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Argument: Bailout cannot prevent inevitable collapse of US autos

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David Brooks. "Bailout to Nowhere". New York Times. 18 Nov. 2008 - There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. As Megan McArdle of The Atlantic wittily put it, "Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package."

In short, a bailout will not solve anything - just postpone things.

If this goes through, Big Three executives will make decisions knowing that whatever happens, Uncle Sam will bail them out - just like Fannie Mae and Freddie Mac. In the meantime, capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.


Andrew M. Grossman. "Automakers Need Bankruptcy, Not Bailout". Heritage Foundation. 15 Nov. 2008 - A Failing Industry[...]The auto industry's collapse has been decades in the making. The combined market share of the Big Three U.S. automakers has been in decline for more than 35 years, when the oil crisis provided an opening for more fuel-efficient Japanese cars. In the 1980s, with the price of oil down, foreign carmak­ers gained market share on the strength of their quality, reliability, and prices and quickly took advantage of the profitable luxury segment of the market. More recently, foreign automakers simply out-innovated their American competitors, invest­ing heavily in smart, fuel-efficient vehicles that Detroit is now struggling to duplicate.

Those failures in management and leadership have been compounded by bad operational and governmental policy. Years of protectionism, such as import restrictions, complex fleet requirements, and regulations that raise costs for foreign produc­ers, shielded the Big Three from competition in vital markets but allowed their creative juices to evaporate. Meanwhile, fat years and government interference allowed the automakers and their workers to put off restructuring their labor agree­ments even as foreign competitors opened U.S. plants that could produce cars of higher quality with fewer workers and at less cost.

These "legacy costs" largely remain on the bal­ance sheets of U.S. automakers, which spend $20 to $30 more per hour on labor than their competi­tors, even following minor concessions by the unions, and, due to inflexible work rules, continue to require more hours to produce a vehicle. Well aware of the writing on the wall, the Big Three and the United Auto Workers union have demonstrated their cynicism in signing on to untenable labor agreements, under which the companies lose money on most small car sales, under the assump­tion that the taxpayers will eventually shoulder much of the burden.

The Big Three are also burdened with obsolete and expensive business structures. All are top-heavy with management and bureaucracy, com­pared to other manufacturing industries. They are also bogged down by too many nameplates that, due to state franchising laws, cannot easily be folded into other brands.

General Motors, for example, currently manu­factures and markets automobiles under eight brands in the U.S., including Chevrolet, Saturn, Pontiac, and Buick, in a market where few custom­ers perceive any significant difference among them. When the company did shut down one underper­forming and duplicative brand (Oldsmobile) in 2004, it had to pay dealerships over $1 billion in "financial assistance" to avoid lawsuits, and four years later, it is still embroiled in litigation from former Oldsmobile dealers who declined to accept assistance or settle their claims. Their antiquated dealership structures also prevent the Big Three from instituting modern and more flexible inven­tory-management practices and selling cars over the Internet.

Already weakened by years of bad business deci­sions, the Big Three were hit hard by high fuel prices and the economic slowdown. Though sales are down across the industry, buyers' interest in the Big Three's fleets has plummeted. For the first time in history, Detroit's share of the U.S. market dipped below 50 percent earlier this year, and it has fallen further since then.

The result has been to bring nearer the day of reckoning for Detroit. General Motors executives, trolling for a federal infusion, say that the company has enough cash on hand to last out the year-- barely--and Ford has about $25 billion in the bank that it expects to burn through sometime in 2009. Chrysler, meanwhile, is majority owned by a private equity fund that may be willing to reach into its deep pockets, but the automaker's sales are down sharply over the past year. In sum, the U.S. auto industry's long-term failure to adjust to market real­ities has finally pushed it into a state of crisis.


"Bailout won't cure what ails Big Three". USA Today. 13 Nov 2008 - Many backers of an auto industry bailout argue it could be cheaper to keep the companies running indefinitely than to deal with the consequences of one or more declaring bankruptcy. This argument is impossible to either prove or refute, because it involves a number of unknowable variables. But it is certainly true that any collapse would result in billions of dollars in lost revenue, increased unemployment benefits, and retirement liabilities being picked up by the Pension Benefit Guaranty Corp.

History, however, provides few examples of economies benefiting by keeping inefficient enterprises afloat. For today's automakers and lawmakers, the lessons are clear. Propping up uneconomical companies is about as productive as pushing a disabled vehicle down the street.


Shikha Dalmia. "It's 65 Million B.C. for the Detroit Three". Reason. 2 Dec. 2008 - these companies will need divine—not government—intervention to survive. And unless Rep. Nancy Pelosi (D-Calif.) and her fellow congressional bleeding hearts can arrange that, they shouldn't risk another dime of already-strapped taxpayers' money to keep these corporate dinosaurs alive.

General Motors alone burned about $5 billion a month for the last quarter and is expected to completely exhaust its kitty by the end of this year. (The other two will follow suit shortly after.) At that rate of cash burn, the bailout money translates into five more months of life.

A comeback in that time would be hard to pull off even if these were the best run companies on the planet, rather than ones debilitated by decades of labor intransigence and management incompetence, two characteristics that show few signs of abating.

Indeed, United Auto Workers (UAW) Chief Ron Gettelfinger, who has been accompanying the auto CEOs on their taxpayer shakedown missions to D.C., had until this morning ruled out any new concessions to the Detroit Three. "We have made dramatic, dramatic changes and the UAW was applauded for that," he insisted. "The focus has to be on the economy as a whole as opposed to a UAW contract." And what precisely are these "dramatic changes" that Gettelfinger touts? The UAW agreed to a labor contract last year that partially capped retiree health care and other legacy costs of the auto makers that will reduce their wage gap with Toyota from about $25 per hour to $10...in 2011! Until then every car rolling out of Detroit will cost $1,500 more than those built elsewhere in the USA by foreign competitors.


Michael Moore. "Let's Buy the Big Three". The Daily Beast. 4 Dec 2008 - Let me just state the obvious: Every single dollar Congress gives these three companies will be flushed right down the toilet. There is nothing the management teams of the Big Three are going to do to convince people to go out during a recession and buy their big, gas-guzzling, inferior products. Just forget it. And, as sure as I am that the Ford family-owned Detroit Lions are not going to the Super Bowl—ever—I can guarantee you, after they burn through this $34 billion, they'll be back for another $34 billion next summer.


"Detroit's Delusion". Newsweek. 3 Dec. 2008 - The sad fact is that the U.S. auto industry has essentially failed. Even if car sales come roaring back from their current anemic pace next year, there's no guarantee the Big Three will return to health, that they'll be able to stay current on debt payments, and be able to raise capital from tough-minded investors. The executives and union leaders speak as if the bailout money is simply needed to tide them over until the sun comes back out. Exuding and instilling such confidence is a big part of their job. But increasingly it seems that the federal funding they're requesting is necessary to help manage failure, not to stave it off.


Nicholas von Hoffman. "Cashing Out Detroit". The Nation. 10 Nov 2008 - No doubt about it, the collapse of any one of these companies will send a terrible number of people out onto the bricks without a job and with little hope of soon getting another. The crash of all three together would have a shattering effect across the country.

Nevertheless, the projected $25 billion loan may only be a postponement of the inevitable. If the car companies continue to use up cash at the current rate, this loan will be used up in a year, after which GM, Chrysler and Ford will be back asking for another loan--unless you believe that the three will have righted themselves in the next twelve months and come close to breaking even. That is not a reasonable business assessment.


Jack Kelly. "Auto Bailout Won't Prevent Bankruptcy". Real Clear Politics. 2 Dec. 2008 - a bailout will only postpone bankruptcy, and raise its ultimate cost. We say we "can't allow" the auto companies to fail. But that's hubris. The truth is, we can't prevent it.


Matt Kibbe. "No Detroit Bailout". US News and World Report. 25 Nov. 2008 - In the long run, the automobile industry faces dramatic changes, with new sources of propulsion and a greater focus on design and marketing. In the not-too-distant future, we will design and purchase vehicles online. The winners in this era will be the most flexible companies able to respond to consumer demands overnight.

If this is where the industry is heading, why should the cash-strapped American taxpayer bankroll failed management teams and the UAW in Detroit, who are clearly not prepared for this new automotive era?

Even if the Big Three get their bailout from reality, it only postpones the inevitable as they continue to grapple with an inflexible workforce and catastrophically high legacy costs. Consumers will still get a piece of the 1970s with every new car they purchase. It will be a repeat of the British bailout of the automotive giant British Leyland. After nearly $15 billion, the British taxpayer is left with nothing but nostalgia.


"Detroit Needs a Selloff, Not a Bailout". Wall Street Journal. 27 Nov. 2008 - After more than three decades of denial about their long-term decline, Detroit's car companies must now face the facts. A bailout will not revive them. Moreover, the leading alternative that has been proposed by others -- bankruptcy -- will not re-energize these companies sufficiently to reverse their decline.


Anthony Mirhaydari. "Why bailout won't save Detroit". MSN Money. 17 Nov. 2008 - "we simply have too many vehicles to sustain the Big 3's current production capacity. The United States now has 981 cars for every 1,000 people of driving age compared to 613 in the United Kingdom and just 24 in China. As a result, no amount of government aid will stop the factory closures and layoffs."

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