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Auto Industry Bail Out

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Auto Industry Bail Out [#permalink] New post 09 Nov 2008, 20:49
Since this is a board of future business leaders, I'll ask this question. Should the government bail out the big 3? Make sure to provide some evidence to back up your opinion.

Personally I think the government shouldn't give them a dime. The US auto industry has been failing for 40 years and is beyond saving. Didn't we bail out Chrysler in 1979? What did they learn? The government should let each of them file Chapter 11, reorganize, void their union contracts, default on their pension liabilities, and move all their factories to right-to-work states. Then they might be able to compete, at least from a cost perspective. Of course then they should clean house as far as management goes, since a large part of their problem is incompetent leadership.
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Re: Auto Industry Bail Out [#permalink] New post 18 Nov 2008, 10:22
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jallenmorris wrote:
There is going to be human cost no matter what happens. There has already been considerable human cost. People's retirements are in jeopardy, which, if the companies fail, there is no safety net for those people that are retired and need that money. Their stocks will be worthless and many of these retirees are people that have held 90%+ of their retirement in GM stock. No one seemd to be concerned about diversification. If you owned where you worked, you were more secure, in theory. You wouldn't sell your shares, so there would be fewere shares on the market if all employees did that, and the price would go up and stay up. Now that the GM stock is essentially worthless, many people are really hurting.


Two things to clarify.

1. Just about every worker for GM and Ford had a pension that is guaranteed by the Federal Government through the Pension Benefit Guaranty Corporation (or PBGC). These people will be just fine for retirement. Very few people were given restricted shares or options for shares, and if they were, they sold out a long time ago. 90%+ of the stock in each of these companies is owned through diversified mutual funds, so we all take the equity hit when the stocks go down.

2. Equity investors in Ford and GM pretty much have been wiped out already as GM is down ~93% since Oct 07 and Ford is down 82%. Bankruptcy really won't hurt too bad. Ford's credit has been junk for a while and most bonds are probably trading at a discount that reflects a future bankruptcy. Equity holders will get wiped out, bond holders will become the new equity holders and the company will restructure and come out better in the end.
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Re: Auto Industry Bail Out [#permalink] New post 09 Nov 2008, 20:58
Agree, but how do the Feds make it politically acceptable to lose 2.5 million jobs in the event of a wave of bankruptcies hitting the US auto industry?
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Re: Auto Industry Bail Out [#permalink] New post 09 Nov 2008, 21:32
The country won't lose 2.5 million jobs. It's Chapter 11, not 7. United, Delta, Northwest, and US Airways are all still around. Even Lehman and Washington Mutual for the most part didn't lay off all their workers. Yes, some people would lose jobs, but not anywhere near 2.5 million. That's just a scare tactic statistic to make you think the auto industry must be saved.
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Re: Auto Industry Bail Out [#permalink] New post 10 Nov 2008, 08:24
Poor leadership has certainly played a role, but the jobs that we're trying to defend belong to the union members that created the issue. I agree with letting these organizations fail and restructure. Show the people of Detroit what the union has done for them in the past.

It may or may not be economically sound to let Detroit die, but we're trying to preserve a dead animal.
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Re: Auto Industry Bail Out [#permalink] New post 11 Nov 2008, 10:39
I agree that the government should not intervene, and that these companies must be allowed to fail. Yes, it will likely cost a lot of jobs, but inevitably that is going to happen within certain industries, and I don't see why the auto industry should be insulated from the risk of bankruptcy. It is one thing to bail out financial institutions to prevent a total economic collapse, but quite another to defend one particular industry from having to lay off its workers. I can't help but believe that there is this "me too" mentality among the auto makers after watching AIG get bailed out, and seeing the $700 billion rescue plan fly through congress. However, I don't think that it's the place of the government to cherry-pick certain industries that it feels are worth saving. Failing companies are part of an efficient economy. If Ford, GM, and Chrysler can't quickly adapt to changing industry dynamics, then they must fail, and be displaced by better companies that are more in tune with demand.
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Re: Auto Industry Bail Out [#permalink] New post 11 Nov 2008, 10:46
Capitalism without failure is not capitalism. I've heard people say "Capitalism has failed!" That's crazy. People failed, but capitalism is designed to allow people to fail. You don't learn anything if you are never allowed to fail.

Don't give the automakers a dime. They will still employ workers, just not as many. The Unions have had their choke collar on this industry for too long and it has strangled the auto industry. Unions point to bad sales because quality is lower and people want a good quality Honda or Toyota. Unions say "It's not my problem you can't design good cars." What they don't understand is that engineers had to start cutting costs somewhere to make an affordable car and still pay the union workers what they demanded or they walk. When the quality starting getting worse it was because the % of cost labor represented was way too high.

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Re: Auto Industry Bail Out [#permalink] New post 18 Nov 2008, 07:25
I'm inclined to agree with my fellow posters - I don't think we should bail them out. However, I do wonder how eager banks will be to give the automakers credit for restructuring efforts if/when the automakers declare Chapter 11. I suspect that most banks will blow the proverbial raspberry at the idea. Certainly the Big Three are dinosaurs; they've bought and sat on every forward-thinking idea re: fuel efficiency, electric cars, etc. since the '70s. Part of me says, you reap what you sow. The other part of me does worry about the human cost. Regardless of whether the early estimates of 2 million+ jobs lost prove to be histrionic or not, we are still talking about a sizable number of people out of work, and no other industry waiting with open arms to absorb them...
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Re: Auto Industry Bail Out [#permalink] New post 18 Nov 2008, 07:41
I'm not sure I agree that 2 million+ will be out of work. The scary part of this is that the Big 3 could file for Chapter 11, but this is contingent upon them getting new lines of credit, or restructuring existing credit terms. If the lenders are willing to work with the auto makers, this is possible. If not, then the Chapter 11 filing quickly becomes a Chapter 7 filing and we'll see liquidation of assets for pennies on the dollar and massive unemployment from these because the companies will actually cease to exist.

There is going to be human cost no matter what happens. There has already been considerable human cost. People's retirements are in jeopardy, which, if the companies fail, there is no safety net for those people that are retired and need that money. Their stocks will be worthless and many of these retirees are people that have held 90%+ of their retirement in GM stock. No one seemd to be concerned about diversification. If you owned where you worked, you were more secure, in theory. You wouldn't sell your shares, so there would be fewere shares on the market if all employees did that, and the price would go up and stay up. Now that the GM stock is essentially worthless, many people are really hurting.

People see individuals and want to help them out, so people demand Congress do something. Congress in their infinite wisdom decides that if they help out, they'll buy an equity share of the automakers and help them through this "rough patch". This is short sighted and stupid. This appears to assume that the automakers were doing things correctly and it was an inevitable slump in the economy; a mere road bump. This is a crater the American Auto Industry fell into because they created it and were too stupid to see it.

I agree with the previous post entirely that the auto industry bought every (or at least most) forward thinking idea and sat on it so it wouldn't change their status quo. The auto industry could have been doing research on better fuel economy, but the oil & gas people didn't want them to. it's truly quid pro quo for each of these industries (but don't think that the auto consumption of fossil fuels is the largest portion of such consumption, it's significant, but not the largest).

I say don't bail the auto industry out. If you truly want to help these people, then bail the people out (although I do have reservations about that). I believe in welfare for people before I believe in welfare for companies.


uphillclimb wrote:
I'm inclined to agree with my fellow posters - I don't think we should bail them out. However, I do wonder how eager banks will be to give the automakers credit for restructuring efforts if/when the automakers declare Chapter 11. I suspect that most banks will blow the proverbial raspberry at the idea. Certainly the Big Three are dinosaurs; they've bought and sat on every forward-thinking idea re: fuel efficiency, electric cars, etc. since the '70s. Part of me says, you reap what you sow. The other part of me does worry about the human cost. Regardless of whether the early estimates of 2 million+ jobs lost prove to be histrionic or not, we are still talking about a sizable number of people out of work, and no other industry waiting with open arms to absorb them...

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Re: Auto Industry Bail Out [#permalink] New post 18 Nov 2008, 10:40
They won't come out better in the end if they don't change the way they do business. They've been behind the others in the industry in quality for quite awhile. I think it's hilarious when Ford states in commercials "Ford's quality is now equal to Toyota's." Wow.

jb32 wrote:
jallenmorris wrote:
There is going to be human cost no matter what happens. There has already been considerable human cost. People's retirements are in jeopardy, which, if the companies fail, there is no safety net for those people that are retired and need that money. Their stocks will be worthless and many of these retirees are people that have held 90%+ of their retirement in GM stock. No one seemd to be concerned about diversification. If you owned where you worked, you were more secure, in theory. You wouldn't sell your shares, so there would be fewere shares on the market if all employees did that, and the price would go up and stay up. Now that the GM stock is essentially worthless, many people are really hurting.


Two things to clarify.

1. Just about every worker for GM and Ford had a pension that is guaranteed by the Federal Government through the Pension Benefit Guaranty Corporation (or PBGC). These people will be just fine for retirement. Very few people were given restricted shares or options for shares, and if they were, they sold out a long time ago. 90%+ of the stock in each of these companies is owned through diversified mutual funds, so we all take the equity hit when the stocks go down.

2. Equity investors in Ford and GM pretty much have been wiped out already as GM is down ~93% since Oct 07 and Ford is down 82%. Bankruptcy really won't hurt too bad. Ford's credit has been junk for a while and most bonds are probably trading at a discount that reflects a future bankruptcy. Equity holders will get wiped out, bond holders will become the new equity holders and the company will restructure and come out better in the end.

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Re: Auto Industry Bail Out [#permalink] New post 21 Nov 2008, 14:00
The 2.5 million jobs lost number was bandied about in a report issued by (gasp!) the Alliance of Automobile Manufacturers. I don't know how reliable it is.

Quote:
In both cases, there would be significant short-term shocks to employment, leading to direct and indirect job losses of 2.5 million to 3 million in 2009.

http://www.nytimes.com/2008/11/19/business/economy/19jobs.html

jallenmorris wrote:
I'm not sure I agree that 2 million+ will be out of work.
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Re: Auto Industry Bail Out [#permalink] New post 25 Nov 2008, 01:45
Having been somewhat involved with the industry (mostly on the Japanese side) as a consultant, things already weren't going that well when I finished my last project in Detroit last month. The current situation has made it a lot worse (I guess I should be relieved that I chose to get out before the SHTF -- then again, my next project is in oil/gas :P ). Given that many of my former clients are now those dependent on the future of the bailout, it does make things personal -- but I am still torn. My start in the industry was with Toyota in college, so I am certainly aware of how Detroit got into the mess it is in today.

I do definitely believe the mistakes Detroit made in the past should not be rewarded or sheltered. For example, cheap gasoline fed the demand for large trucks and SUVs, but it also shifted R&D $$$ away from small cars. When fuel prices shot up this year, the Big 3 were caught with their pants down, losing the major share of their profit streams.

To play devil's advocate, Toyota and Nissan obviously planned and designed large pickups and SUVs as well -- and they were also hurt. But they built out a solid full lineup, including fuel-efficient small vehicles, so the damage was mitigated to an extent. Toyota lost money on Tundras, but cushioned the blow with profitable Corolla and Yaris sales. And Toyota is the Dr. Evil of PR -- they took a niche product that was designed specifically for the anti-diesel Japanese domestic market (the Prius) -- and turned it into their calling card as an "environmentally-friendly" car company (indeed, going by average fuel economy ratings -- Honda is actually more "green"). GM had the same opportunity with the EV1 earlier, but floundered with it.

Now, that's not to say Detroit had no small cars -- they have products like the Cobalt and Focus. But even then, many of Detroit's small cars weren't even profitable -- instead, their role was more a buffer to balance out truck sales in CAFE ratings. So when you can't sell trucks, and your smaller cars don't make much money (even though they are selling more now) -- the result is not so good.

But while Detroit has had its fair share of missteps, that's not to say there isn't any potential. I do think the quality gap actually is shrinking (and this is supported by Consumer Reports, JD Power, etc.). Toyota and Honda are still up there on quality, but they've also grown rapidly and are still ironing out some of those kinks. Nissan and Toyota's current CEOs are also known for rampant cost-cutting, in the name of growing market share (as opposed to the more organic growth they've had before). The UAW in contrast, has made some concessions with the Big 3 when it comes to plant overhaul and other aspects on the manufacturing side that will make Detroit as productive and efficient. The Japanese are still ahead when it comes to flexible manufacturing, but the American companies are competitive. And in the end, there are several American models that do indeed meet or exceed the Japanese on quality and refinement. The issue that Detroit faces now is changing perception (which takes sustained quality and time -- not just a one-trick pony), and also the intangibles (like interior quality and ergonomics -- which are changing as well).

So things have been changing to an extent before, but the pace was glacial. That was the first problem. The second was that the credit crisis basically put a stop to any further improvements. I can name at least a few different car programs (models that actually had me excited as to what was going to come out of Detroit in the future) that got canned because GM and Ford knew they wouldn't be able to fund them once the crisis hit. Ultimately, those bright spots that could actually start to turnaround the Big 3 faded away. And so to an extent, that's the dilemma that Detroit is in now -- they do know they need to make changes, but now they apparently can't (without the bailout, at least).

The problem I see with bankruptcy is not only the difficult of obtaining exit-financing, but also the perception. Studies have shown that consumers are significantly less likely to purchase a car from a bankrupt company versus other scenarios, such as airlines. With automobiles being a durable good, the perception issues of servicing and resale also come into play. For the Chapter 11 option, it would probably have to be orchestrated very well to give the general public an impression of a restructuring rather than an actual bankruptcy.

If it can be done with loans (and not a bailout, per se) -- part of me thinks it could work. The predecent with the Chrysler loan guarantee in the early 1980s is positive, as Chrysler AFAIK paid off the loan early and the interest collected by the government was a handsome amount. But Chrysler at that time had several hits (the K-car, minivans, etc.) and great timing. And how much will $25 billion help? IIRC, GM is burning through billions per month, so will we simply see them come back next year and ask for more?

So with all that said, I abstain from finalizing an opinion. :lol:
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Re: Auto Industry Bail Out [#permalink] New post 10 Dec 2008, 23:19
Alright who wants to bet its not going to pass the senate? I'll give two-to-one odds it wont. Anyone?
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Re: Auto Industry Bail Out [#permalink] New post 11 Dec 2008, 12:40
It will fail the first round since Republicans on the Senate only want to cause a ruckus for publicity and later say, "I DIDNT SUPPORT THIS!!!!"

Every time I see a senator or a goveror or any politician on TV commenting on any intelligent issue, they sound like uneducated, clueless morons.....
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Re: Auto Industry Bail Out   [#permalink] 11 Dec 2008, 12:40
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