Monday, November 17, 2008

Wasting Billions on an Automaker Bailout?

The smallish three US automakers, General Motors, Chrysler, and Ford, are all suffering huge losses and have a staggering amount of debt on their books at a time when their products simply aren't moving off showroom floors.

Democrats in Congress are looking to give the automakers a bailout. Some figures thrown about are up to $50 billion. That's a curious fact, given that the automakers are actually worth just about $7 billion these days.

Automakers have struggled to compete with foreign companies, not on quality terms, but on the cost to produce. American cars and trucks are sought after because that's what many people want, but GM, Ford and Chrysler are all saddled with huge costs that the foreign automakers don't have.

Unions have gold plated benefits packages that must be funded by those automakers, and that adds thousands to the cost of each car that rolls off the factory assembly line.

You could have two identical car factories in the US producing vehicles that are in the same segment of the market, and if one is unionized and the other isn't, the non-union factory costs will be so much less that the cars can not only be marketed for less, but the company that runs that factory can make more per vehicle.

That's the exact situation facing US automakers as foreign companies have multiple factories in the US where the per-vehicle profits are anywhere from about $1,000 to $1,500. Comparable UAW factories (the unionized US automakers have no choice in the matter) see losses on every vehicle, with Ford taking the biggest hit at nearly $1,500 in losses per vehicle.

It's simply unsustainable. Bailing out the automakers isn't going to save these companies. It's going to save the UAW - the union workers who have basically run American owned automakers into the ground.

There is absolutely no reason to bail out the automakers in this fashion. None.

If the automakers threaten to go into bankruptcy, that would be the best thing for these companies since it would actually enable them to restructure their debt and the contracts with the unions to put them on a sound financial footing and improve their competitiveness with foreign automakers producing vehicles domestically.

We've seen how airlines have been able to restructure and become more competitive in the process, so there's no reason to believe that the automakers can't similarly engage in the restructuring of their contracts to improve the long term survivability of the automakers.

However, you can expect the unions to make such a stink and for their Democrat backers to foist a bailout on an industry that can ill afford any such steps. All any such bailout will accomplish is delay the failure and exacerbate the competitive disadvantage with the foreign automakers.

The US automakers are busy talking about how they're going to cut back on development cycles and other cost cutting measures that will affect product lines going forward and make the vehicles even less desirable. That's the absolute wrong prescription to improve the health of US automakers.

Meanwhile, watch for homeowners to try and game the system to take advantage of the perverse incentives to actually miss mortgage payments to qualify for the new homeowner bailout plan that will enable lenders and borrowers to reconfigure their loans.

Neither of these bailouts actually makes much sense for taxpayers or has any basis in sound economic policy. Bad business decisions should not be insured against all risk, yet the bailouts do just that. They eliminate the risk from bad business decisions.


US cars are quite competitive compared with foreign automakers in every area except the cost to produce.

That can be traced directly to the unions, so any bailout will not change this situation but drag out the costs and unprofitability of the automakers until such time that they can somehow reorganize their debts and return to profitability by reducing the union costs per vehicle.

Bankruptcy helped steer airlines to improve their balance sheets and reduce overhead, and yet Congress is pushing to maintain the status quo here. Hot Air also notes the similarities between the Fannie Mae/Freddie Mac situation to the automakers and how Barney Frank is pushing for a auto bailout.

As I've been saying for some time now, just because someone has tenure in Congress it doesn't mean that they have experience or knowledge, or are even right. Frank has been wrong about the solvency of Fannie and Freddie, and he's now pushing the wrong prescription to fix what is wrong with the automakers.

It's past time to let the markets fix the automakers - by allowing them to engage in reorganization under the Bankruptcy code to improve their balance sheet and return to profitability in a way that will speed the recovery.

Of course, that would reduce the power of the unions, specifically the UAW, which the Democrats have no interest in watching happen. That is why the Democrats will attempt to push through this bailout, and the GOP will likely go along with it claiming that it will help save jobs.

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