That beeping sound you hear this week is the semi-truck being backed up to the Federal Treasury in Washington. After being filled with taxpayer billions, it’s on its way to Detroit.
A heaping bailout for the Big Three automakers – currently losing millions every day theyproduce cars no one wants to buy – feels like it’s being gift-wrapped for the holidays.But the beeping sound you should be hearing is the heart monitor of the Big Three, slowing downto flatline. General Motors, Chrysler and Ford are such horrific financial wrecks that not even the Jaws of Life – and certainly not a taxpayer bailout – can save them.
MORE: The Auto Industry: Boom To Bust
“We’re funding a day care system for people with extinct skills,” says Michael Covel, an entrepreneur, trader and author who is among many to back the simple argument: “let them die.”
“We’ll be a heck of a lot stronger in the long run if we just take the pain on this right now. They’ll burn through it and be back for more. We’re turning auto jobs into government-supported jobs and it’s a shame.” In just under two years, GM has lost $57 billion. The current quarter will provide more huge losses, and even in its regulatory documents the company admits that demand for its products isn’t coming back soon. Translation: profits are as likely as trucks that run on rainbows.
GM burned through $7 billion in cash in the third quarter and told the world it may not have the gas to see 2009, much less operate profitably next year. The credit default swap markets – yes, the same complicated monster fingered as an instigator of the credit chaos – is pulling the sheet over GM’s head, and analysts are lowering their share price estimates to a tidy zero.
At the urging of Treasury Secretary Hank Paulson and a chorus of legislators, Congress meets this week to consider a multi-billion-dollar holiday gift basket for three cash-starved companies that may eat all the little truffles in one sitting and ask for more. It’s the first leadership test for President-elect Barack Obama, who should think very hard before putting the federal government behind the wheel of GM or any other American automaker.
* GM needs more than a loan; it needs a double debt-ectomy and a new business model. It’s locked in asphyxiating labor deals, has dealership franchise agreements that it can’t break and faces huge pension bills its rivals don’t. The company’s retiree medical benefits bill was $3.3billion in 2007 – the company is trimming that back next year but still faces mounting costs its foreign foes don’t pay.
How did Detroit’s finest find themselves here? Blame decades of collective bargaining withunions, the whims of crude oil and, most of all, trucks. The truck is Detroit’s salvation and its downfall. Pickups and sport utilities threw off so much profit in the days of cheap oil that the Big Three could lose money on dull, less-reliable cars and simply shrug.
Plus, the Midwestern-flavored designs of Big Three cars didn’t exactly overwhelm status buyers on either coast; eventually even loyalists in the Heartland have given up on the Heartbeat of America’s sedans and coupes. Do you see the teenage tuner crowd drooling about the prospect of buying aftermarket mods to soup up their Chevy Cobalts or Dodge Calibers?
Lacking any incentive to improve fuel efficiency and battle imports on style notes thanks to the cushy truck business, the Big Three doubled down on gas-guzzlers just before crude oil prices soared.
In the era of $4 unleaded, the Big 3 spit out fleets of guzzlers that required $100 fill-ups and tepid sedans that, while better than ’90s era Detroit metal, still choke on Accord and Camrydust. As the economy slowed and consumers put off new car purchases, the trucks are still too expensive to drive and even deep discounts won’t move the inventory. GM’s sales were down by nearly half in October.
“The market is telling them that we don’t want what they’re selling,” Covel says. Yes, gas prices are back to 2007 levels and truck sales are picking up, but Honda and Toyota’s trucks are now good enough to stab at the Big Three’s coronary profit artery. In 2005, foreign trucks accounted for one-third of all US purchases; as recently as 1995, American trucks accounted for almost 90% of the domestic market.
The United Auto Workers can blame management all they want for the predicament, but the compensation numbers are sobering. Detroit’s workers earn more than $70 an hour compared with $45-$48 for the non-union shops of Toyota and Honda in the US. You can argue until you’re Ford Oval Blue in the face about why the wage gap exists, but Detroit’s carmakers start the sales contest already down two scores to the imports. Years of strikes and threatened strikes forced the Big Three to buy labor peace at a price they can no longer afford. The scenario gets even worse when you look at the Big Three’s pension woes.
GM claims its pension plans are fully funded; the government agency charged with picking up thepieces for failed pension plans says the deficit is $31 billion. The Pension Benefit Guaranty Board predicts that if GM defaults on its pensions, the claim against the PBGC will be bigger than all previous claims combined. Who funds the PBGC? U.S. companies that have pensions pay dues, but pension-offering firms are dwindling fast. If the Federal agency can’t pay, taxpayers open their wallets again.
“They’ve all been failing for a very long time,” argues economist and commentator John Tamny. “This is management that’s going to keep making the same mistakes no matter how much money we give them. They won’t do any good with it.”
* So why not try Tough Love Capitalism and leave GM to fend for itself? GM head Richard Wagoner has said repeatedly that filing bankruptcy isn’t even a realistic possibility, namely because he believes consumers won’t buy any cars from a company that’s under court protection. Buyers would fear the worst; no one would buy a car that they weren’t sure had a big automaker to back it up in five years. The damage to the brands would be hard to calculate.
If you think American car makers are “the backbone” of the nation’s manufacturing (your mileage may vary on that claim), the fear is that Big Three failures paralyze the towns scattered around the Midwest that supply parts. Car dealerships nationwide would wither, and auto-ad dependant local television stations and newspapers would suffer even more than they do today. And don’t tell anybody in the South what would happen to NASCAR. Can you swap paint in a Prius?
Even if the restructuring automakers can solve the union problem, meanwhile, they’ll have to face angry dealers. GM has spent upwards of $2 billion ridding itself of Oldsmobile, and much of that cost comes from lawsuits from former Olds dealers. While dozens of the nation’s 20,000 or so dealers have gone out of business this year, the country still has hundreds more than it needs and most won’t go quietly.
Further, if the Big Three shut down, it’s 240,000 jobs directly lost and nearly 2.9 million total jobs lost in the first year, according to the Center for Automotive Research. The same study suggests a total failure of all three companies would suck $400 billion of personal income from the US economy over three years. Some fear civic budgets across the nation’s midsection would implode as tax dollars dwindle and uncertainty drives economic development elsewhere.
It’d be an employment neutron bomb that might leave factories intact but take out all the people; downtown Detroit would make New Orleans look crowded. Investors would feel it too – a downtrodden Dow Jones Industrial Average would see one of its 30 components wiped out. GM’s been part of the Dow since 1925. Hundreds of thousands of retirees would turn to government medical care, burdening an already flawed system.
The flaw in this dire outlook is simple; car production and buying would not shut down in a bankruptcy. Life goes on at bankrupt companies – cars and trucks would still come off assembly lines and head to dealers. The key would be explaining the process carefully to assure folks that no one is going away.
Taxpayers bailed out AIG and invested billions in struggling banks, and we did it because the global financial system might not work if we didn’t. Detroit’s Big Three are pretty big, but they’re a rounding error in the global economy. Bailing them out throws open a door for any struggling industry with a lobbyist to knock on the Treasury door.
Bankruptcy has lost a lot of its stigma, and some, like former top Wall Street stock analyst Henry Blodget, say there’s no other way for the Big Three to throw off their financial chains and fight. Restructuring experts say that, with a bankruptcy done properly and swiftly, any of the Big Three could emerge with plenty of capital to retool idled factories with better car designs and use the momentum of brand names to rekindle sales.
It’s not like there’s no money wanting to fund that process. As cash fled the stock markets this year, much of it is sitting around in private equity funds looking for a good home.Some experts feel a pre-packaged restructuring could be sold to American car buyers as long as Joe Sixpack knew Ford, GM and Chrysler were just going for a tune-up, not headed to the salvage yard.
“There’s a certain amount of education that I’ve seen happening here,” said author and debt expert Martin Fridson of New York, who has questioned the need for taxpayer money for automakers. “Initially this was a one-sided debate and we had to do something for them; now we’re seeing that there are alternatives to public money.” The biggest power a company has in bankruptcy is to reject contracts of virtually any type, and the Big Three would have lots of leverage to remake their businesses, jettison brands that weren’t working (adios, Hummer!) and buy themselves time to make the cars Americans won’t need a tax break to buy. In a global economy, pity is not an effective sales tool.
Airlines have used bankruptcy wisely for nearly two decades, and no one batted an eye buying a ticket on a restructuring carrier. Carriers used their bankruptcies to shed billions in costs, despite labor unions protesting every move. Some carriers, like UAL Corp.’s United Airlines, dropped the pension plans, whacked salaries and scuttled health benefits, all over the screams of unions that were ignored by a bankruptcy judge.
*This is President-elect Obama’s first big test, taken before he even takes office. Will he do what’s right for the unions that backed him and the Democrats? Or will he do what’s best for the country? The United Auto Workers, whose numbers are now under 500,000 nationally, has said they won’t take concessions under any circumstance. Betraying the historical Democratic base may not be the kind of “change” he had in mind.
Indeed, there are signs the auto bailout cake may already be baked, and this week is merely the frosting. Congress has already set aside $25 billion in loans to help car makers retool – the talk is for $25 billion more to keep the Big Three on the road. At least the hearings, if held, could shed light on exactly what Detroit has in mind for the aid it’s about to get.
There’s some hope, thought, that meaningful conditions will be hitched to the bailout. Detroit’s stubborn resistance to higher mileage standards might have to fall. Congress may limit salaries and bonuses and perhaps help guarantee some return on the money if, as many fear, the cash simply delays an inevitable slide to what would become a full-employment act for lawyers and restructuring experts – you might even think of it as a minor stimulus package for New York law firms. It might not be bigger than Lehman Bros.’s monster filing with $600 billion in assets, but the complexity of any Big Three Chapter 11 would starch a lot of shirts. But we can hope that Obama doesn’t double-down on the bailout’s bad bets, encouraging a Congress already looking for his leadership to spread the wealth foolishly. Let the Big Three crash. It may be the only way to get them in for repairs. “Even when the economy was good in 2000 these guys were losing billions,” Tamny says. “They’ve lost our money before and they’ll lose it again. It doesn’t have to happen.” Eric Torbenson is a business reporter for the Dallas Morning News.