I like cars. I even like movies centered around cars, i.e.: Gone in 60 Seconds, Smokey and the Bandit, Cannonball Run, Vanishing Point, Days of Thunder and The Fast and the Furious.
I also like politics. You aren't bestowed the title of "chief white house correspondent" for nothing around here. So when the Big 3 automakers are on Capital Hill, you know I'm watching.
The request for money by the Big 3 was broken up into two trips, the first summarized like this:
Carmakers: We need a financial bailout.
Congress: Hmm, times are tight. What will you do with the money to improve your business?
Carmakers: (birds chirping).
The second trip is best summarized by this SNL skit (for as long as the link lasts):
If you can't see the above, the automakers did not return with any real solutions to their financial trouble even though specifically asked to do so. There was mention of plug-in cars a few years off that can go for a little while, alternative fuel cars some day, but nothing serious. Oh, and no guarantees. If the economy as a whole doesn't get better, well...
Still, as I write this piece, congress is debating whether or not to give them money anyway. The House already gave them the thumbs up to $14 Billion (less than half the amount requested), but the Senate is still debating. But even if the money is green-lighted for the Big 3, that doesn't mean that the bailout was (or is) the right thing. Let me tell you why:
(1) The Big 3 and the SUV
If you look at the story from the automaker's viewpoint, they could say that selling trucks and SUVs was the only thing that made sense.
All corporations, including the Big 3, exist solely to make money for their shareholders. Wikipedia indicates that "over half of [the big 3 automaker's] profits have come from light trucks and SUVs, while they the allegedly could not break even on compact cars unless the buyer chose options... One report estimated that an automaker needed to sell ten small cars to make the same profit as one big vehicle." So, if it is true that SUV and truck sales are the most profitable item for the auto corporations, it makes sense that these would be what they'd push.
There's consumer demand: people like my sister, or IM's main man, Joe Procopio, each with three children, or, for the extreme example, the Duggar Family; families that may need something like an SUV to get around together.
But the way I see it, somewhere along the way the Big 3 got off track. SUVs grew in size through the 1990s, to their peak in 2005. Ford went from The Ford Explorer in 1990, to the larger Ford Expedition in 1997, to the now discontinued Ford Excursion, which was sold from 2000 to 2005. Compact pickup trucks, like the Dodge Ram 50, Chevrolet S-10 were discontinued for larger models, and even the Ford Ranger has grown much over the years.
Just because SUVs and trucks were selling, why did the Big 3 need to keep giving them steroids? Even if it was truly driven by consumer demand, did the Big 3 automakers think they could just keep increasing vehicle size? How long could such a trend continue before we have to widen all the lanes and increase the sizes of parking spaces? Not to mention, environmentally, it's completely and utterly irresponsible. Even if there hadn't been a fuel crisis, why persist in the escalation of vehicle behemoths on our highways? The Big 3 either didn't care, or were too dumb to realize that it was a bad business model. I consider this reason enough to deny the Big 3 a bailout.
(2) Return of the Muscle Car
If SUVs weren't enough, the big 3 also chose to double-down on large fuel-burning sports cars the likes of which haven't been seen since the 1970s. I suggest that the real kick off started with Dodge in 1992 with the introduction of the 10 cylinder Viper, which is still in production. But even though dependence or foreign oil has been a front-page concern since at least the 9/11/01 attacks, Dodge has upped the ante by reintroducing the Charger in 2006, and the even meaner Challenger in 2008. Next year marks the return of the Chevrolet Camero. As a car guy, I find this resurgence a little exciting, and would love to speed down the highway in one of these things with the radio up too loud. But, nothing about these cars suggests that the Big 3 have any great business plans for sustainability or responsibility. More reason they don't deserve a taxpayer bailout.
(3) The Big 3 are not the only people building cars in America
GM, Chrysler and Ford are supposedly "America's" auto makers. But Honda built it's first plant in Marysville, Ohio 26 years ago. Now, Subaru, Toyota, Hyundai, Kia and Nissan are all building cars in this country. And they're not sticking their hands out. What's GM, Ford and Chrysler doing wrong? How is it that American car companies with American roots can't successfully make money in America?
The answer, as I see it, is two-fold. First, the problem of the end of the "SUV craze" described above; now that the Big 3 have put so many eggs in the SUV basket, an about-face is not so easy.
The second reason, as I see it, is the United Auto Workers (UAW). Unions, once necessary to protect workers from having to work 18 hour days in dangerous conditions in the early part of the industrial revolution, are now in the habit of driving up production costs. I know there are a lot of fans of union labor, but I'm not one of them in this day and age. I don't think the Big 3 can ever survive under the UAW's thumb. Republicans in the Senate, not convinced that a bailout is the right idea, are focusing on getting concessions from the UAW that would help bring production costs more in line with foreign companies producing cars in the U.S. Without such concessions, they believe (as I do), that any auto bailout will be like throwing money to the wind.
People in favor of the bailout say that, if the Big 3 fail, it's only going to prolong the economic distress of our country. I say, lending money to wrong-headed auto industries with bad union worker contracts, bad business models, and no real plan for the future, is merely prolonging the inevitable at great expense. And such an expense at this time, is one we can't afford.
Bottom line for me: let the Big 3 file for bankruptcy. The rules of bankruptcy will help the Big 3 settle their bad debt, re-negotiate bad contracts, and will permit Court intervention that can steer these companies toward (hopefully) a better future. The alternative is handing money to corporations who clearly aren't doing it right, and who haven't demonstrated in any respect that they will on their own. That's too foolish of a bet in today's fragile economic conditions.
ABOUT JEFFREY D. WALKER
A practicing attorney and semi-professional musician, Walker writes for his own amusement, for the sake of opinion, to garner a couple of laughs, and to perhaps provoke a question or two, but otherwise, he doesn't think it'll amount to much.
Thank you, Jeff. Thank you. I agree whole-heartedly. Your bottom line sums up my feelings exactly. They can declare bankruptcy just like any other business that's run itself into the ground and the UAW can reap what it has sown.
I was surprised and happy to find out that the bailout bill was defeated in Congress last night.
Well said, Jeff. VERY well said.
12.12.08 @ 9:36a
Now, Subaru, Toyota, Hyundai, Kia and Nissan are all building cars in this country. And they're not sticking their hands out.
From what I heard on the radio on the way to work this morning, the reason the bailout failed in the Senate was because the UAW would not concede to immediate wage cuts which would bring American workers' wages in line with, say, Japanese workers'.
There's a good NYTimes article that explains the intricacies thereof, devaluing the "mythical $73/hr" that autoworkers are allegedly paid. It calculates the average WAGES paid as somewhere around $40-45/hr.
So Joe the Welder isn't bringing in $584/day. But still, some perspective: "fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so.
"Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour. It’s a little more than twice as much as the typical American worker makes, benefits included."
(Not included? What the average auto worker pays each year in Union dues. Or the average salary of UAW officers and representatives.)
But the bottom line for the story, and the bottom line for all of this is this: "If we had wanted to preserve the Big Three, we would have bought more of their cars."
Well, Big Three: if you wanted us to buy more of your cars, you'd've bought cars worth buying.
That's another point I didn't get into (time pressed) -- the quote from Wiki that "... an automaker needed to sell ten small cars to make the same profit as one big vehicle."
American small vehicles are sub-standard. Hyundai and Suzuki are offering 10 year warranties, and their 4 cylinder engines are much more efficient. Honda and Toyota; their 4 cylinders are even more efficient. Heck, I think the Chevrolet Aveo is as cute as my Honda Fit, but consumer review reports confirm that the Aveo gets about 10 miles less per gallon, and will most likely need major repairs about 3-5 years out. Why would anyone sign up for that?
Henry Ford created the system of auto production now copied all over the world. But frankly, the rest of the world built a better mousetrap. The Big 3 let themselves get beat, plain and simple.
1. Only 10% of the costs of the Big 3 are associated with labor. As easy a target as they are, it's time for everybody to stop kicking the workers of these companies. Besides, most of the people whose jobs are threatened by the collapse of the Big 3 are NOT in the UAW. Think about that. 2. As Russ very helpfully points out, most of the onerous costs associated with labor at the Big 3 are for benefits -- health care and pensions. Who do you think it going to pick up the tab for those bills when these companies fold, huh? GM spent $5 billion last year on health care for its retirees alone. In the long run, bankruptcy may very well end up costing U.S. taxpayers MORE than a WELL CRAFTED bailout. 3. People won't buy cars from a bankrupt company. Would you? Bankruptcy isn't the option to rebuilding these companies you imply, Jeff. It's a guarantee of their liquidation. 4. The problems these companies currently face are not all their own doing. While Detroit has made huge, costly mistakes, GM and Ford were both proceeding respectably along a path of restructuring when the credit freeze hit. The reason these companies are in such immediate dire straight is because people can't get car loans to buy cars. All automakers are in the same boat right now. The Big 3 were just in a more vulnerable position when this hit. Even Volkswagen is in the midst of negotiating its own bailout with the German government. 5. Most economists have publicly predicted that if these companies go down, that we risk pushing the entire economy into a deflationary spiral that leads to depression. When you anti-interventionists get your own pink slips, I'll be happy to remind you how eager you were to see other people get theirs. 6. Yes, Detroit is to blame for most of their own problems, but so what? The stakes are much higher than appeasing anyone's self-righteous indignation, as pleasurable and fashionable as that sentiment may be these days. I don’t know if the bailout will work. But I do know that if we do nothing, and trust to the market to fix this problem – a problem that trusting the market got us into in the first place – then we are very likely looking at a darkening of the economic horizon in already pretty bleak times. Look, I don’t like this anymore than anyone else, but now is not the time to be putting a million or more people out of work. Better to piss this money away and see these companies fail in a year or two when the economy has recovered enough to absorb the blow, than pound the final nail into our coffin now.
I'm curious to see how the UAW handles it if there's no bailout and all of their workers suddenly find themselves, not with wage cuts, but with no wages at all.
12.12.08 @ 10:23a
I'll grant you points on the some of the UAW issues. But as far as bankruptcy being the end of the companies, I can't agree. Pretty much ALL of the airlines went bankrupt after 9/11. Moreover, people weren't flying that much then (not because they couldn't get loan, but from plain old fear). But after a few years have passed, the airlines are back and its consumers are back.
I can't believe that a bankruptcy court wouldn't do everything in their power to steer the big 3 back to health. Basically, bankruptcy may well work and permit the Big 3 to restructure. A bailout, on the other hand, will do nothing to fix the underlying problems. It will just be a bandaid, that will eventually fall off of the rotting Big 3, exposing the puss underneath of the rotting Big 3, which will certainly collapse anyway without real restructuring! Until there is a plan to address the problems, there can be no handing out of money. They Big 3 were given two (2) chances to spell out a plan, but they can't. So, let a Court tell them how. Bankruptcy isn't "doing nothing" - it's giving the Big 3 a real chance to heal themselves, BUT ALSO holding them accountable for how they do it.
12.12.08 @ 10:50a
Jeff, when you buy an airline ticket, you are not purchasing a 3 to 5 year commitment, ok? Who is going to risk buying a car, the second most expensive purchase most people ever make in their lives, from a bankrupt company that may not be there to provide parts in the future or live up to its warrantee obligations? Would you? I haven’t even mentioned what happens at resale. Yes, the airlines were able to keep flying while they were bankrupt. But the only commitment you had to make when you purchased your $500 ticket was that they would survive until the next month when you took your flight. This is a much, much different scenario. You’re comparing apples and oranges. Bankruptcy IS essentially doing nothing, because it all but guarantees liquidation.
I disagree that a bailout will not fix the underlying problems. You both oversimplify and exaggerate the culpability of the Big 3 in the current state of affairs. Ford was actually well on its way to recovery when the credit crisis hit. It is making cars people want to buy. Consumer Reports now ranks it among the best brands in terms of quality and reliability. It has a slate of popular, fuel efficient and well received European models that it is about to unveil in the U.S. GM has bigger problems, but it’s false to imply that it was doing nothing to address them. A bailout that forces these companies to accelerate the greening of their fleets and reorganize their labor contracts, coupled with a rational national approach to healthcare that removes some of the burden from corporate America and an easing of the credit crisis, is a scenario that just might lift them out of this situation.
Also, it’s infuriating to me that so few people comprehend the unlevel playing field that Japanese and Korean auto manufactures have enjoyed in their home countries. If you go to Japan and Korea, you won’t see any American cars on the road – not because people won’t buy them, as you might like to assume, but because the barriers to their importation are almost insurmountable. Japanese and Korean manufacturers have had an incredible competitive advantage over American firms for decades, because they haven’t had to compete in their closed home markets.
Besides all that, what the heck difference does it make to hold the Big 3 accountable, when we all risk such terrible consequences as a result of their failure? This desperate need everybody has to sate their anger and demand accountability is understandable and even laudable in the abstract, but frankly absurd when the real stakes are so high for the entire economy. What will it take to make you see how dangerous a situation we are in right now? Do we really need to go back to bread lines and double digit unemployment?
12.12.08 @ 11:11a
I think, Rob, our fundamental difference of opinion is that I think that the Big 3 can ride through bankruptcy to a more successful business model, while you believe bankruptcy would certainly lead to liquidation and closing of doors. I guess neither of us can be sure until it's over.
That said, 1st of all, besides GM, no American company is offering a warranty beyond 3 years (and GM only upped to 5 relatively recently). 2nd, bankruptcy wouldn't invalidate warranties; so long as the companies continued to operate, they would still have obligations to prior consumers.
Sure, the Big 3 may have some negative public opinion if they enter bankruptcy, but they have that now. The difference is, after emerging from bankruptcy, I submit they'd be seen as new; clean; fresh; like a Phoenix from the ashes. They will not get such a definable makeover if they are given a small handout and permitted to merely putter along in the slow lane. Bankruptcy doesn't have to lead to liquidation; it can lead to salvation. It can be the clean break they need. And, it commands oversight by the Court. I submit that the American public need this to happen to ever feel good about the Big 3 again.
Lastly, the unfair playing field is nothing new. This didn't sneak up on the Big 3. Moreover, if that was the real issue, then the Big 3 should have been up at Congress chewing them out on their foreign policy; not asking for handouts.
12.12.08 @ 11:17a
The alternative is, if we just "give them handouts", it will not end. They already asked for $34 Billion, and said they'd be back for more next year. The congress couldn't approve 1/2 that amount, and if they had, the Big 3 would be back. Why put taxpayers on the hook, only to lead to the Big 3 shutting down a couple years from now. If that, my friend, is the ultimate conclusion, better to nip it in the bud now via bankruptcy, as opposed to continuing to throw money at it for a few years only to then get the same failure later. At least in Bankruptcy, they have a good chance to fix the problems via restructuring. And if they can't, then we get the failure over with, because it isn't going to hurt less if we hand them multi-billion dollars now only to have a failure in the near future anyway.
12.12.08 @ 11:21a
I am a Detroiter now and a big 3 engineer. I hate to see the detroit 3, Detroit itself, Michigan, Ohio, and many other auto producing states as well as the US and the world suffer due to the poor choices of the guys at the top of these companies. These guys do not understand the cars all they see is numbers. Based on this, they choose to make cars that are more profitable rather than the small fuel efficient cars that many people are asking for now. SUV sales have been impressive over the years and their profits are staggering. Look how many new competitve foreign-made SUVs have been introduced over the last few years to take advantage of the sweet profit margin. Maybe the American people should shoulder a large part of the blame for buying these vehicles.
In my opinion ehe bad decisions that the Detroit 3 have made are the following: 1. Not reinvesting profits from SUV sales in the future drivetrains that require less fuel or sustainable sources of energy. 2. Not pushing for more strict intellectual property laws. Example: Kia not only reverse engineers vehicles they copy components that other companies have spent time and money developing. 3. Outsourcing everything!!! The knowledge base is disappearing. Manufacturing is leaving the US. Low cost country sourcing affects big 3 quality, profit and the US economy at large. 4. Trying to cost cut their way to profitability. Cheaper materials, less vehicles to develop with, and outsourcing (ties in to number 3, killing the local suppliers). 5. Not pushing harder on the healthcare industry and government policies that affect their business. These costs are getting ridiculous. 6. Not pushing for incentives to reinvest in our economy. Tax incentives to buy cars made in USA (includes transplants... they provide benefit to our economy) etc..
I think the big three can do better with the vehicles that they produce too. But, in defense, there has been a lot of improvement in many arenas over the years. Safety, features, handling, capabilities, reliability, serviceability, comfort, power, efficiency are just a few.
It is not a simple issue.
Buying a car is one of the two largest purchases in most families. Most people have to finance a new car. When there is no money available in financial markets, the stock market is down (affecting confidence), people are losing their jobs....it makes it tough to sell cars. The financial crisis was preceeded by record high gas prices. Two large outside factors that have crushed these guys. Bottom line is this..... a significant investment needs to be made in this industry to make our economy stronger. I think it should be a wakeup call to these guys at the top that they need to diversify products, prepare for the future, etc. Give them the money and demand performance!! It is pennies in comparison to the money invested in the banks.
Rolling back executive salaries, bonuses and other perks wouldn't be a bad start, either. I'd love to see an expense audit of any of the Big 3.
12.12.08 @ 11:33a
Thanks for jumping in, Dan. I almost put a writer's note shout out to you, because I know you're closer to this issue than anyone else I know. Your thoughts are appreciated.
12.12.08 @ 11:41a
Jeff, I agree with many of your points. I don't know that bankruptcy will not work, although I suspect you are not taking into full account the negative impact on consumers' willingness to risk buying a car from a bankrupt company. As I said, it's not just the warrantee issue... It's also resale, parts, etc. I also agree that the Big 3 may not make it even with a bailout and that the whole scheme could easily become a black hole for taxpayers... But, my point is that no matter what we do, it already is a black hole for taxpayers. Bankruptcy will largely shift the burden for health care and pensions onto the federal government anyway, so we're in it for billions no matter what happens. Furthermore, I don't think you and I agree on the fundamental risk to the overall economy that the collapse of the U.S. auto industry poses to the economy NOW, at this critical moment in time. I believe it when economists tell me that the economy is too weak at the moment to absorb this collapse. I fear deflation and depression, and the risk of turning what could have been a deep but defined recession, into a long, protracted depression that takes us years and years, and a great deal of collective misery to climb out of. We are tiptoeing on a precipice right now and it just won't take much to push us off. I think it’s worth risking another $50 billion or even $100 billion pissed away on the auto industry to stave off that disaster. Even if the money doesn’t save the auto industry, if it prevents a depression, as far as I’m concerned it’s money well spent. I guess you don’t see the danger in those terms. As a lawyer, maybe you have greater faith in the wisdom and efficacy of the bankruptcy courts than I do.
Anyway, it doesn’t matter what you or I think. Thankfully, we don’t own the burden of making the final decision. Thanks for this post, however! As always, it’s been great to argue this issue out with you!
Thanks for your post, Dan. You're right, btw. What we're talking about for the Big 3 is pennies compared to what we've already given to the banks. I think we needed to do that too, btw... It's people like you who will be screwed the worst if this "sucker goes down" to quote our outgoing president.
12.12.08 @ 1:15p
I think of confederacy as explained by my high school teacher. Most of the power delegated to the local government. The federal government would be more of a national defense and foriegn policy force. I mean let them smoke pot in California without the Supreme court saying sure its legal, but you can still be fired for it. Wouldn't it be nice if the state you lived in said more about you than geographical locale. Alabama has Mercedes, Honda, and Hyundai plants so this Big 3 meltdown might improve our economy. The workers at Mercedes start at around $17 which is good money for that region of the country. We are a right to work state. Not anti-union, but I can see how maybe too much union is a bad thing.
Russ -- Thanks for the link. I notice that it only talks about averages, though, without taking into account the two-tier agreement that the Detroit 3 and the UAW put into place last year, where any new worker receives a considerably lower wage (I've seen numbers that show the average new hire at one of the three would make lower wages than their equivalents at a nonunionized company).
Michael -- No shots at the South in that way; the CSA constitution had basically the same distribution of federal vs. state powers that the USA constitution did (and does).