well before the recession is over. And I hardly believe the government has that kind of money to spend at this juncture to save companies that almost everyone agrees are going to go under anyways.

  3. 5 Chris Schroeck December 18, 2008 at 7:22 am

    Yeah, government DIP financing is a must, because no one else wants to lend to these companies, and for good reason.

    Also, I feel like what these companies need to do is make a splash, product-wise, and release something truly spectacular, or they are doomed. GM might just have it with the Volt, Ford kind of already does with the Fiesta (but not in the U.S. yet). Chrysler has no prayer.

    But sometimes an entire company, and its perception, can be turned around by a single great product (Apple, for instance). People need to see something from these companies that says that they are capable not only of making good cars, but of making cars that are better than cars made by Honda and Toyota.

    Either a huge technological leap, or huge price leaps.

  4. 6 joesas December 18, 2008 at 9:48 am

    Absolutely. It doesn’t take much. Great example in Japan is Nissan, which used to be the second largest car manufacturer until it stumbled badly and essentially got taken over by a French auto maker. The CEO, who now runs the French parent company as well, really turned around the company by introducing sleek looking cars. If you go to Japan, you can easily tell Nissan cars; they’re that distinctive.

    In the cell phone market, it’s Motorola with the Razr, although I think that’s a better example of how you need more than a one hit wonder to survive.

  5. 7 Chris Schroeck December 19, 2008 at 9:10 am

    I never understood why Ford didn’t go all-in with this “sync” feature designed by Microsoft. That is some really neat technology, but they only locked it up for a year and now other manufacturers can use it.

  6. 8 joesas December 19, 2008 at 9:51 am

    I don’t know anything about this “sync” feature you speak of (which is not a good sign for the company). What did it do?

  7. 9 Chris Schroeck December 19, 2008 at 3:01 pm


  8. 10 Chris Schroeck December 19, 2008 at 3:05 pm

    Basically, it allows you to control your phone and mp3 player when in your car by using voice commands, such as “play artist x” or “call mom”. Your car will then actually call your mom, and you can speak with her through your car speakers.

    It’s really slick and has had a significant effect on sales, mostly because it’s a feature that’s neat to show off in dealerships.

    GM’s OnStar is a similar type of feature, but comes without the wow factor that Sync had.

    As I understand it Sync will be licensed a lot and will become much more commonly available in the next year or two.

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