Thumbs down on the bailout

[jducoeur]

Loathe though I am to agree with the Republicans, on balance I'm coming to the conclusion that they're right about the auto bailout.

It's probably true that going Chapter 11 would cause GM an enormous amount of short-term pain (and Chrysler might well just go under), and it's true that there would be a nasty, sharp contraction as a result. That said, if it was packaged correctly, I suspect that it would correct much more efficiently: it would rip the bandage off, and allow the industry to do the necessary restructuring fast. It would to a substantial degree break the UAW (which, even granting that it does *some* good, is doing too much harm at this point), and probably come out with a GM that was smaller but ready to fight back much more quickly.

And I suspect that much of the PR debacle could be offset if the company, from the start, aggressively painted this as "reorganizing to be stronger". (And, frankly, played the national-pride card hard.) They have to move off the defense publically, changing both their thinking and look into that of a scrappy competitor. Granted, they've shot themselves in the foot on this particular point (over and over and over again in recent weeks), but public attention is fickle, and I'd bet that it could still be turned around.

Chapter 11 and the bailout both have essentially the same medium-term goal: restructuring the auto industry to make more *sense*. The difference is that Chapter 11 would probably be much faster and more efficient, because the legal power to change would be stronger. And really, it would be more honest. The bailout has this image of "saving jobs" and suchlike, but that's nonsense -- the whole *problem* is that GM is ridiculously inefficient, and there's no way to save it in the long run without lots of pain. So the choice is between dragging that pain out over the course of years (the bailout) or getting it out of the way in a horrible shock (Chapter 11). The latter would be much nastier in the short run, but I suspect better a year or so down the line...

Comments

[its-just-me.livejournal.com]

I am also in agreement despite the flogging I'm getting for having such thoughts. The union has them by the balls, and even if that weren't the case there is a bloated inventory, no hopes for getting rid of it, no feasable plan and five other things you've heard before.

[dsrtao]

I think the union is largely a red herring.

The actual salary paid to Ford/Chrysler/GM workers is not much different from that paid to Toyota/Honda workers in the US. The difference in pension requirements is very large -- because F/C/GM have 50+ years of retired workers still living and drawing, whereas T/H has only been assembling cars in the US since the early 1980s.

The fact is, as Justin says, is that F/C/GM are ridiculously inefficient and extremely bad at predicting what the market will want to buy.

How many lines does Toyota have? 3. High-end is Lexus, most cars are Toyotas, and the edgy line is Scion.

How many lines does have Honda have? 2. Honda and Acura.

Ford? Ford, Lincoln, Mercury, Mazda and Volvo. What the heck is the differentiation between a Ford and a Mercury?

GM? Buick, Cadillac, Chevrolet, GM Daewoo, GMC, Hummer, Pontiac, Saab, Saturn, and outside the US, Holden, Opel, Vauxhall, and Wuling. Oy.

And Chrysler is 80% owned by Mega-Evil Corporation, aka Cerberus Capital.

They all need to get crunched into the jaws of reorganization.

[its-just-me.livejournal.com]

I would be able to ignore in part the insane union contract if indeed GM had a decent plan in place. That BTW would not be said of me if just the union behaved themselves and came down to realistic contracts. Without a plan there's really no point.

If GM saved Saturn, Ford, Dodge, Chevy, and Cadillac that would be a nice streamlining of the popular brands. Possibley SAAB.

[jducoeur]

The actual salary paid to Ford/Chrysler/GM workers is not much different from that paid to Toyota/Honda workers in the US.

Are you sure? That doesn't match my understanding at all -- I thought there was an average of about $10/hour difference, which is a considerable margin.

No question that there are other important issues (even GM doesn't defend its ridiculous number of marques), but I do think the union is a major component of the problem.

OTOH, who owns Chrysler *is* a red herring: it makes very little difference to any of the relevant questions here. The difference between private and "public" ownership doesn't matter much on either the moral or practical level...

[dsrtao]

Hourly wages for UAW workers at GM factories are about equal to those paid by Toyota Motor Corp. at its older U.S. factories, according to the companies. GM says the average UAW laborer makes $29.78 per hour, while Toyota says it pays about $30 per hour. But the unionized factories have far higher benefit costs.

from the AP story at http://news.yahoo.com/s/ap/20081212/ap_on_go_co/congress_autos

The UAW says that wages at GM factories start at $14/hour, and go up to $33, which is in line with the numbers above.

[herooftheage.livejournal.com]

The net seems to think the difference in hourly wage per worker between the Big Three and the foreign companies in the U.S. is $4/hour in cash, and about another $4-$5/hour in benefits. Again, the hivemind thinks it takes about 30 hours of labor to build a car, and by that number the labor cost differences/vehicle should be about $250/car.

So while I wouldn't put labor costs as a complete red herring, it is certainly not the major difference between why Honda is showing a profit and GM isn't.

[goldsquare.livejournal.com]

Agreed. (FYI, I have a link and data to add here, that goes with your question below.)

More to the point, UAW uses "pattern bargaining" with Chrysler/Ford/GM, where they negotiate with whomever they consider weakest, and then use the same contract with the other two. If Ford is "OK" and GM/Chrysler are not, it isn't just the auto unions...

PS "I'm sure that I'm going to be asked, 'Congressman, I work at Honda' or 'I work at Mercedes. I get $40 an hour. Why are you going to take my tax dollars and pay it to a company that's paying their employees $75 an hour?' " Rep. Spencer Bachus (R-Ala.) said last month.

That wage figure -- widely used by opponents of the auto industry bailout -- is not in fact the wage paid to current workers. It is an approximation of the costs of salaries and benefits for current and retired workers. After wage concessions in recent contracts, the UAW says its workers at GM, Ford and Chrysler plants range from $33 an hour for skilled trades to $14 an hour for new hires.

[goldsquare.livejournal.com]

I agree. Injecting money into a dying business is like burning it. There are two means for reorganizing a business - a plan, or a bankruptcy.

If Michigan had come to Congress with a plan and a defined need, or had presented their old plan clearly and discussed how diminished sales had damaged their redesign plan, I'd be more sympathetic.

I'm still somewhat disturbed that the Republicans managed to negotiate almost a pre-packaged bailout and then scuttled it in a demeaning manner.

I will object to one of your comments. I looked up (not long ago) the efficiency of car manufacture itself. American car companies are as efficient as any others in terms of man-hours per car. The problem is that union labor costs are far higher per hour, and then there is the overhead for benefits and pensions, which are also far higher. As much as 2,500 or 3,000 per vehicle.

For an American car to price-compete with a non-union labor car, they have to be MORE efficient. They are. But it isn't helping.

[jducoeur]

Actually, we're essentially agreeing -- I was just counting the union input as part of "efficiency". It's not part of the efficiency of making an individual car, but it *is* part of the efficiency of the company overall. (That is, from a return-on-investment POV.)

Really, it's the thing that tweaks me about the Republicans in this case. They *ooze* vengefulness and antipathy towards the union, so obviously that I automatically get suspicious of them. Unfortunately, I think they're largely right that the UAW (and more specifically, the weight of history between the union and the car companies) is a large part of the problem...

[goldsquare.livejournal.com]

I've been referring to the joke about the 3-legged pig a lot lately. Do you know it? (Classic city-slicker asks the farmer about the 3-legged pig.)

[jducoeur]

Yaas...

[doubleplus.livejournal.com]

But that doesn't add up when you talk about how they'll have to shed jobs because they're ridiculously inefficient. If they're inefficient in a ROI sense but not a productivity sense, then they may not be able to afford those jobs, but they can't shed them without making fewer cars.

[jducoeur]

Well, true -- but the fact is, they *are* making too many cars. That's part of the problem. Every report I've seen says that overcapacity was serious even before the downturn, and particularly bad for GM.

That's part and parcel of the union problem: they desperately need to shed capacity, but due to union contracts it's extremely hard for them to do so. I gather that, in the past, they've agreed to some pretty crazy buyouts just so they can close factories...

[herooftheage.livejournal.com]

Huh, where did you get your numbers? When I looked around on the web, it seemed to think GM pays its hourly workers an average of $31/hour, and Toyota $27, and estimated the difference in benefits as another $4-$5/hour.

There's certainly something to the labor difference. Ford is marginally profitable because of foreign operations, where presumably labor costs are more competitive.

[goldsquare.livejournal.com]

I did not bookmark the article, I was just randomly searching. As I recalled the articles and pages that I read, they were measuring man-hours on the assembly line per vehicle at some fraction near 40 hours, usually under.

The same articles talked about overhead based upon superior benefits, and pension contributions.

If it matters to you, I can take the time to try again to find the articles, and recheck the figures. (I can't re-check the browser history, since I no longer have access to that computer.)

[herooftheage.livejournal.com]

No need to bother, I was mostly wondering if it were handy. We certainly agree that there is a difference, and if I really cared, I'd not only go off and do an extensive search, I'd have to evaluate what I thought of the sources.

[hudebnik.livejournal.com]

Jobs are going to be lost in Detroit, regardless of whether there's a bailout: there's a big inventory of unsold cars, and a lot of people who suddenly can't afford to buy cars, so factory lines are going to shut down, period. Giving the car companies a big loan, or even a big gift, won't change that unless they take the course of "run a factory to produce cars that we know we can't sell," which would be even worse management than they've shown so far.

If you want to keep the workers afloat, it would be much simpler and more efficient to give the money directly to the workers, e.g. through unemployment compensation. Which will happen anyway, so why do we need a bailout?

The rhetoric I've heard from Detroit CEO's and Democratic Senators keeps talking about a car company "failing", but (IMHO) intentionally conflates two notions of failure: bankruptcy and ceasing operations. A car company can file Chapter 11 without necessarily costing ANY jobs (although layoffs MIGHT turn out to be the best way out of the situation). It strikes me as another case of terrifying the public in order to get what you want, just like the invasion of Iraq.

I have to admit grudging respect for those Republican (and a few Democratic) Senators who act as though the free market meant freedom both to succeed AND to fail.

[goldsquare.livejournal.com]

To consider - I think they feel that their reputation post-bankruptcy would be far worse, and that would be a bankable problem.

I think they are forgetting how badly their reputation has been affected by asking for bailout money, and doing so poorly.

[tpau]

did they have a good reputation in the first place? i can count on one hand the number of peopel i know who bought Detroit cars voluntarily and i will not use all the fingers.

[goldsquare.livejournal.com]

Well, there is the reputation of the cars, and the reputation of the companies. In the past, whether you liked your Ford or not, no one worried whether there would be a company to stand behind the warranty or manufacture parts.

[tpau]

true... but, if no one much wants to buy the cars, does it matter? fundamentally they make crappy cars. why should a company that makes a bad product be saved? especially with my tax money?

[goldsquare.livejournal.com]

To your first question: yes, it does.

To your second question, as you phrase it, of course it would be stupid. It might be, however, that your assumptions are not shared.

For one thing, the product is not crappy.

For another, no one should be planning on saving any particular company, but on saving the economy as a whole.

[tpau]

well true, my thinking American cars are rubbish doesn't make them that way.

that aside

i don't think government handouts are the way to save the economy...

[jducoeur]

well true, my thinking American cars are rubbish doesn't make them that way.

Do keep in mind that this has been shifting. While it's true that the big three still produce a lot of crap, they're producing a lot *less* crap than they were 10-15 years ago. They haven't caught up with Toyota, but it's no longer unusual to see Consumer Reports speaking well of one of their cars, as it used to be. And it looks to me that they've passed a number of European brands in terms of quality.

I prefer to judge companies, like people, as they are rather than as their reputation paints them. At this point, an objective look at the big three seems to say that they're pretty much mid-level: better than some, worse than others.

Mind, I'm still buying Toyota. But that's because that same objective look still puts them at or near the top in terms of quality. (Besides, I just plain like their handling...)

[tpau]

i am a honda girl myself. mostly because it is much more commn to see a 25 year old honda (or toyota) on the road then anythng else...

[goldsquare.livejournal.com]

i don't think government handouts are the way to save the economy...

What's your plan?

[tpau]

didn't say i had a much better one, but that one strikes me as throwing money away. *shrug* i believe the market will right itself, the strong companies will survive, and we will all adjust.

[goldsquare.livejournal.com]

That's funny.

[tpau]

you asked.

[jducoeur]

Say it with me: "Massachusetts Reality Warp". This is somewhat true locally (and perhaps even more generally in the northeast), but becomes a lot less true as you move westward. Your friends are far from normative...

[tpau]

but i am counting firends in wisconsin, TExas, california, indiana, mariland, virginia, england, australia, germany...

[jducoeur]

Yeah, but it's still relatively self-selected for your general background -- in particular, the intellectual set that has been skeptical about US auto makers for decades. AFAIK, you *mostly* hang out with various sorts of Weirdians; there are a lot of us, but most people are still Mainlanders.

The fact is that the big three still sell something on the order of half the cars in this country, so it's pretty clear that your friends aren't statistically representative...

[doubleplus.livejournal.com]

So the choice is between dragging that pain out over the course of years (the bailout) or getting it out of the way in a horrible shock (Chapter 11). The latter would be much nastier in the short run, but I suspect better a year or so down the line...

With all due respect, this statement especially, and most of your reasoning here only comes close to making sense if you consider the auto industry in complete isolation without regard to the economic environment that has brought us to this point. While there's lots of talk in the media about the UAW and bad management decisions and so on (and remarkably little about brands and dealerships, which are a huge part of the problem), the reason they're in danger of going under now is that credit is nonexistent and auto sales across the industry are down more than 30%, neither of which are the result of any action by these companies. For Chapter 11 not to result in liquidation, it requires credit that would add up to a massive amount for companies of this size, at a time when the unavailability of much smaller levels of credit is the exact short-term problem they're asking for help in dealing with. And on the results side, it's not hyperbole to say that the effect of a "nasty, sharp contraction" of the country's largest industry with the current state of the economy could be the difference between a nasty recession and a worldwide depression. Even if you believe that's necessary for the auto industry, doing it a year or a year and a half from now would be infinitely better than doing it when the economy is already in its steepest decline in decades.

[herooftheage.livejournal.com]

most of your reasoning here only comes close to making sense if you consider the auto industry in complete isolation without regard to the economic environment that has brought us to this point.

Quite the opposite, I think. It takes into the account the fact that money for a bailout has to come from someplace - i.e. the taxpayers, and money you use on a losing proposition is money that wasn't used on winning ones. Every dollar used on the bailout is a dollar not used for food, or housing, or medical expenses, or investing in companies you think might actually add wealth to the economy.

Even if you believe that's necessary for the auto industry, doing it a year or a year and a half from now would be infinitely better than doing it when the economy is already in its steepest decline in decades.

So why back a loser. As a thought experiment, what makes any bailout plan the government is likely to come up with better than taking that money and giving it to the winners with the thought of expanding into the territory Chrysler and G.M. leave behind? Giving the money to Toyota, Honda, and yes, Ford, surely would make better sense - they've demonstrated they can operate their companies at a profit.

It is at least partially true that GM and Chrysler don't have much to do with the economic climate, but they do have a great deal to do with their preparations for it. It's no accident Ford isn't in trouble right now - they made moves anticipatory of the downturn in sales and the credit crunch.

[jducoeur]

It's far from clear that this is true.

Besides the points made by herooftheage, here are a couple more things to ponder.

First, and perhaps most importantly, there is a *vast* amount of credit sitting on the sidelines -- several trillion dollars by most estimates. That money is waiting for *confidence*: it wants to know that businesses are looking like they are going somewhere.

The bailout is likely to do nothing but hinder that process. It's a tacit (indeed, maybe explicit) admission that this company is dreadfully broken and mismanaged. Moreover, it gets the government involved in a weird ownership stake, with new and ill-defined rules. That means that nobody *outside* the government is likely to invest in it for many years, until that's unwound.

(You'll note that Ford is at pains to emphasize that it neither expects nor wants to take the government's money -- it just wants a backup plan in case things go much worse than they expect. This is probably part of why.)

By contrast, the sharp shock of Chapter 11 is likely to get to an investable state much more quickly, because they'll have court power to untie the complications. Especially if they come up with a plausible plan (much, much easier if they have that court power), they're more likely to be able to convince those investors on the sidelines that there's a real opportunity here. By breaking the union contracts, closing unprofitable business lines (which I gather are in some cases constrained by state laws), and wiping out existing equity, they could pretty quickly turn the company into a very attractive investment proposition. But most of that can't be done by a bailout, even with a supposedly-powerful "car czar".

Further, the fall in sales is at least partly their own damned fault. You'll note that the fall is not consistent across the industry -- it's especially noticeable that GM's sales have fallen significantly further than the industry average, and Ford's significantly less. To me, that's a clear sign that the consumer market has *already* priced GM's bankruptcy in. That is, everyone has gotten the message (sent mostly by GM itself) that GM is about to go bankrupt, and you shouldn't buy from a bankrupt company. It's not clear to me that a bailout is going to do a damned thing to change that: it doesn't make a qualitative difference to that message. Do you really see people as more likely to buy GM after the bailout? Personally, I think it's *less* likely -- I think it'll just worsen the death-spiral.

To put it more bluntly: it's not clear to me that a bailout of GM will do anything but stave off the inevitable for a few months. They need major qualitative changes in both their business and their image, and it's not clear to me that anything *except* Chapter 11 can bring that about, because their hands are tied in too many ways they can't change without court backing. So that bailout money seems likely to simply get poured down a black hole, as effectively a short-term job-insurance program. Which is a fine thing to want, but if that's the real desire, there are better ways to do it...