Why the Big Three Must be Bailed Out.
Interesting set of recent posts on the moribund auto biz and what to do about it and lots of debate beyond BOTB, for sure. If Obama is serious about fixing the economy, global warming, technology leadership and restoring a leadership position in the world, the single most effective move he can make is revitalizing (bailing out) the auto biz.
You’ll get no argument from me that simply throwing cash at a bad business is a bad idea. Companies that sell things like Hummers in a post-Peak Oil world have no reason to exist, no less be bailed out at taxpayer’s expense. But the auto biz, despite its shrinking market share, is the cornerstone of our revival as a nation. It’s stature in American business is unique–no other business has a more profound, far reaching impact on the current economy or our future. Here’s why:
Beyond the jobs and brands, the auto biz operates, feeds and accesses nothing less than one of the most sophisticated and far-reaching supply chains in the world. Materials, labor, engineering, pre-manufacturing processes, finance, accounting, sales, distribution, media. If Obama is serious about transformation, he’s going to need every bit of that and more as a platform. The reason to bail out Ford, GM and perhaps Chrysler is to maintain and repurpose the infrastructure, not save the Ford Focus or the Jeep Wrangler. This is way beyond punishing the car companies for being arrogant and negligent.
It’s all about leveraging the relationships and the distribution of good and services that will be required to transform our economy and our nation. There is no time to recreate it from scratch–it would take decades to identify suppliers and organize them into workable relationships. The current auto infrastructure can be retooled, not easily, but certainly much more rapidly than starting over or subcontracting overseas. In fact, If Obama is planning on implementing a Manhattan Project style revitalization program, the auto biz is it’s platform. That’s why it has to survive.
Posted: November 14th, 2008 under Best of the Blogs.
Comments: 16
Comments
Comment from Josh Hammond
Time: November 15, 2008, 6:00 am
I was heavily involved in the auto business in the 80s and 90s. Bob Stemple, who followed Roger Smith as CEO, was of the chairman of the business think thank that I ran on quality and innovation. So I have some knowledge about this industry. I also know that when a company files for bankruptcy, it does not necessarily go out of business, rather it uses that opportunity to restructure, usually at the expense of suppliers, lenders, jobs, and remaining workers wages. Indeed, bankruptcy has kept many industries humming, especially the airline industry.
Three million jobs will not be lost, either way. My guess is the same number of jobs will be lost either way. So to me, jobs are not the issue. They are the emotional hammer in this rescue, but they are not the issue.
The supply chains you speak of are global, so many, I don’t know the percentage, of jobs in the supply chains are global, NOT based in or of direct benefit to the US economy. Also there are multiple supply chains for other automotive companies, such as Toyota, VW, Fiat, etc. Some suppliers overlap, but many suppliers that are in the GM and Ford link, also provide goods and services to other companies as well. So I don’t see the total collapse here.
Unlike the collapse of the financial markets and AIG, the auto industry in the USA does not impact everyone. Consumers have viable, and indeed more reliable options in the marketplace. With regard to innovation, the American auto industry is the least innovative industry in the world, and their business model is stone-age stuff.
One thing Obama is doing that is smart: he has resigned his senate seat so that he doesn’t have to vote on this one. Either way the vote goes, his options are not limited on January 21, 2009.
It will be interesting to watch how this one plays out.
Comment from Sasha
Time: November 15, 2008, 9:19 am
Did (any of) you read The Shock Doctrine?
Comment from Josh Hammond
Time: November 15, 2008, 9:32 am
I didn’t. What’s it about, without having to look it up.
Comment from Sasha
Time: November 15, 2008, 9:37 am
The Shock Doctrine retells the story of the most dominant ideology of our time, Milton Friedman’s free market economic revolution. In contrast to the popular myth of this movement’s peaceful global victory, Klein shows how it has exploited moments of shock and extreme violence in order to implement its economic policies in so many parts of the world from Latin America and Eastern Europe to South Africa, Russia, and Iraq.
At the core of disaster capitalism is the use of cataclysmic events to advance radical privatization combined with the privatization of the disaster response itself. Klein argues that by capitalizing on crises, created by nature or war, the disaster capitalism complex now exists as a booming new economy, and is the violent culmination of a radical economic project that has been incubating for fifty years.
http://www.bookbrowse.com/reviews/index.cfm?book_number=2048
This just seems like another way to shift money from individuals to corporations. I can’t understand why we would bail out the big three instead of bailing out individuals or creating a decent health care system or subsidize a green energy revolution.
Comment from Leftcoast
Time: November 15, 2008, 10:36 am
Josh, we might have been in some of the same briefings and meetings back then…This is an important debate. Most of what you say is accurate, but it comes down to objectives. The point is that if we want to stop the outsourcing, if we want “Made in America” to mean increased control over our economic future, establishing their current competitiveness as the bar for bail/no bail is the wrong parameter. As mentioned, if we were talking about American Airlines or Macy’s I say let ‘em fail. But we need to better leverage existing infrastructure in order to “get the change we need.” Letting them fail does erase our instant access to those resources. There’s nothing wrong with the auto companies’ procurement systems, engineering resources or component quality, it’s management laziness and lack of vision. These can be addressed with conditions set for investment.
BTW: Naomi Klein’s Shock Doctrine is required reading if one is going to get the full picture of what’s been happening at least since 9/11. It fully explains Paulsen’s bait and switch this week and it’s no surprise. Expect more looting before Jan 20.
Comment from Sasha
Time: November 15, 2008, 10:52 am
Agree with your analysis of The Shock Doctrine, Lefty. (I think it recently came out in paperback.) I have been much less surprised about the government moves since reading it.
Comment from timr
Time: November 15, 2008, 11:34 am
LC, great post. Except that I believe that the jobs and pay lost will never come back. and trying to find a 50 year old auto worker who has no HS diploma a new job at comparable wages Good luck with that. Also the big 3 could very well try and dump both the union-the UAW is very corrupt, I will have to grant that, but I remain a very strong union supporter because like the saying goes, a rising tide lifts all boats-and the retirement which would once more go to the govt, and which I do not believe is anywhere near being fully funded
Comment from Nosebetter
Time: November 16, 2008, 4:35 pm
LC:
One thing not being mentioned in the news is that the auto companies bet a lot of their futures on home mortgages. That seemed to be GM’s strategy for survival until the real estate bubble popped and they lost their &$@ on that.
Another problem on the horizon, Europe says they are taking us to World Court if we bail out the big three. It has become obvious that the reason they insisted on the summit before Bush left is because they know as we do that Bush is…well…stupid. One of the things they convinced him to do is pledge that we would not take measures to protect our country from the global train wreck. They say this strenthens their case to file charges against us for any industry bail-out measures.
The reason for this is obvious–they know as we do that there is far more auto manufacturing capacity than cusumers. The industry will shrink and they want us to go bankrupt.
Comment from Leftcoast
Time: November 16, 2008, 5:08 pm
Nose, what’s your source for the Euro threat? I hadn’t read that anywhere. If that’s true, it’s even more reason to call their bluff and bail them out. Re: Home mortgages, I’m not sure that GMAC got into the mortgage business and if they did they were not likely to dive into the subprime mess. No matter. One of the conditions for bail out must be dissolution of unrelated side businesses like GMAC…
Comment from Nosebetter
Time: November 16, 2008, 8:47 pm
Leftcoast:
I found an article in Forbes from reuters called
“Europe car sales plunge, GM’s Opel seeks bailout”
11.14.08, 12:44 PM EST
“If it is illegal state aid, we will act at WTO level,” Commission President Jose Manuel Barroso told Europe 1 radio.”
It won’t send.
Comment from Nosebetter
Time: November 16, 2008, 8:49 pm
I found an article in The Miami Herald
“GM says GMAC mortgage unit may not survive
By BREE FOWLER and TOM KRISHER
AP Auto Writers
DETROIT — Bad news kept piling up for General Motors Corp. on Monday as its shares plunged to their lowest point in 60 years and the company said in a government filing that the mortgage unit of its finance arm may not survive.
The company said that the troubled mortgage industry and frozen credit markets have raised doubts that the mortgage business of its GMAC LLC financial arm can survive.
The filing says that the value of Residential Capital’s mortgage loans have deteriorated due to weak housing prices, delinquencies and defaults. It is also having trouble raising capital.
GM owns 49 percent of GMAC LLC, with the rest owned by Cerberus Capital Management LP.”
…but it won’t send either.
Comment from S.R.Chasm
Time: November 17, 2008, 5:05 am
Comment from S.R.Chasm
Time: November 17, 2008, 5:31 am
http://www.thetruthaboutcars.com/gmac-may-file-for-bankruptcy-tomorrow/
Comment from Leftcoast
Time: November 17, 2008, 9:32 am
Thanks, Nose. Interesting that the Pugs are all too willing to give $700B to the banks without conditions but are balking at saving millions of American jobs for a fraction of that…should tell you everything about this issue.
Comment from S.R.Chasm
Time: November 17, 2008, 1:22 pm
No problem, Josh.
Comment from I.B.Lever
Time: November 17, 2008, 2:45 pm
The first meeting between the incoming and outgoing US presidents suggest that, despite appearances, the White House visit was anything but friendly.
In fact, they may provide a clue as to what opponents of Barack Obama’s incoming administration can expect.
A story that appeared in the US press, that George Bush, the US presdient, insisted on support for a trade deal with Colombia from the president-elect in exchange for bailing out the US auto industry, sounds like hard-nosed, Chicago-style politics.
It has put the pressure squarely on the lame-duck president to prove that he does not put his personal policy goals above the health of the US economy.
The White House spokesperson has subsequently attempted to re-characterise the substance of the meeting, and deny any quid pro quo, but the damage has been done.
With US workers in imminent danger of losing both their jobs and their homes as the US economy collapses, George Bush has appeared to prefer to fiddle, like the Roman emperor Nero, with free-trade deals.
It was a devastating pre-emptive strike by the Obama side, as it also effectively dismissed any actual objections that Bush may have had to bailing out the Detroit-based auto manufacturing industry.
Not only is he on the defensive, but the outgoing president may now hesitate before bringing up the Colombia trade deal again; a policy goal he had invested a lot of effort in.
During the election campaign, Obama raised doubts about regional trade deals, and even suggested that the Clinton-era North American Free Trade Agreement (Nafta) may have to be re-negotiated.
Very much in tune with the economic climate, he wondered whether enough had been done to protect US workers, and whether labour and environmental standards had been sacrificed for the sake of the agreements.
He made no secret of his opposition to the Colombia trade deal in particular; insisting that the country’s human rights record and its treatment of trade unionists would first need to be thoroughly investigated.
This very much meshed with the position of one of the traditional constituents of the Democratic Party, US labour unions.
The unions in Michigan, the home of the US auto industry, have claimed the credit for mobilising the kind of support for Obama that caused John McCain, his Republican rival, to surrender the state way ahead of the November 4 election.
This may give a clue as to the actual quid pro quo at play.
The seemingly aggressive pursuit of support for the ailing US auto industry is a sign not only of how potential enemies may be dealt with, but also how faithful allies will be rewarded.
If the story from the first White House visit is indeed true, it reveals an indiscreet moment on the part of the outgoing president.
Bush may have been swayed by the public image of the incoming president as a healer who is above politics.
He will probably be the last man in Washington to be so incautious.
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