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Rick Wagoner on Why GM Deserves “Support”
By JLP | November 19, 2008
Reading Assignment: Why GM Deserves Support by Rick Wagoner
If I understand his editorial correctly, GM should be bailed out because:
1. They are going to build cars that are efficient, that will help reduce our dependence on foreign oil.
2. They have plants all over the U. S.
3. The health of domestic auto business is critical to the health of the U.S.
I remember GM talking about electric cars back when I was a kid. They keep dangling that carrot on a stick but they have yet to come through with anything. I understand that when gas prices are low, there’s little incentive to produce electric cars or cars that run on alternative fuels. But, companies also must plan for the future.
The health of the domestic auto business is critical to the health of the U.S.? I’m not so sure about this one. Yes, if GM were to shut down all their plants, it would hurt. It would hurt a lot. But, how are we hurting ourselves if we continue to support a failing business?
I’m against a bailout. I would be open to a loan of some sort but I wonder if that would even help, or would it just prolong the inevitable? Once credit starts flowing again, will people buy domestic cars?
These are tough times. I don’t have the answers.
Topics: Business News |
November 19th, 2008 at 12:47 pm
Actually they did come through with an electric car. The EV1 from Saturn. But they were leases only and when the leases were up they demanded the cars back. Watch “Who Killed the Electric Car?”.
November 19th, 2008 at 1:22 pm
The domestic auto industry is without a doubt very important to many parts of our economy, and some areas actually rely entirely on the industry, so if it were to suddenly vanish, yes there would be many areas of suffering that trickle down to much more than just the auto companies.
The problem is that this little 25 billion dollar band-aid won’t do anything. First, this 25B is for all three companies combined. What good will that do when GM alone is losing over 4 billion in just 3 months? A quick influx of a few billion dollars isn’t going to much. You can’t just convert factories over to a new production line over night. You can’t roll out new models in a few months. All of the changes that have to be made with each of these companies in order to create a profitable industry will require years of planning and restructuring. A couple billion dollars will only put enough money in their coffers to keep their lights on for another six months to a year.
As long as you’re shelling out tens of billions of dollars a year on retiree benefits at a ratio of 2 to 1 compared to active employees, and you’re building cars that are less attractive in terms of either image, gas mileage, or price, you could give them all the money in the world and they won’t be any better off.
The whole point of this type of bankruptcy is to reorganize. Sure, chapter 11 isn’t any fun, people will certainly lose their jobs, some benefits will be lost, and so on… but that’s the ONLY way these companies can turn themselves around as an efficient company that can turn a profit going forward.
If Honda and Toyota and the like can build new factories in this country, find employees to work in them, and sell their vehicles here, and make some money doing it, then certainly GM, Ford, and Chrysler can too. But only if they completely overhaul their operations. This can only only be done by unloading the dead weight that’s holding them back so they can start with a virtual clean slate.
November 19th, 2008 at 2:02 pm
This may be a weird analogy to throw in there. I was watching football this past weekend. And John Madden says “You’re not really a rushing team unless you can move the ball when it counts.” What kind of business are you running if you cannot get through hard times? Smart businesses understand that there is always hard times right around the corner. Understanding this, it’s hard for me to agree with bailing out any big business. But I can see how this one particular case affects America as a whole.
Caleb @ blueprinteconomics.com
November 19th, 2008 at 2:06 pm
For starters, I work for GM so my view is obviously somewhat biased…..
Just to clarify a couple of points, the EV1 was an experimental car that was not viable in most climates and had too short of a range. My wife worked on that program and we talked with many of the engineers. The maker of the documentary also has come out and supported our decision.
I have also seen the Volt and it is a real car that will go 40miles on a charge using no gas. It also has a small gas engine that can charge the battery to give the car a normal 300-400 mile range comparable to a traditional vehicle.
Finally, the money we seek is a loan, not a handout, it is intended to be repaid with interest. The purpose is to ensure we have enough cash to survive until the credit freeze eases.
There are no guarantees but GM is a very different company than we were even 10 yrs ago.
I think we are worth saving.
November 19th, 2008 at 2:14 pm
Craig,
How much will the Volt cost? I’ve read estimates ranging from $40K to $50K, and given that the lower number is roughly twice the cost of a Prius, why should I, or anyone, shell out that money for something that’s not significantly (as in 150mpg or more, with comparable performance) better?
Also, this is the first time I’ve heard that GM et al are asking for a loan rather than a grant, but I admit I haven’t studied the literature on all this very closely.
November 19th, 2008 at 2:24 pm
One more reason why the bailout is a bad idea. First get house in order before asking for money!
http://abcnews.go.com/Blotter/WallStreet/story?id=6285739&page=1
Big Three CEOs Flew Private Jets to Plead for Public Funds
November 19th, 2008 at 5:12 pm
I emailed the uaw local over here. I suggest GM or Ford set up a loan website similar to Prosper.com. Let those of us who really believe there should be a loan give the loan. It doesn’t look good to get one from the government. I wonder how much they could raise. Probably not 25 billion. Maybe they could raise some taxpayer support though.
November 19th, 2008 at 11:11 pm
Kim, this is what bonds are for. The problem is - nobody wants to buy their bonds not even at very very high yields. If there were people willing to risk their own money to lend them money, they would buy their bonds. Here is a list of Ford bonds, for example: http://reports.finance.yahoo.com/z1?is=Ford
Notice yields-to-maturity (YTM) of 29% and 30%? Also CCC is considered a junk bond - a very poor credit. Now do you seriously think any individual would lend them money? If you are lending them money you know that unless they’ll raise enough they’ll go bankrupt. Which may not be a bad thing for them, but for you as a lender it means great chance of losing everything you gave them.
I have mixed feelings about this. On the one hand, there is no guarantee that 25 billion will do any good. Besides, next thing you know is that your local bookstore will want bailout too. On the other hand, I am really sick of my investments going down almost every day and I shudder at what is going to happen if all three of these companies will go out of business. So I am still trying to make up my mind here.
November 20th, 2008 at 6:44 am
I heard this morning that the reason GM doesn’t want to file for bankruptcy because people won’t want to buy there cars. They say the stigma of that will hurt them. If your company is not doing well then file so that you can redistribute the debt that you have and possibly turn thing around to make a profit. I don’t believe that filing will cause anyone to buy or not buy your product. As a tax payer, I certainly don’t want their debt shoved on to my shoulders.
November 20th, 2008 at 1:01 pm
I have pondered this for sometime and I come to the decision that we should not bailout the automakers. As a small business owner, I don’t see the government or others preparing to provide me with a bailout package. A bailout would only allow these companies and unions to continue working in an inefficient manner and only postpone the inevitable. Unfortunately, the big 3 and the UAW need to fix what they have created without government intervention. The pain and suffering of this situation will be far reaching and long lasting, but it is a necessary step to correct the situation. This whole mess is going to get a lot worse before it gets better.
November 20th, 2008 at 1:02 pm
If GM is not seeking a bailout/handout and they really just want a loan, can someone explain why they don’t go to a lender? Why does it need to be tax-payer money that fronts their “loan”?
Also, if the auto industry gets more money to continue its failed business model, where do the handouts end?
Unless I’m mistaken, many major airlines have gone bankrupt (some of them numerous times) in the past, why is the auto industry different? What makes them so special? There are hundreds of suppliers and manufacturers who support the airlines who see business drop when the airlines hit hard times, yet we don’t bail them out…
November 20th, 2008 at 4:10 pm
This is a tough call. Managment has screwed up over the years and the UAW has burdened the auto industry with costs that the transplants (toyota, honda, etc) don’t have to deal with.
But this current crisis has hit because the economy has collapsed. Sales are down 40% and by the way Toyota sales are also so over 30%. But Toyota is a lot stronger than the Big 3. Thanks to the advantages they have in costs and the fact they make good cars.
GM and Ford make good cars. The quality ratings are in line with foreign. And the cost of a US car is in line with foreign and gas mileage is even better with many GM cars than Toyota. Unfortuantely GM/Ford’s profit margins are much smaller than Toyotas due to legacy costs.
All that said with cash flow cut by 40% in a mainly fixed cost business they will fail withouta bridge loan.
The question: do we let Amercian Manufacturing Die? or do we help them get through this sales depression to live another day? I’m all for forcing Union concessions firing management, ect. But I don’t think we let them die because of a Wall Street inducted credit bubble that has to correct itself.
November 20th, 2008 at 8:42 pm
Ed,
Who says the auto industry has to die? Why can’t the big 3 (or 1 or 2 of them) fail and a smaller, smarter and more competitive auto industry rise from the ashes?
Why not let American Manufacturing manufacture what people will buy and do so with a profitable business model?
November 21st, 2008 at 8:00 am
Mike,
I understand you thoughts and I don’t neccesarily disagree. If I was a union man I wouldn’t be on this site that is about self sufficiency in finacial matters.
But starting a car company against giants like Toyota, Honda, Daimler, ect. is a nice fairy tale. Nobody will do it. Too capital intensive and too tough of competition. So in the end we would see no American prescence of significance in the auto industry. I think we need to help these guys and if they means tear up the UAW contract and fire some people… lets do it.
Again, this goes against my grain also. But we need manufacturing to stay in this country. And believe it or not they had a plan for survivial that got deep sixed once the credit bubble burst.
November 21st, 2008 at 7:52 pm
If GM and/or Chrysler go bankrupt, I don’t doubt that the demand for their cars will plummet. Unlike an airline ticket that you use very quickly, a vehicle is consumed for multiple years. With a bankrupt airline, the worst thing that can happen to you is difficulty arranging alternative transportation. With a bankrupt car company, you could get stuck owing money on a prematurely broken vehicle.
That being said, I don’t think the impact of a GM bankruptcy will be as great as people think. Yes, GM shareholders, creditors, employees, suppliers, and dealers will be hurt, but the demand for cars will still be the same. If people won’t buy the GM cars, they will have to buy cars from Ford, Honda, Hyundai, Toyota, etc. Those companies, their shareholders, employees, dealers, and suppliers will all be better off. The net loss should be quite a bit less than what GM wants you to believe.
Some, of course, will argue that the benefit will mainly go to overseas companies. There is some truth to that, but the effect won’t be as great as people think. Most of the foreign companies now produce a significant amount of their vehicles here in the US.